Tax Experts Forum: Examining the World Ahead
By Alexandra Loli, Publisher | Business Partners, Mar-Apr 2019

At the beginning of its sovereign debt crisis, Greece undoubtedly had a more competitive corporate tax system than it has today. While other countries used the crisis as the perfect opportunity to develop into tax friendly and tax stable jurisdictions, Greece opted to shoot itself in the foot and become instead a high-tax jurisdiction.

Indicatively, in 2011, the Greek statutory corporate income tax rate was 20%, the eighth lowest among the 36 OECD economies and tenth lowest among the 28 EU member states. In 2018, this tax was increased to 29%, being the eighth and sixth highest in the OECD and EU respectively. The tax on dividends also increased from 10% (in 2014) to 15% (in 2017). At the same time, the average Greek employee is paying more than 50% of his gross annual income in taxes and social security contributions.

The justification for this trend was that tax increases were a natural antidote to Greece’s fiscal deficit. In essence, it was the inability and/or unwillingness of the Greek political system to accept what international experience has already proven: that overtaxation kills the economy.

Two of the other three EU member states that experienced a bailout, Ireland and Cyprus, treated their low corporate income tax rates as sacrosanct and kept them untouched. According to Eurostat, Ireland’s GDP growth rate for 2017 was 7,2%, while Cyprus’s was 4,2% (Greece’s was 1,5%), and unlike Greece, both countries have low unemployment rates. Of course, corporate income tax rates are not the only reason for their recovery; however, they are an indication of how a growth-oriented crisis-stricken economy can face recession. And it is not only Ireland and Cyprus that set an example. Other EU member states—including Bulgaria, Romania, Hungary, Malta, and Cyprus—have adopted a policy of low tax rates, which is reflected in their high GDP growth rates (between 3,8% and 7% for 2017) and low unemployment rates (between 3,7% and 8,5% for 2018). Those jurisdictions have promoted tax incentives that attract foreign direct investments, high-skilled workers, or high-net-worth individuals.

Has Greece lost the game of international tax competition?

Going in the opposite direction, Greece focused on increasing its tax revenues beyond the abilities of the local economy, while maintaining the anti-competitive features of its tax systems. For example, Greece remains a hostile jurisdiction for holding companies from a tax and financial perspective; this is evident in the fact that three of the companies listed in ATHEX’s large cap index have changed (or attempted to change) their seat during the last few years. Instead of watching holding companies migrate or the ownership of local companies kept under newly established foreign holding companies, Greece could have copied holding-friendly measures, such as a participation exemption for capital gains, net interest deduction for equity financing, a less complex system for debt financing, or incentives for repatriated high-skilled employees and managers.

Has Greece lost the game of international tax competition? Statistics and empirical evidence suggest that most likely it has. Can this situation be reversed? International experience also suggests that it is possible, but would require long-term commitment and dedication to a stable, business-friendly tax regime with an equivalent adjustment of public expenditure. Business-friendly fiscal policies lead to growth, while excessive taxation only raises obstacles to business development and competitiveness.

In March 2018, the European Parliament approved the European Commission’s proposal on the Common Corporate Tax Base (CCTB) and the Common Consolidated Corporate Tax Base (CCCTB) directives. These create a legal framework under which companies would be taxed in the EU under a harmonized corporate tax law system that also takes into account their digital activities.

The directives will be mandatory for groups of companies established within the EU, with a consolidated turnover exceeding €750 million. The threshold will be lowered to zero within maximum seven years.

The CCTB actually means that large MNEs, operating across borders in the EU, would no longer have to deal with 28 different sets of national rules when calculating their taxable profits. Instead, the directive provides for a common set of mandatory rules for the calculation of the taxable base, regulating the non-deductible expenses, limitations on interest, the carry-forward period for losses transferred, anti-avoidance measures, transfer pricing, R&D tax incentives, etc.

In addition, the directive introduces the concept of a digital permanent establishment (DPE), representing a significant digital presence of a taxpayer providing online services to individuals or businesses in a member state other than its resident state.

