Combating Tax Avoidance in the EU EUCOTAX Series on European Taxation VOLUME 61 Series Editors Prof. Dr Peter H.J. Essers, Fiscal Institute Tilburg/Center for Company Law, Tilburg University Prof. Dr Eric C.C.M. Kemmeren, Fiscal Institute Tilburg/Center for Company Law, Tilburg University Prof. Dr Dr h.c. Michael Lang, WU (Vienna University of Economics and Business) Introduction EUCOTAX (European Universities Cooperating on Taxes) is a network of tax institutes currently consisting of eleven universities: WU (Vienna University of Economics and Business) in Austria, Katholieke Universiteit Leuven in Belgium, Corvinus University of Budapest, Hungary, Université Paris-I Panthéon-Sorbonne in France, Universität Osnabrück in Germany, Libera, Università Internazionale di Studi Sociali in Rome (and Università degli Studi di Bologna for the research part), in Italy, Fiscaal Instituut Tilburg at Tilburg University in the Netherlands, Universidad de Barcelona in Spain, Uppsala University in Sweden, Queen Mary and Westfield College at the University of London in the United Kingdom, and Georgetown University in Washington DC, United States of America. The network aims at initiating and coordinating both comparative education in taxation, through the organization of activities such as winter courses and guest lectures, and comparative research in the field, by means of joint research projects, international conferences and exchange of researchers between various countries. Contents/Subjects The EUCOTAX series covers a wide range of topics in European tax law. For example tax treaties, EC case law, tax planning, exchange of information and VAT. The series is well-known for its high-quality research and practical solutions. Objective The series aims to provide insights on new developments in European taxation. Readership Practitioners and academics dealing with European tax law. Frequency of Publication 2-3 new volumes published each year. The titles published in this series are listed at the end of this volume. Combating Tax Avoidance in the EU Harmonization and Cooperation in Direct Taxation Edited by José Manuel Almudí Cid Jorge A. Ferreras Gutiérrez Pablo A. Hernández González-Barreda Deloitte Legal Chair of Business Taxation Published by: Kluwer Law International B.V. PO Box 316 2400 AH Alphen aan den Rijn The Netherlands E-mail: international-sales@wolterskluwer.com Website: lrus.wolterskluwer.com Sold and distributed in North, Central and South America by: Wolters Kluwer Legal & Regulatory U.S. 7201 McKinney Circle Frederick, MD 21704 United States of America Email: customer.service@wolterskluwer.com Sold and distributed in all other countries by: Air Business Subscriptions Rockwood House Haywards Heath West Sussex RH16 3DH United Kingdom Email: international-customerservice@wolterskluwer.com Printed on acid-free paper. ISBN 978-94-035-0154-3 e-Book: ISBN 978-94-035-0142-0 web-PDF: ISBN 978-94-035-0151-2 © 2019 José Manuel Almudí Cid, Jorge A. Ferreras Gutiérrez & Pablo A. Hernández González- Barreda All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without written permission from the publisher. Permission to use this content must be obtained from the copyright owner. More information can be found at: lrus.wolterskluwer.com/policies/permissions-reprints-and-licensing Printed in the United Kingdom. Editors José Manuel Almudí Cid is Professor of Tax Law and Vice Dean for Postgraduate Studies at Law Faculty of the Complutense University of Madrid. His main fields of research are European Tax Law in the area of direct taxation, international anti- avoidance rules, the harmonized system of VAT and taxpayer guarantees in tax procedures. He is the author of several publications on Tax Law, and he is regularly invited to speak at various tax conferences both in Spain and abroad. He is a member of the International Fiscal Association and of the Spanish Association of Tax Advisors. Jorge A. Ferreras Gutiérrez is Tax Inspector and currently is Financial Counsellor at the Spanish Permanent Representation to the European Union. He was previously Deputy Competent Authority for International Taxation at General Directorate for Taxation in the Ministry of Finance of Spain. He obtained Dual Degree in Law and Business Administration from Universidad Pontificia Comillas (ICADE), studied at the Université Catholique de Louvain (Belgium) under