The European Commission has just proposed to postpone the deadlines to report cross-border tax arrangements by three months. Should this proposal be adopted, cross-border arrangements whose first step was implemented between 25 June 2018 and 1 July 2020 would have to be reported by intermediaries or relevant taxpayers no later than 30 October 2020 (vs. 31 August 2020 originally). Also, the 30-day period to report cross-border arrangements identified as from 1 July 2020 would start on 1 November 2020 (vs. 31 August 2020 originally).
Such respite, unless it is renewed, should however not have a major impact on the organisational difficulties that intermediaries and MNEs currently encounter. In addition, difficulties also arise with respect to the scope of the new reporting requirement. In that respect, the administrative guidelines published a few weeks ago provide useful details which already are binding for the French tax administration, until their potential revision since those are comments submitted for consultation.
Some points are detailed below, although they are not intended to be exhaustive:
Concept of arrangement (BOI-CF-CPF-30-40-10-10-20200309 §10 and seq.)
The concept of arrangement as defined in article 1649 AD § II of the French Tax Code (“FTC”) has a very broad meaning. It includes any agreement, arrangement, mechanism, transaction or series of transactions, which may or may not be binding. The constitution, acquisition or dissolution of a legal person, or the acquisition of a financial instrument, shall also constitute an arrangement.
Concept of intermediary (BOI-CF-CPF-30-40-10-20-20200309 §10 and seq.)
An intermediary is defined as any person, professional or not. The intermediary may not necessarily have a legal personality and the absence of remuneration is irrelevant. In the case of employees acting on behalf of a company, the company is considered as the intermediary.
In addition, among intermediaries a distinction should be made between “promoters” and “service providers”. The “service provider” provides aid, assistance or advice regarding a cross-border arrangement. The French tax authorities indicate that a service provider whom intervenes or becomes aware of a cross-border arrangement must not be regarded as an intermediary. The following examples are in this respect provided: a custodian bank claiming an overpayment of withholding tax for its client; an adviser, different from the adviser at the origin of the arrangement, who is only responsible for deciding whether a cross-border arrangement is reportable.
The French tax authorities also indicate that the concept of intermediary as “service provider” does not, in principle, include operators of the financial sector carrying out routine banking transactions (receipt and custody of funds, fund transfers and foreign exchange transactions, provision of financing, provision of payment banking services).
Relevant taxpayers (BOI-CF-CPF-30-40-10-20-20200309 §220 and seq.)
The relevant taxpayer is defined as the user or as a party to the reportable cross-border arrangement. The French tax authorities indicate that within a group of companies, such concept must be assessed at the level of each company. Thus, if a company implements a reportable cross-border arrangement used by other companies, it must be considered as a promoter. Also, if that same company also benefits from the arrangement, this company may also be considered as a relevant taxpayer. This could in particular be the case of top holding companies.
Main Benefit Test (BOI-CF-CPF-30-40-10-10-20200309 §120 and seq.)
The French tax authorities indicate that the main benefit test must be assessed in relation with the whole arrangement, taking into account the impact within the EU and outside the EU.
In addition, the French tax authorities confirm in their guidelines that the analysis as to whether the main characteristics of the tax advantage are fulfilled must be carried out objectively. The motives or intention of the participants are irrelevant. The importance of the tax advantage is determined by comparing the value of the tax advantage obtained to the value of the other benefits derived from the arrangement.
The French administrative guidelines also indicate that, as an exception, the benefit of tax incentives obtained in France and consistent with the object or purpose of the French tax law is not considered as a main tax advantage for the purpose of implementing the arrangement. The limited scope of this exception is controversial as such exception should at least be extended to the EU. Certain Member States seem to have already adopted this position.
Finally, the French tax authorities’ most-expected guidelines on the hallmark have just been published. The interpretation of some hallmarks indeed required further clarifications. This is particularly the case for the specific transfer pricing hallmarks et more precisely, the “E1” and “E3” hallmarks:
- Hallmark E1: Arrangement which involves the use of unilateral safe harbour rules (BOI-CF-CPF-30-40-30-20-20200429 §360 and seq.) The nature of “unilateral safe harbour rules” is not defined in French law. The French tax authorities therefore refers to the OECD Transfer Pricing Guidelines. Under those guidelines, administrative simplification measures (which do not directly involve determination of arm’s length prices) and advance pricing arrangements concluded with the competent authorities are not included.
- Hallmark E3: arrangements involving a cross-border transfer of functions and/or risks if the transferor’s annual earnings before interest and taxes has decreased by 50% after the transfer (BOI-CF-CPF-30-40-30-20-20200429 § 450 and seq.)The concept of “earnings before interest and taxes” does not correspond to an intermediate balance as defined in the French general accounting. The term “EBIT” is literally translated from the English term “EBIT”. Fortunately, the French tax authorities indicate that the annual earnings before interest and tax refers to the operating income, thus allowing the exclusion of financial products (interest and dividends).
While the recently published guidelines provide an insight on some points, others remain unclear and invite to adopt a careful approach when analysing the scope of the hallmarks.
In this context, though a break may be granted, the intermediaries and the relevant taxpayers will need to finalise in a prompt manner the analysis of cross-border arrangements carried out since 25 June 2018 and, where appropriate, to prepare and file the related declarations. In addition, adequate internal procedures will have to be determined and set-up as soon as possible so that future transactions falling within the scope of the reporting requirement be identified and that all arrangement be adequately followed-up and documented.
