Thematic Report EATLP 2017

1. Thematic Report EATLP 2017 Determining the residence of companies belonging to multinational groups: a mission impossible? 2017 EATLP Congress, 1-3 June in Lodz, Poland Section 3: Residence, multinational enterprises and BEPS Friday 2 June 2016, 14.00-15.30 Raymond Adema Irene Burgers Maarten de Wilde University of Groningen University of Groningen Erasmus University Rotterdam

2. Some issues revealed • Internationalisation, globalisation, and BEPS • Corporate tax residence… • Place of incorporation (aim: certainty) – appealing? • Place of effective management (aim: equity) – appealing? • … determination – a mission impossible? • Differences in approaches taken • Difficulties in developing a unified and unambiguous approach towards effective management localization • Tax planning and tax competition responses • Replacing Art 4(3) OECD MTC? • MAP-tiebreaker? • Place of incorporation test?

3. Struggles and approaches • Some historical notes; • From incorporation to effective management to mutual agreement • Corporate residence, gateway to (unlimited) tax liability • Place of incorporation doctrine • Real seat doctrine • Ensuing BEPS issues and responses • Most countries embrace both approaches • Unlimited tax liability • (No) hierarchy between the two concepts • Notable exceptions: Finland, Ukraine, and the United States • Treaty tie-breaker rules to resolve dual residency issues • Relevant (catalogues of) criteria vary • Rise of MAP-tiebreaker approaches • Treaty access denial dual residents (US MTC 2016)

4. Root causes driving disconnection between economic presence and taxable presence • Corporate nationality • A legal construct to locate profit production for tax purposes • Some potential effects (e.g. corporate inversion) • Place of effective management • Ceremonial events to locate profit production for tax purposes • Some potential effects: tax-induced management localization (e.g., fly-in-fly-out management, outsourcing corporate management functions, dual residency utilization) • Permanent establishment threshold • Physical presence to locate profit production for tax purposes • Some potential effects: reduced need to establish tangible presence to service national markets; digitisation

5. A three tiered bottom-up approach to tax planning All planning starts with setting-up group entities in favorable tax jurisdictions • Tier one; operational level – OpCo in host/investm. jurisdiction • Minimization host state corporate taxation on investment returns (beneficial tax regimes utilization, deductible payments creation) • Minimization host state source taxation on repatriation (tax treaty shopping) • Tier two; intermediate level – ConduitCo in channel jurisdiction • Minimization channel state corporate taxation (beneficial tax regimes utilization, deductible payments creation) • Minimization channel state source taxation on repatriation (tax treaty shopping, dual residency utilization) • Tier three; top level – ParentCo in home jurisdiction • Minimization home state corporate taxation on repatriation of investment returns (exemption utilization, tax deferral)

6. Counter measures & implications • BEPS initiative adheres to current international tax framework • Governments seem on the case; the BEPS initiative • Tier 1; OpCo – BEPS 2 (mismatches), 4 (int.ded.) 5 (nexus) 7 (PE), 8-10 (TP) • Tier 2; ConduitCo – BEPS 3 (CFC), 6 (treaty abuse) • Tier 3; ParentCo – BEPS 3 (CFC) • Transparency; BEPS 12 (disclosure), 13 (CBC reporting), 14 (dispute resolution) • Implementation (treaty aspects); BEPS 15 (MLI – a.o. MAP-tiebreaker) • Implications • Substance (requirements) to credibly argue tax planning and tax competition responses; a solution? • MLI MAP-tiebreaker on top of existing corporate tax residency determination rules; a solution or added red tape?

7. Takeaways (1) • Corporate residence, a mission impossible? • It depends it seems… • Establishing tax jurisdiction • Little substantive has changed over the years in terms of the tax connecting factors that countries deploy to establish tax jurisdiction • Substance to secure tax effects • What has changed over the years is that legal arrangements now seem to be required to carry some substance to have some tax effects • Countries trying to keep afloat in the tax competition race • Generic tax rate reductions • Adoption of substance requirements

8. Takeaways (2) • Perhaps the impossibility of the mission does not lie so much in tax residency determination, but rather in the effective addressing of base erosion issues and the bringing of the race to the bottom to a halt

9. Key points for Panel discussion • 1. Principles • Place of incorporation and effective management: prevalence of principles certainty vs. equity? • 2. World without BEPS: Determining place of residence not a mission impossible if domestic law/EU law/OECD Model would be improved? • Add hierarchy of tests? • Replace “place of effective management” with “place of executive management”/”place where economic nexus is strongest”/”main business purpose”/other? • 3. Place of residence and BEPS • Harmonization of substance requirements? Role of EU/OECD • Art. 4 MLI: Mutual agreement without arbitration -> Taxpayer’s rights? • Merits and drawbacks of French territorial system? • Merits and drawbacks of international tax system based on economic allegiance/origin, requiring income to be allocated on the basis of four considerations of weight, being the acquisition of wealth, the location of wealth, the enforceability of wealth and the consumption of wealth, instead of residency and source? • Tax rate reductions/substance requirements: What’s next in the tax competition race in relation to “residence issues”? • 4. Other?

10. Contact details: • Dr. Raymond Adema • r.p.c.adema@rug.nl • Prof.Dr. Irene Burgers • i.j.j.burgers@rug.nl • Dr. Maarten de Wilde • dewilde@law.eur.nl