an exchange programme and obtained a Major in Finance from the Stockholm School of Economics (Sweden). He is also a frequent speaker at international tax conferences and author of articles related to international taxation, in particular BEPS project. Pablo A. Hernández González-Barreda is Assistant Professor of Tax Law at Univer- sidad Pontificia Comillas – ICADE and Secretary to the Deloitte-ICADE Chair of Business Taxation. His main research subjects are Abuse in International and European Tax Law and Taxation of the Financial sector. He has authored and edited several publications on these matters. He also frequently participates in national and interna- tional conferences and has been a visiting researcher or professor in many leading academic institutions. v Contributors Aitor Navarro Ibarrola is senior tax scholar in Carlos III University, Madrid, focused in corporate and international taxation, especially on transfer pricing matters. He has published various relevant papers and books, among which the book entitled Trans- actional Adjustments in Transfer Pricing, published in the IBFD Doctoral Series (vol. 40), may be highlighted. He also regularly participates as lecturer in various Spanish and International Tax Law seminars and conferences, as well as in regular lectures at undergraduate and LLM levels. Alejandro Zubimendi is lecturer at the Instituto Superior de Derecho y Economía (Madrid), where he lectures on tax law. He is also engaged on his PhD on international taxation. Previously, Alejandro performed during years as a tax lawyer in several law firms in Spain, dealing with tax planning at domestic and international level. He obtained his Degree in Law at the Deusto University and his LLM degree in interna- tional taxation at the University of Florida. Andrés Báez Moreno is Associate Professor of Tax Law at the Universidad Carlos III de Madrid and a lawyer at the Madrid Bar. He has been a visiting pre- and postdoctoral researcher at the University of Münster, the University of Cologne, the University of Padua at IBFD, and currently holds a Scholarship of the Max Planck Institute for Tax Law and Public Finance in Munich. His areas of expertise are domestic company taxation (in particular, commercial and tax accounting) and international taxation, fields in which he has published two books and more than 30 articles and contribu- tions. Andrés Sánchez is Honorary Professor of the Universidad Complutense de Madrid, has a Bachelor of Laws and a Bachelor of Business Studies (Universidad Pontificia Comillas – ICADE). He lectures at the Instituto de Empresa (IE), at the Centro de Estudios Financieros (CEF) and at the Universidad Complutense de Madrid. He is a partner at Cuatrecasas, specializing in international taxation and transfer pricing matters. vii Antoinette Musilek is tax inspector of the State. Spanish delegate in international taxation of the Directorate General of Taxes to the OECD, the Global Forum on transparency and exchange of information, the EU and the G20. Author of several articles and chapters of international fiscal manuals. Currently, Head of the Finance Department at the Embassy of Spain in Brazil, providing counselling regarding taxation and customs matters, as well as budgets and public accounting. Ascensión Maldonado is tax auditor for more than 20 years. Since 2013, she is working in the International Taxation Office at the Spanish Tax Agency. She was involved in the discussion of the amendment of Directive 2011/16/EU as regards mandatory automatic exchange of information on tax rulings and has participated in the Forum on Harmful Tax Competition (OECD) where BEPS Action 5 was discussed. Nowadays, she is mainly devoted to the discussion of mutual agreement procedures in transfer pricing cases. Beatriz Parejo is Deputy Competent Authority for Corporate Taxation at General directorate for Taxation in the Ministry of Finance of Spain. Degree in Law and Business Administration from Comillas Pontifical University (ICADE). She is tax inspector, frequent speaker at international tax conferences and author of articles related to corporate taxation, in particular BEPS project. Parejo was part of the discussions of Actions 2, 3, 4 and 5 of the BEPS Action Plan at the OECD. Brian Leonard is a Graduate of Strathclyde University in Bachelor of Laws (LLB). After joining Deloitte he qualified as