The CCCTB directive contains the principles of fiscal consolidation and a formula to allocate the tax base of a multinational enterprise between member states. In practice, the directive provides that one of the companies of a multinational group (the principal taxpayer) will calculate the consolidated tax results, by offsetting profits and losses at EU level and will submit a tax return to the principal tax authority (one-stop shop).

Further, the consolidated tax results will be distributed among the member states concerned, based on a formulary apportionment approach. The latter consists of four equally weighted factors: labor (payroll and number of employees), assets, sales and data collected and exploited by digital content users. Finally, each member state will tax at the national tax rate the taxable profits corresponding to the local subsidiary or permanent establishment.

This distribution mechanism has been criticized by smaller member states, since it is argued that it will result in a loss of substantial amounts of taxes in favor of larger member states: Countries with a large working population will benefit from the labor factor, countries with a high manufacturing segment would benefit from the asset factor (for capital intensive industries), and high consumption states will benefit from the sales factor.

To address this issue, the directive provides that the European Commission will establish a compensation mechanism financed by the fiscal surplus from those member states that experience gains in fiscal revenues (set for an initial period of seven years).

In the form adopted by the European Parliament, the directives will be mandatory for groups of companies established within the EU, with a consolidated turnover exceeding €750 million. The threshold will be lowered to zero within maximum seven years.

The two directive proposals mention the deadline of December 31, 2019, for transposing their provisions, with measures to take effect as of January 1, 2020.

The proposal is now under consideration by the European Council and the Commission. The unanimous vote of all member states in the European Council is required to adopt the directives.

Following recent developments in the field of international aand EU tax law, it is apparent that the concept of substance is more than a simple catchphrase in cross-border planning. The introduction of the MLI and ATAD 1 and 2 is evidence that the international tax world is shifting to a substance-over-form paradigm; notably, ATAD 1 entered fully into force on January 1, 2019, coinciding with the MLI’s provisions on withholding taxes.

Both the ATADs and the MLI are expected to trigger profound changes in the application of tax treaties and EU directives, introducing and incorporating the concept of substance. This concept is expected to play a key role in anti-abuse and treaty residence rules, also affecting transfer pricing structures and CFC rules among other things.

The lack of a universally accepted definition of substance is bound to lead to a rise in tax disputes around the world

While no definition of the term may be found in domestic law or double tax treaties, international jurisprudence identifies substance with a combination of functions, i.e. allocation of wages, assets, i.e. premises, offices, and risk allocation, i.e. risk-free back-to-back transactions. The level of substance required to avoid challenges by the tax authorities may be determined on a case-by-case basis; however, it seems that the required level is specific to each structure or activity under review. In this respect, for a holding company managing a single shareholding to meet substance requirements, the mere avoidance of letterbox/brass-plate companies may suffice. Nonetheless, the lack of a universally accepted definition of substance is bound to lead to a rise in tax disputes around the world.

On a tax treaty level per the OECD’s Model Convention, where a company is considered to be a resident of both states involved, the conflict is resolved according to the place of effective management (POEM) tie-breaker rule, essentially, the place where key management and commercial decisions are made in substance, i.e. according to all the facts and circumstances pertaining to the case.

It must be noted that in the revised Article 4 of the OECD MTC 2017 edition and Article 4 of the MLI, cases of residence conflict may be resolved under the mutual agreement procedure which takes under consideration a variety of factors including the POEM rule. It should be noted that where states fail to reach an agreement, treaty benefits may be denied to the taxpayer.

Furthermore, the MLI introduces a principal purpose test (PPT) in most tax treaties, aiming to limit treaty benefits in situations where the tax benefit was a main purpose of the arrangement or transaction. The broad scope of the PPT and its inherently subjective nature may give considerable leeway to tax authorities to exclude from treaty benefits structures or transactions where the PPT is deemed to be an application of a treaty benefit.

The interplay between the PPT and EU tax law where the application of the anti-abuse provision is limited only to wholly artificial arrangements without economic activity or substance should provide interesting results.

