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Correcting invoices is common practice. An invoice must be corrected if local VAT has been invoiced and new facts later show that, for example, the VAT reverse charge mechanism was applicable. But can a taxable person who paid the incorrectly invoiced VAT reclaim this VAT from the tax authorities if the assessment had already been finalised? The EU Court of Justice has recently ruled on this question (SC Terracult SRL, C-835/18, 2 July 2020).
Since 1 January 2020, the European VAT legislation has contained four so-called ‘Quick Fixes’. According to the EU Commission, they are intended to simplify cross-border trade within the EU. Now six months after the implementation we evaluate the current status of the Quick Fixes.
Building on earlier initiatives and directives aimed at creating an environment for fair and transparent taxation, the EU has expanded the scope of its Directive on Administrative Cooperation. With the introduction of Council Directive 2018/822 of 25 May 2018, the EU creates mandatory disclosure rules for intermediaries and taxpayers with respect to potentially aggressive cross-border tax planning arrangements.
Apple’s landmark court battle – An Irish victory or a €13bn loss?
Ireland has always defended its tax transparency and the active role it has played internationally, in both the OECD BEPs and EU ATAD programmes. Ireland has been an early adapter of many of the anti-avoidance measures included in these programmes. The Irish Department of Finance has regularly cited the three R’s of rate, regime and reputation being the cornerstone of the Irish corporation tax code. And earlier this month, the Irish Government and Apple won their appeal against the EC regarding a 2016 ruling that stated Apple owed the Irish Revenue €13bn in unpaid corporation tax.
But while many people in Ireland celebrated the decision, others asked why would Ireland celebrate a decision to not accept an additional €13bn into the exchequer?
Low corporation tax
Ireland has a low corporation tax rate for profits attributable to Irish corporate presences of 12.5%. It has significant additional advantages to the regime such as tax depreciation for capital spend on IP, a knowledge development box which allows a corporation tax rate of 6.25% on certain earnings from IP and generous research and development tax credits.
However, all these rates and incentives are based on real substance in Ireland and the Irish Government stand firmly by its commitment to close any potential tax avoidance loopholes that may exist in the regime.
International loopholes
Apple had taken advantage of one such international loophole that existed. Ireland’s corporate tax residency rules were historically based on where management and control existed. While other countries, the US for example, considered residency to be the place of incorporation. Apple used a structure of Irish incorporated entities which were tax resident in Jersey, to achieve a significant tax advantage and result in an effective corporation tax rate on its worldwide profits of almost 0%. The Irish Revenue confirmed in both 1991 and 2007 that they did not consider the Irish incorporated entities to be Irish tax resident, given where management and control resided. However, this meant the entities profits were subject to tax in Jersey, with worldwide profits flowing to these entities and not being subject to tax anywhere else in the world.
Certainly from a moral compass perspective, the structure was aggressive and reduced many countries of their right to a portion of corporation tax, however, it was within the boundaries of international tax rules that existed at the time. In 2014, the Irish Government announced the introduction of measures from 1 January 2015 to put an end to any double Irish structures being put in place, with existing structures having until 31 December 2019 to unwind. The US also carried out significant tax reform to stop offshore IP tax advantages.
The EC had found Ireland guilty on two fronts in its original ruling; for providing illegal State Aid to Apple and for methodological errors in how profits were attributed to Ireland. However, the EU’s general court found Ireland was not guilty on either charge. Apple worldwide profits could not be attributed to a branch in Ireland of these non-resident entities and the EC failed to sufficiently evidence any rulings provided by Ireland which provided for State Aid or advantageous transfer pricing methodology.
The finding by the EU’s general court defends Ireland’s position of a tax transparent system. It gives encouragement to international business that Ireland offer an attractive location for foreign direct investment.
It is likely the EC will now appeal further to the European Court of Justice. Competition commissioner Margrethe Vestager said in a statement that the commission would “carefully study the judgment and reflect on possible next steps”.
“The commission will continue to look at aggressive tax planning measures under EU state aid rules to assess whether they result in illegal state aid,” she added.
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The article was first published on http:www.bakertilly.ie on 16 July 2020 and has been republished with the author’s permission.
Meet the expert
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| Brendan Murphy |
| Tax Director |
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