a Chartered Accountant with the Institute of Chartered Accountants of Scotland (ICAS). In 1998, he moved from Deloitte UK to Deloitte Spain and undertook a masters in Spanish taxation with the Centro de Estudios Tributarios y Economicos. He has been a partner in the international tax practice of Deloitte since 2006. He is currently partner in charge of Deloitte’s Spanish tax practice and leads the Global Business Tax service line in EMEA. He is recognized by Best Lawyer as one of Spain’s leading tax advisors. Cristino Fayos is Co-Chair at the Deloitte Chair of Business Taxation and Adjunct Professor at the Law Faculty at Universidad Pontificia de Comillas (ICADE). He has been a partner in the Tax Department of Deloitte Legal since 2013. He is currently in charge of the firm’s tax technical committee. He is the author of several books and has published many articles at newspapers and specialized publications. Diego Arribas has obtained double degree in Law and Business Administration (University of Zaragoza) and a master in Tax Law (Centro de Estudios Financieros – CEF). Currently, he is a PhD student in International Tax Law (Universidad Com- plutense de Madrid). Diego is a tax lawyer at Cuatrecasas. In particular, he is a member of the knowledge management team of the firm, specializing in international taxation. Domingo J. Jiménez-Valladolid de L’Hotellerie-Fallois is Tenured lecturer of Tax Law at the Autonomous University of Madrid. He has authored several articles, books and chapters on International and European tax issues. He holds a PhD from the Contributors viii Autonomous University of Madrid (2011) which was awarded with the 2012 European Academic Tax Award (European Association of Tax Law Professors/European Com- mission) and the 2013 Sorbonne Tax Law Thesis Award (University of Paris 1 Pantheone-Sorbonne). In July 2018, he was appointed to the Spanish Ministry of Labour as advisor of the Secretary of State for Employment. Edoardo Traversa is Professor of Tax law and Policy at the Faculty of Law and Criminology and Head of the Institute of European Studies at Université Catholique de Louvain and visiting professor at KU Leuven and WU Vienna. He is a member of IFA and EATLP. He holds editorial responsibilities of several tax law journals (Intertax, Rivista di diritto tributario internazionale). He has extensively published on EU and international tax issues. Consultant to EU and Belgian authorities and Counsel Lawyer at Liedekerke. Eduardo Tapia Tejedor has obtained Law degree from the University of Salamanca, tax inspector since 2009 and member of the Madrid Bar Association and the Institute of Accounting and Auditing. Master in Public Finance, Public Policies and Taxation. Elena Rodríguez Ruiz de Alda has obtained Bachelors in Economics from the University of Navarra. Tax official since 1998, when she joined the technical corps of the Ministry of Finance. Her current post is in the Sub-Directorate General for International Taxation within the Directorate General for Taxation of the Spanish Ministry of Finance. Formerly, she worked for the Sub-Directorate General for Inter- national Fiscal Affairs and Tax Policy. Since 2002, she has been part of the team responsible for the formulation of the Spanish participations in preliminary rulings and actions for failures to fulfil in direct taxation matters. Eva Escribano is Associate Professor of Tax Law in Universidad Carlos III de Madrid (Spain) since 2011. Her areas of expertise are tax treaties and tax policy, with special emphasis on the taxation of corporate profits in the light of the challenges posed by an increasingly digitalized and global economy. Her thesis (Jurisdiction to tax corporate income pursuant to the presumptive benefit principle) obtained the European Aca- demic Tax Thesis Award 2018 granted by the European Commission and the European Association of Tax Law Professors. Félix Daniel Martínez Laguna is junior lecturer and PhD candidate at the Tax Law Department of Universidad Autónoma de Madrid (UAM). His research focuses on international, comparative and domestic corporate taxation and his PhD studies on hybrid financial instruments, double non-taxation and linking rules. He has authored several articles and book chapters on domestic and International Tax Law for Spanish and international publications, and he has received the 2018 IFA President