On February 26, 2019, the Court of Justice of the European Union (CJEU) delivered two long-awaited judgments relating to proceedings concerning a refusal by the Danish tax authorities to grant to certain Danish companies exemptions from withholding tax on interest and dividends paid to group companies resident in other EU states. The exemptions at issue were provided for by the Interest and Royalties Directive (IRD) and the Parent-Subsidiary Directive (PSD) respectively, whereas the facts reviewed in the cases at issue (joined cases N Luxembourg 1, X Denmark, C Danmark I, Z Denmark as well as joined cases T Danmark and Y Denmark) involved interposed companies and non-EU ultimate parent companies, complex financial transactions, as well as the grant of intragroup loans.

The role of the CJEU is to interpret EU law so that it is applied in the same way in all EU states. These landmark decisions and their useful pointers are to be considered among others by companies making payments to group companies of other EU states, under the IRD and the PSD.

These landmark decisions and their useful pointers are to be considered among others by companies making payments to group companies of other EU states

In more detail, the competent tax authorities had considered that groups of companies not satisfying the conditions of the IRD or the PSD respectively may sometimes create, between the company which pays the interest or dividend and the entity which is intended to actually have the use of it, one or more artificial companies meeting the formal conditions of the directive. The court ruled in this connection on a number of referred issues, two of which concerned abuse of rights and the concept of beneficial owner related to the financial constructions under review.

The CJEU ruled that due to a general principle of EU law, where there is an abusive or fraudulent practice, the IRD or PSD exemption, as the case may be, is to be refused even if there are no domestic or tax treaty rules providing for such a refusal. The court provided a number of indications which as stated, if established by the referring court as being objective and consistent, can demonstrate an abuse of rights.

In accordance with the guidance provided by the court, an indication of artificiality could be that all or almost all of the interest or dividends are, very soon after their receipt, passed on by the companies that had received them to entities which do not fulfill the conditions for application of the IRD or PSD respectively. Another relevant indication could be the absence of actual economic activity of the recipient company, inferred by factors relating to that company’s management, to its balance sheet, to the cost structure, to the staff that it employs and to the premises and equipment that it has.

As regards the concept of beneficial ownership as a condition of application of the IRD tax exemption, the CJEU ruled that a beneficial owner of the interest is the entity which actually benefits from the interest economically and accordingly has the power freely to determine the use to which it is put.

The appropriate way for governments to deal with the challenges their societies are confronted with still remains high on the public agenda. Environmental footprint reduction and public health protection are at the center of this debate.

The initial response of governments worldwide was to impose stricter regulations, a tighter framework aiming at reducing usage of all products and habits that are burdensome to public health and the environment. However, the development and, in particular, the maintenance of the necessary control mechanisms put additional pressure on public accounts, while the results failed to meet expectations.

Innovation provides solutions where regulators and traditional industry players have failed to do so

Next came the introduction of the so-called “sin taxes.” Additional taxes were imposed on items such as alcohol, tobacco, plastic bags, and certain unhealthy food and beverages in an attempt to reduce bad consumer habits. Were these measures successful? Taking tobacco as an example, the answer appears to be no. On one hand, illicit trade boomed, covering any excessive demand, while on the other hand, public revenue declined.

Perhaps it’s time to take a different approach to finding a solution. Punitive tax policies can be complemented by the introduction of more favorable regimes for other alternatives reducing the root cause of the issue. The results in countries that have adopted such a differentiated tax policy are impressive and certainly a precedent worth examining.

The United Kingdom and the Netherlands offer vivid examples of successfully implemented tax differentiation policies. Confronted with the issue of excessive alcohol consumption, both countries proceeded with an increase of excise duty on high alcoholic beverages, while simultaneously applying a tax discount to low alcoholic beverages. Thanks to this differentiation, both the state revenues and the consumption of low- or zero-alcohol products increased. In the Netherlands specifically, alcohol-free beer consumption rose to 33.4 million liters in 2015 from 12.5 million in 2010¹.