YIN Scientific Award for his article Abuse and Aggressive Tax Planning: Between OECD and EU Initiatives – The Dividing Line between Intended and Unintended Double Non- Taxation, published in World Tax Journal, vol. 9, issue 2, 2017. Contributors ix Félix Vega Borrrego is Professor of Tax Law at the Autonomous University of Madrid, Spain. He specializes in the field of international taxation and is the author of several articles and books on Spanish and International Tax Law. Gianluca Mazzoni is SJD candidate at the University of Michigan Law School, where he also completed his LLM in International Tax in 2016. As an LLM student, Gianluca Mazzoni served as a research assistant to Professor Reuven Avi-Yonah focusing on tax evasion and transparency. Before joining Michigan Law in 2015, Gianluca Mazzoni was a trainee tax lawyer in a leading Italian tax law firm, where he drafted memoranda for cases involving international and domestic tax matters and provided assistance in the context of pre-litigation settlement procedures with the Italian Tax Authority. While residing in Italy, Gianluca Mazzoni was a teaching assistant in a third-year tax law course at the University of Milan. Giulio Allevato is Assistant Professor of Tax Law at IE University Law School in Madrid. He is also Affiliate Professor of Tax and Law at SDA Bocconi School of Management in Milan. In the past, he has been Hauser Global Fellow at NYU School of Law and Ernst Mach Scholar at the Institute for Austrian and International Tax Law of the Vienna University of Economics and Business. His research and publications encompass topics of international taxation and tax risk management. He holds a PhD in International Law and Economics from Università Bocconi and an International Tax LLM from the University of Michigan Law School. Gloria Marín Benítez is adjunct professor at the Comillas Pontifical University and lawyer in Uría Menéndez’s Madrid office since 1997. She has devoted her entire professional career to advising on tax law and specifically corporate taxation, including litigation, tax aspects of corporate reorganizations and day-to-day matters. Gloria holds a doctor of law and she has published numerous contributions. Her areas of special- ization include anti-avoidance regulations and legitimate tax planning. Jaime Mas Hernández graduated in Economics and Business Management and tax inspector. He started his professional career in 2001 at the inspection services of the Spanish Tax Agency. He also worked at the Office of the Secretary General for Finance of the Ministry of Finance, where he was appointed Head of the Legal Tax Advisory service. He has also served as officer at the OECD Center for Tax Policy and Administration. Since 2013 and until 2018 he worked as International Tax Coordinator at the Adjunct Directorate General for International Taxation at the Ministry of Finance. In September 2018 he was appointed Financial Counsellor at the Permanent Represen- tation of Spain to the OECD. Javier Doldán is a tax inspector. He belongs to the Directorate General for Taxation, Ministry of Finance of Spain. He has ten years of experience as Financial Transactions Taxation Coordinator. His main activities have been: drafting, analysis and interpre- tation of legislation in the field of taxation of the financial sector or in the taxation of securities income. Mr Doldán has participated in numerous EU meetings. In particular, Contributors x he recently was a member of the experts group established to develop the Code of Conduct on Withholding Tax, which was put forward in December 2017. He has a degree in Economics from the Universidad Autónoma de Madrid, specializing in Public Economics. José María Cobos Gómez is partner in the tax practice area of Garrigues and Adjunct Professor at Universidad Pontificia Comillas. He obtained degree in Law and Business Administration, Universidad Pontificia Comillas (ICADE E-3) and PhD in Law, Univer- sidad Cardenal Herrera-CEU. He has extensive experience in the field of business taxation, restructuring transactions, advisory to sports companies, artists and profes- sional sportsmen and women and advisory relating to environmental taxation, R&D and environmental tax incentives. Juan Zornoza Pérez is Professor of Public Finance and Tax Law at the Universidad Carlos III de Madrid, where he holds the PwC Chair on International Corporate Taxation. Prof. Zornoza is a founding member of the Ibero-American Observatory of International Taxation and is the author of five books and more than 120 chapters and articles published in textbooks and journals in Spain and abroad. His areas of expertise are domestic company taxation, international taxation and tax crimes. Manuel Santaella has obtained degree in Economics and Business Administration at Universidad Pontificia Comillas (ICADE) and in Law at the Universidad Nacional de Educación a Distancia (UNED). He was finance inspector at the Spanish Ministry of Finance and currently serves as Head of the Tax Counselling Department in Tax Matters of the Directorate General of Taxation, where he coordinates the EU tax issues. Previously, he has held the positions of Fiscal Attaché at the Permanent Representation of Spain to the EU in Brussels. María Cruz Barreiro Carril is lecturer in Tax Law at the University of Vigo (Spain), where she obtained her doctoral degree with the mention of European Doctor. Her thesis on ‘Direct taxation and EU Law: Negative tax integration by the ECJ’, received the PhD award by this University and the Law Institute of Fiscal Studies (Spanish Ministry of the Finance) Thesis Award. She has been researching in European and International Tax Law at different centres and Universities such as the IBFD, WU Vienna University of Economics and Business and NYU. María del Mar Barreno Asensio is tax inspector with 8+ years of experience. Since 2013, she is working in the field of international taxation, dealing with mutual agreement procedures, Double Tax Agreements’ negotiation and domestic regulations’ proposals, among other issues. Since February 2017, she is the Assistant Deputy Director for International Taxation, in charge of other MAP cases’ coordination. She attends MAP’s bilateral meetings as Head of Spanish delegation. Additionally, she was the Spanish delegate at the Sub-Group on Arbitration of OECD Multilateral Instrument and, at the moment, she represents Spain at the FTA MAP Forum of the OECD. She has Contributors xi written several articles highlighting her participation as co-author of the book ‘El Plan de Acción sobre Erosión de Bases Imponibles y Traslado de Beneficios (BEPS)’. Paula Benéitez obtained double degree in Law and Economics from Carlos III University and an Adv. LLM in International Tax Law from the International Tax Center (Leiden University) where she served as Teaching Assistant. Paula is a tax lawyer at Cuatrecasas, specializing in international tax. Plácido Martos Belmonte obtained degree in Law, is Spanish tax auditor and is highly specialized in International Taxation and Financial Transactions Taxation. Belmonte has fourteen years of experience in international tax matters, attended numerous meetings as the Spanish delegate at OECD/EU and also participated as member of the Spanish Delegation in negotiations of DTCs and TIEAs. He has deep expertise on automatic exchange of information and is responsible of implementing domestic legislation on FATCA and CRS. He is currently working in the Spanish Tax Agency. Reuven Avi-Yonah is Irwin I. Cohn Professor of Law and Director of the International Tax LLM Program, and he specializes in corporate and international taxation. He has served as a consultant to the U.S. Department of the Treasury and the Organisation for Economic Co-operation and Development (OECD) on tax competition, and is a member of the steering group for OECD’s International Network for Tax Research. He has published more than 150 books and articles, including Advanced Introduction to International Tax (Elgar, 2015), Global Perspectives on Income Taxation Law (Oxford University Press, 2011) and International Tax as International Law (Cambridge Uni- versity Press, 2007). Roberta Poza Cid is partner on International Taxation at PwC since 2017. She had qualified in both Economics and Law and belongs to the National body of Finance Inspectors. Roberta has been the Head of International Tax within Spanish Ministry of Finance responsible for legislative projects, tax rulings, Double Tax Agreements and competent authority for MAP. She represented Spain at the EU and the OECD. Since 2014 and until 2017, she was Finance Counsellor of Spain before the EU. Salvador Pastoriza is lecturer at Universidad Complutense and at Centro de Estudios Garrigues