Sweden is another example of the social benefits deriving from the implementation of a differentiated tax policy. In the ‘90s, the Swedish government, aiming at the reduction of the harm associated with cigarette consumption, increased excise duty on conventional tobacco products, keeping flat the tax rates on an alternative product called snus. Six years later, in 1996, the sales of this alternative product exceeded the sales of cigarettes²; most importantly, in 2017 Sweden was the country with the lowest smoker population and with the lowest tobacco-related disease incidence in the EU³.

In the era of the Fourth Industrial Revolution, there are no longer unknown variables in balancing fiscal policy objectives and the successful addressing of socio-environmental issues. Socially responsible innovation is the answer.

Innovation is behind the ideation of the first electric car, the designing of environmentally friendly products, and the development of public health harm-reduction alternatives. Innovation provides solutions where regulators and traditional industry players have failed to do so.

Now is the right time for Greece to move forward and design a tax model that fuels growth and promotes innovation by evaluating the social footprint of products and treating risk-reducing alternatives as part of the solution, not as part of the problem.

¹ Nederlandse Brouwers, Bierconsumptiecijfers 2016. https://www.nederlandsebrouwers.nl/nieuws/actueel/consumptie-alcoholvrij-bier-verdriedubbeld-sinds-2010/

² Swedish Match, Tobacco Use in Figures. https://www.swedishmatch.com/Snus-and-health/Tobacco-use/Tobacco-use-in-figures/

³ Special Eurobarometer 458: Attitudes of Europeans towards tobacco and electronic cigarettes (2017). http://ec.europa.eu/commfrontoffice/publicopinion/index.cfm/Survey/getSurveyDetail/instruments/SPECIAL/surveyKy/2146

Taxation’s framework is set by the constitution in order to protect citizens from unjustified measures that may restrain their economic freedom. The constitution excludes administration from defining taxation and reserves this task for Parliament. Certain principles, such as the principles of certainty and of strict interpretation, go beyond the constitution. The former ensures the objectivity of tax legislation so that taxpayers know in advance their tax obligations, and the latter ensures that in dubio the letter of the law prevails and that application of tax law by analogy is categorically forbidden.

Centuries ago, Adam Smith posited that the higher the taxes, the higher the tax evasion—yet states have still chosen to elevate tax compliance as the superior concept and have invented ways and rules to get around their applicable restrictions

Lately, however, there is a trend in Europe to deviate from these principles that protect human rights and to prioritize tax collection and the fight against tax evasion. States, in their inability to produce fair systems, invent various sets of rules and regulations to imprison taxpayers in their tax regimes, limiting their freedom to select their place of economic activity or at least to select the most proper kind of contractual relation to develop such activity, all in the name of fighting tax evasion. Centuries ago, Adam Smith posited that the higher the taxes, the higher the tax evasion—yet States have still chosen to elevate tax compliance as the superior concept and have invented ways and rules to get around their applicable restrictions.

In civil law, mainly in continental legal systems, there is a single provision that can rescind and abrogate any exercise of legal rights if such exercise is considered an abuse of such rights. Intended to regulate extraordinary circumstances that deviate from normal ways of living and having dealings, this is a moralization of the law, based on subjective judgment of moral principles and standards. This aspect of civil law seems compatible with public law only in relation to the behavior of the authorities, as these have the powers, the abuse of which undermines democracy and human rights. In public law the prohibition of abuse of right appears as a mandate for fair administration, dictating the proper way of management; however, when this concept refers to the behavior of citizens, it raises philosophical and political questions and is incompatible with the principle of certainty governing tax laws.

Recently, EU tax law has evolved to include the concept of tax abuse, as depicted in the Anti Avoidance Directives (ATAD 1 and 2) of 2016 and 2017. In Greece, such a principle has been legislated as part of the Code of Tax Procedures (N.4174/2013) in Article 38. The latter claims any tax benefit enjoyed by the contracting parties if their relationship could be considered an artificial arrangement. Although it may appear attractive as a moral rule, this introduces subjective judgment and the challenge of the expediency of business decisions as part of the tax assessment. Consequently, this refutes or jeopardizes the certainty of taxation.

The aforementioned legal framework together with Council Directive 2018/822 on mandatory disclosure of potentially harmful tax planning arrangements by intermediaries create uncertainty in terms of tax implications of various business and non–business transactions and a negative environment for domestic as well as foreign inward investment.

It is common knowledge that tax fraud, tax evasion, and tax avoidance limit the capacity of EU member states to raise revenues. Through tax avoidance, profits are shifted to or through a member state resulting in tax base loss for another member state. Tax evasion and fraud produce or increase inequalities and affect company activity, especially at the cross-border level. In this context, tackling tax evasion and fraud, while taking effective measures for preventing aggressive tax planning, is essential in order not only to secure tax revenues but also to strengthen tax morale between individuals and companies and promote a culture of compliance.

The fight against tax fraud, tax evasion, and tax avoidance within the European Union calls for coordination at both the EU and national level. Indeed, several initiatives have taken place at the EU level in recent years. In June 2015, the European Commission adopted an action plan for fair and efficient corporate taxation, including the relaunch of the Common Consolidated Corporate Tax Base (CCCTB). The CCCTB provides for two stages of reform: first, the harmonization of the rules determining the taxable profits of large European and non-Europeans companies operating within the EU, and, subsequently, the introduction of a consolidation scheme for profits and losses and a mechanism to allocate net profits between member states based on predetermined criteria (assets, labor, and sales).

The fight against tax fraud, tax evasion, and tax avoidance within the European Union calls for coordination at both the EU and national level

Other key initiatives include the two Anti-Tax Avoidance Directives (ATAD 1 and 2) and directives in favor of tax transparency. ATAD 1 entered into force in January 2019, defining minimum standards with regard to controlled foreign company rule to deter profit shifting to low/no-tax countries, a hybrid mismatches rule to prevent double non-taxation, an exit taxation rule to prevent companies from avoiding tax when relocating assets, an interest limitation rule to discourage artificial debt arrangements designed to minimize taxes, and a general anti-abuse rule to counter aggressive tax planning when other rules do not apply. ATAD 2, with measures to tackle hybrid mismatches in relation to third countries, is scheduled to enter into force in January 2020. Furthermore, several amendments were made in recent years to the Directive on Administrative Cooperation (DAC), including the new rules for intermediaries—such as tax advisers, accountants, banks and lawyers—that design or sell potentially harmful tax schemes (DAC6). Progress has also been made in the area of exchange of information, with the extension of automatic exchange of information to almost to all categories of income. EU member states have also adopted or improved various directives and regulations as regards other forms of administrative cooperation, such as joint audits and tax collection.

Despite these measures, one could expect closer cooperation between member states. Yet there is still mistrust between member states engaged in tax competition, with smaller member states fearing that certain initiatives may reduce their tax revenues (e.g. through profit diversion) or their tax autonomy. However, in light of current geopolitical developments, the EU and member states cannot afford mistrust. The global tax competition and continuous efforts of individuals and legal entities to avoid taxation of their profits call for acceleration of all actions within the EU.

Last February, Apple® agreed to pay 10 years of back taxes to France. Apple has not disclosed the size of the settlement but said in a statement: “We know the important role tax payments play in society, and we pay all that we owe according to tax laws and local customs wherever we operate.”

It is estimated that the CCCTB can raise investment in the EU by 3.4% and growth by up to 1.2%

Large tech firms such as Apple have been criticized for the small amounts of tax they pay in EU countries including France and the UK relative to the billions in sales they report in these countries. In the UK, Chancellor Philip Hammond recently announced plans to introduce a special digital services tax by 2020 on online firms making more than £500 million globally per year. France is also introducing the so-called “GAFA” tax—referring to Google, Apple, Facebook, and Amazon—which would affect tech companies with global sales of more than €750 million and €25 million in France.