and Lawyer at Garrigues. He obtained PhD in European Tax Law from the University of Bologna and the Royal College of Spain (Italy) and master’s in Tax and Accounting from Universidad de Santiago de Compostela, executive master’s in Tax Advice from Centro de Estudios Garrigues. LLM in Advanced European Legal Studies from the College of Europe (Bruges). Silvia López Ribas holds degrees on Business Administration and on Political Science, and a masters in Public Administration from Harvard University. She is a tax inspector and has held different positions in the Spanish Agency for Tax Administration concerning tax auditing of international and corporate taxation as well as in the General Directorate of Taxes regarding Corporate Income tax. She is Spanish Delegate in WP11 (Aggressive Tax Planning) and in WP1 (Double Tax Conventions) at OECD. Contributors xii Summary of Contents Editors v Contributors vii Foreword xxxv Preface xxxvii CHAPTER 1 BEPS, ATAP and the New Tax Dialogue: A Transatlantic Competition? Reuven Avi-Yonah & Gianluca Mazzoni 1 PART I European Construction, Competences in Tax Matters and the Development of Anti-avoidance Rules 37 CHAPTER 2 The European Union, the State Competence in Tax Matters and Abuse of the EU Freedoms Gloria Marín Benítez 39 CHAPTER 3 The Role of Negative Harmonization in the European Tax Arena: Special Reference to the Cross-Border Loss Relief Regime Andrés Sánchez López, Paula Benéitez Régil & Diego Arribas Plaza 61 CHAPTER 4 The BEPS Project in the European Union: Working Up the ATAP Package Roberta Poza 81 xiii PART II Council Directive (EU) 2016/1164 of 12 July 2016 Laying Down Rules Against Tax Avoidance Practices That Directly Affect the Functioning of the Internal Market 99 CHAPTER 5 The Scope of the Directive and the Principle of Subsidiarity Cristino Fayos 101 CHAPTER 6 The General Anti-abuse Rule of the Anti-tax Avoidance Directive Andrés Báez Moreno & Juan José Zornoza Pérez 113 CHAPTER 7 Interest Limitation Rule Beatriz Parejo 145 CHAPTER 8 Harmonization of Controlled Foreign Corporation Rules in the European Union: The Spanish Perspective José Manuel Almudí Cid 159 CHAPTER 9 Hybrid Mismatch Arrangements Silvia López Ribas 173 CHAPTER 10 Exit Taxes: One Size Should Not Fit All Pablo A. Hernández González-Barreda 191 CHAPTER 11 The Switch-Over Clause in the 2016 Proposal for an Anti-tax Avoidance Directive Félix Daniel Martínez Laguna & Félix Alberto Vega Borrego 227 PART III Administrative Cooperation in Tax Matters: A Need for a Full Applicability of European Freedoms and a Guarantee to Tax Effectiveness 245 CHAPTER 12 Administrative Cooperation in the Recovery of Claims: Directive 2010/24/EU – A Spanish Approach José María Cobos Gómez 247 Summary of Contents xiv CHAPTER 13 Combating Tax Avoidance in the European Union: Harmonization and Cooperation in Direct Taxation Antoinette Musilek 279 CHAPTER 14 Amendment of Directive 2011/16/EU as Regards Mandatory Automatic Exchange of Information on Tax Rulings Ascensión Maldonado García-Verdugo 301 CHAPTER 15 Country by Country Reporting María del Mar Barreno Asensio 315 CHAPTER 16 Mandatory Disclosure Rules for Tax Planning Schemes and Automatic Exchange Jorge A. Ferreras Gutiérrez 325 CHAPTER 17 The New Tax Dispute Resolution Mechanisms in the European Union: The ‘Arbitration Directive’ Jaime Mas Hernández 339 CHAPTER 18 Code of Conduct on Withholding Tax and the OECD TRACE System Javier Doldán Varela & Plácido Martos Belmonte 353 CHAPTER 19 Elimination of Double Taxation in the European Union: Former Article 293 TEEC, EU Competences and Controversial Aspects of the Arbitration Directive Aitor Navarro Ibarrola 369 PART IV Tax Treaties and the External Dimension of the European Union in Tax Matters 391 CHAPTER 20 The Recommendation on Tax Treaties and the Legal Framework of Tax Treaties Between Member States and with Third States Within EU Law Brian Leonard 393 Summary of Contents xv CHAPTER 21 The 2016 Communication on the Strategy on External Action and the External Dimension of the EU in Tax Matters: Balancing Internal Market and Tax Sovereignty Edoardo Traversa & Alejandro Zubimendi 407 CHAPTER 22 The EU List of Non-cooperative Jurisdictions for Tax Purposes Manuel Santaella Vallejo 429 PART V Other European Measures to Prevent Tax Avoidance: State Aid and the Code of Conduct for Business Taxation 447 CHAPTER 23 The Revision