It is important to remember that apart from online sales of products, a significant part of the income of these companies comes from the provision of online services. Users access their accounts from remote locations; providers are almost always located in multiple taxing jurisdictions; and the data traffic itself, via the internet’s complex architecture, is routed through different locations. This makes it impossible to determine location for the purposes of defining where wealth is created and hence the source of income taxation. This is the reason why countries like France end up introducing unilateral measures to collect taxes from tech giants who on their part appear willing to pay. But is it possible to resolve this complex issue through unilateral actions of member states? It need not be so. This issue can be addressed by the Common Consolidated Corporate Tax Base (CCCTB) launched by the European Commission.

According to the CCCTB, depending on the location where the parent of a multinational resides, the corresponding member state is responsible for assessing the group’s tax base by application of a formula. The formula apportionment employs factors like capital, sales and labor on which the allocation is based. Finally, every allocated share of profit is taxed in the respective member state with the relevant corporate income tax rate. The multinational would only have to deal with one tax administration and would be subject to a single set of tax rules. In principle, the profit tax becomes a tax on the factors included in the formula, i.e. capital, sales and labor. Tax planning is still possible as companies have an incentive to shift the tax base to low-tax jurisdictions by means of transferring the formula factors, e.g. capital (i.e. assets), and not just their headquarters. Because tax planning under separate accounting focuses on tax base shifting whereas tax planning under a formulary apportionment will focus on the location of investments.

It is estimated that the CCCTB can raise investment in the EU by 3.4% and growth by up to 1.2%. It will encourage business and investment by offering companies solid and predictable rules, a fair and level playing field, and reduced administrative costs. Unilateral measures, on the other hand, increase uncertainty and the risk for double taxation.

As one of the lawyers who co-represented the major litigant in the famous, by now, case regarding the VAT on Marinopoulos Group’s bad debts, I am tempted to comment upon the merits of the case.

Yet the value of this case lies also in the procedure itself, which constitutes a paradigm of coordination between the business community, the administration, and the courts.

The system can work well when there are appropriate mechanisms in place and, more importantly, when there exists a will for matters to be progressed

The case is well known. The Greek legislation on the recovery of VAT did not allow recovery of the VAT that Marinopoulos Group’s suppliers had paid, even though the underlying debts had been written off in the course of the insolvency procedure and EU legislation was far from clear on the matter.

For this reason, a number of companies decided to pursue the case through legal means while business associations applied pressure to the tax administration to resolve the matter through guidelines. It must be said, however, that this was a matter hardly possible to resolve through administration guidelines, because authentic interpretation of legal provisions, which was needed in this instance, falls under the competence of the courts.

The tax administration however made use of the so-called “pilot-case” procedure that was introduced in 2011 (Law 3900) with a view to accelerating a decision by the Supreme Court on disputes with widespread impact.

This initiative of the administration, which also sought certainty on the matter, must be appraised especially in view of the likelihood of a result that would cost to the public treasury.

The Supreme Court responded positively to the request for a pilot case and arranged for a hearing within a period of just a couple of months; the decision too was issued in a timely fashion and within a very reasonable timeframe given the complexity of the case.

Apart from this time efficiency, the Supreme Court issued a high-quality decision that dealt thoroughly with rather delicate questions of both tax and commercial law and resolved the matter in a definite and clear way.

The whole experience is a bright example of how the system can work well when there are appropriate mechanisms in place and, more importantly, when there exists a will for matters to be progressed. And we have in place modern laws, an eager tax administration, and a responding judiciary.

As regards the substance of the case, as the court held, the proper interpretation of the Greek VAT law provision, in light of EU law and the jurisprudence of the European Court, dictates that the VAT on bad debts that are definitely not payable based on a procedure described in law should be recoverable by the supplier who was burdened with this tax upon issuance of his invoice. It might sound obvious, but according to the applicable provisions, it wasn’t.

Thanks to the harmonized actions of certain companies, the business associations, the tax administration and the Supreme Court, the matter is now clear. It took some time and effort, but in any event, according to the Supreme Court, the refund of the VAT will be interest bearing.

The Greek State comprises three powers: the legislative, the administrative, and the judicial. The functioning of the state depends on the exact functioning of these three powers, which, although independent, overlap to a certain degree to make the system work.

During the period of economic crisis, consecutive tax policy amendments of a rather tax-collecting character were introduced, aiming at increasing revenues. Inevitably, tax justice was called in to interpret tax legislation, weighing between the impartial implementation of constitutional principles and the need of the state, enforced by the tax legislator and implemented through the tax administration.

It remains to be seen how tax policy, lying between the legislative, administrative and judicial powers, will adapt to the global tax challenges ahead

Notably, it is the tax justice that has done the most to restore taxpayer trust in the tax administration. Following the groundbreaking ruling of the Supreme Administrative Court in 2017 (Council of State, decision No. 1738/2017) that put an end to the consecutive extensions of the five-year statutory limitation period of the right of the state to impose taxes¹, two more decisions have been released, contributing to the establishment of trust and to the country’s tax competitiveness. Specifically, the Supreme Administrative Court, through its decision No. 2465/2018, ruled on the issue of the nature of the special solidarity tax and confirmed that such tax falls within the scope of double tax conventions, contrary to the stance persistently adopted by the tax administration. Notably, the tax administration immediately complied with the interpretation adopted by the courts, sparing the taxpayers of unnecessary compliance, administrative and judicial costs. At the same time, the tax administration has taken a step towards enhancing tax competitiveness in the income taxes field, while aligning with international tax principles and practice.

Adding to this trend, very recently, the Supreme Administrative Court has provided a relief on the issue of bad debt VAT deductibility, through its decision No. 355/2019. This decision is in full alignment with EU VAT legislation and the well-established EU jurisprudence, further enhancing tax competitiveness, this time through confirming the principle of fiscal neutrality in VAT. Even though the case concerned VAT bad debt on pre-insolvency situations, it undoubtedly sets the ground for VAT treatment of substantially similar situations concerning bad debts.

The importance of this ruling from a tax perspective notwithstanding, it is remarkable that this case was brought before tax justice on the tax administration’s initiative via the pilot trial proceedings regime. Having this in mind, one could clearly conclude that the tax administration aimed at resolving the issue in a definite manner towards a consistent implementation of the EU legislation.

Undoubtedly, the tax administration faces the challenge of striking a balance between creating a tax competitive environment while preserving fairness and a level playing field. Acknowledging the positive developments in Greece’s tax landscape, it remains to be seen how tax policy, lying between the legislative, administrative and judicial powers, will adapt to the global tax challenges ahead.

¹ It remains to be seen whether the similar issue of the statutory limitation period of the right of the state to impose taxes in the cases of Greek enterprises that have been audited by certified auditors and have obtained an “unqualified tax certificate” will be ultimately resolved.

On February 26, the Court of Justice of the European Union (CJEU) issued its long-awaited judgments on the “beneficial owner” cases¹. The main question was whether dividend and interest payments were exempt from withholding tax, in accordance with the Parent-Subsidiary Directive (PSD) or the Interest-Royalty Directive (IRD), when the payments were made by a Danish company to an EU company, if the payments were fully or partially passed on to an ultimate parent company resident in a third country.

The cases have a significant impact on most international group structures and the flow of funds from EU subsidiaries to parent companies

The CJEU clarified that the term “beneficial owner” concerns not a formally identified recipient but rather the entity that benefits economically from the income received and has the power freely to determine the use to which it is put. Moreover, based on the general EU anti-abuse principle, an EU member state has to deny benefits following from the IRD or PSD if an arrangement constitutes abuse of rights.

Proof of an abusive practice requires, first, a combination of objective circumstances in which, despite formal observance of the conditions laid down by EU rules, the purpose of those rules has not been achieved and, second, a subjective element consisting in the intention to obtain an advantage from the EU rules by artificially creating the conditions laid down for obtaining it.

A group of companies may be regarded as an artificial arrangement where it is not set up for reasons that reflect economic reality, its structure is purely one of form, and its principal objective or one of its principal objectives is to obtain a tax advantage running counter to the aim or purpose of the applicable tax law.

That is so, inter alia, where a conduit entity is interposed in the structure that otherwise would not be covered by the IRD or PSD. If the funds are passed on wholly or partially shortly after they are received, this may be an indication that the entity is a conduit and this could be an indicator of abuse. It is not a requirement that there is a contractual obligation to pass on the payment.

Another indication of abuse may be if the recipient lacks substance. The absence of actual economic activity must be inferred from an analysis of the relevant factors relating, in particular, to the management of the company, to its balance sheet, to the structure of its costs and to expenditure actually incurred, to the staff that it employs and to the premises and equipment that it has.

Regarding the burden of proof, the CJEU stated that an EU member state is obliged to prove that an arrangement is abusive, but if the authorities conclude that the recipient of the income is not the beneficial owner, they are not obliged to determine which entity is the actual beneficial owner.

The cases have a significant impact on most international group structures and the flow of funds from EU subsidiaries to parent companies, especially when the ultimate parent is resident in a third country.

¹ Judgments T Denmark and Y Denmark vs. the Danish Ministry of Taxation (Joined Cases C-116/16 and C-117/16 – “the dividend cases”) and N Luxembourg 1, X Denmark A/S, C Danmark I, and Z Denmark ApS vs. the Danish Ministry of Taxation (Joined Cases C‑115/16, C‑118/16, C‑119/16 and C‑299/16 – “the interest cases”)

Academics, policymakers and international organizations have been analyzing and debating the relation between taxation and growth for years. It is evident through reports such as the World Economic Forum’s Global Competitiveness Report that taxation is a significant metric in evaluating the competitiveness of countries. Especially in relation to foreign direct investment, the OECD’s and UN’s special reports have correlated taxation with the mobility of investments worldwide.

Technologies stemming from the fourth industrial revolution have already enabled tax authorities to go beyond traditional tax auditing methods

At Deloitte, we have been focusing for some time now on the tax incentives available across jurisdictions, and we see that in many cases they are the enabling drivers of growth. In most countries and industry sectors, a system of financial incentives is available to fuel research, innovation, capital expansion, energy sustainability, employment, and training. These incentives are available for both domestic investments and growth opportunities abroad, as well as at various government levels (e.g. federal, regional, and local), and they are constantly changing to align with shifting political and social developments. Some governments are making their incentives more generic to foster growth, whereas others are targeting specific sectors to address narrow policy goals. The effectiveness of government incentives is always being evaluated, thus resulting in constant change, sun-setting laws, transition rules, and complex enforcement policies.

At the same time, technologies stemming from the fourth industrial revolution have already enabled tax authorities to go beyond traditional tax auditing methods. Using data analytics and artificial intelligence, tax authorities are improving the way they cross-correlate tax records to establish fraudulent or undisclosed activities. As ever-increasing processing power enables more data analysis, the application of tax rules and legal regulation will eventually evolve into an automated process, and this may well be the way to reduce corporate tax rates. The UK’s example shows that technologies such as XBRL and Connect have contributed to the reduction of the corporation tax rate from 28% to 20% in less than a decade. This has helped improve the UK’s competitiveness, contributing to robust economic growth, which has, in turn, led to higher profits for companies and higher corporate tax receipts for the UK Treasury.

When it comes to growth and competitiveness, corporations consider taxes to be one of the cost elements that can make products or services competitive or not. Tax incentives, such as R&D credits and IP boxes, provide reduction of taxes for specific sectors of an economy, making IP related products and services more competitive in the global markets. Lower corporate tax rates, on the other hand, can reduce the cost of products and services across the whole economy, helping the overall competitiveness of a country. Nevertheless, many governments do not consider taxes as growth tools. In fact, taxation policy is often considered as an instrument for redistributing wealth or even influencing public behavior.

It is up to governments to realize the significance of taxes for the competitiveness of products and services that target the global markets. Policymakers can use tax incentives to enable growth in specific sectors of the economy corporate tax reductions as a means to enable horizontal growth across the economy. It is up to them.