of the Code of Conduct for Business Taxation Domingo Jesús Jiménez-Valladolid de L’Hotellerie-Fallois 449 CHAPTER 24 Application of the State Aid Regime to Tax Rulings Juan Salvador Pastoriza Vázquez 467 CHAPTER 25 The Commission’s State Aid Decisions on Advance Tax Rulings: Criticisms and Potential Impact on the Future of Direct Taxation Within the European Union Giulio Allevato 483 CHAPTER 26 The Difficult Relationship Between the Fundamental Freedoms and the Nexus Approach as a Criterion for Applying Preferential Regimes Within the European Union: Special Reference to IP Boxes María Cruz Barreiro Carril 497 PART VI The Future of European Taxation 519 CHAPTER 27 Case Law of the Court of Justice of the European Union: A Reflection for the Future Elena Rodríguez Ruiz de Alda 521 Summary of Contents xvi CHAPTER 28 Study of the Proposal for a Council Directive on a Common Corporate Tax Base Eduardo Tapia Tejedor 541 CHAPTER 29 A Preliminary Assessment of the EU Proposal on Significant Digital Presence: A Brave Attempt That Requires and Deserves Further Analysis Eva Escribano 559 Index 601 Summary of Contents xvii Table of Contents Editors v Contributors vii Foreword xxxv Preface xxxvii CHAPTER 1 BEPS, ATAP and the New Tax Dialogue: A Transatlantic Competition? Reuven Avi-Yonah & Gianluca Mazzoni 1 §1.01 Introduction: The US and BEPS 2 §1.02 Past Accumulations 4 §1.03 Future Accumulations 8 §1.04 Base Erosion 14 §1.05 BEPS Action 6: Should the US Reconsider the Rejection of the PPT? 18 §1.06 Anti-hybrid Provisions 28 §1.07 Conclusion: The Future of BEPS 35 PART I European Construction, Competences in Tax Matters and the Development of Anti-avoidance Rules 37 CHAPTER 2 The European Union, the State Competence in Tax Matters and Abuse of the EU Freedoms Gloria Marín Benítez 39 §2.01 The Approach to the Issues 39 §2.02 ECJ Jurisprudence on the Use for Tax Reasons of EU Freedoms 42 xix [A] Anti-avoidance Rules Enacted Motu Proprio by Member States 42 [1] Exit Taxes 43 [2] CFC Rules 44 [3] Thin Capitalization Rules 46 [B] Anti-avoidance Rules Grounded on Rules of Secondary EU Law 48 [C] Lack of Domestic Specific Anti-avoidance Rule: General EU Principle Forbids Abuse of Rights 51 [1] Case C-255/02 Halifax 51 [2] Case C-321/05 Kofoed 54 §2.03 Status Quo on Abuse of EU Law for Tax Reasons 55 §2.04 Some Remarks on the Eventual Influence of the Anti-avoidance Directive on the Status Quo 56 [A] On the Purpose of the Directive and Its Eventual Implications 56 [B] On the Source of Measures Adopted 57 [C] On the Concept of Abuse Deriving from the General Anti-abuse Rule Contained in Article 6 58 CHAPTER 3 The Role of Negative Harmonization in the European Tax Arena: Special Reference to the Cross-Border Loss Relief Regime Andrés Sánchez López, Paula Benéitez Régil & Diego Arribas Plaza 61 §3.01 Negative Harmonization of Taxation 61 §3.02 The System for Cross-Border Set-Off of Losses 65 [A] The European System for Cross-Border Set-Off of Losses 65 [B] The Spanish Cross-Border Loss Relief Regime 71 [1] The Spanish System for Cross-Border Set-Off of Losses 71 [2] The System for Cross-Border Set-Off: Historical Development 72 [a] Up until 2012 72 [b] 2013–2016 73 [c] 2017 75 [d] Conclusions 77 [C] Final Remarks 78 CHAPTER 4 The BEPS Project in the European Union: Working Up the ATAP Package Roberta Poza 81 §4.01 Introduction 81 §4.02 Background 87 §4.03 Anti-tax Avoidance Package 91 Table of Contents xx §4.04 Procedure in the Council: Approval of the Measures 93 §4.05 Adoption of the Last BEPS-Related Measures 96 PART II Council Directive (EU) 2016/1164 of 12 July 2016 Laying Down Rules Against Tax Avoidance Practices That Directly Affect the Functioning of the Internal Market 99 CHAPTER 5 The Scope of the Directive and the Principle of Subsidiarity Cristino Fayos 101 §5.01 Introduction 101 §5.02 Subsidiarity and Proportionality of the Measure 104 §5.03 Scope of Application 106 [A] ‘Corporate Income Tax’ for the Purposes of the ATAD 106 [B] Subjective Scope of Application: ‘Taxpayers Subject to Corporate Income Tax’ 107 [1] General Features 107 [2] Considerations on Tax Residence and PEs 108 [3] Excluded Taxpayers 108 [a] Transparent Entities 108 [b] Individuals 109 CHAPTER 6 The General Anti-abuse Rule of the Anti-tax Avoidance Directive Andrés Báez Moreno & Juan José Zornoza Pérez 113 §6.01 Introduction 113 §6.02 The Fight Against Tax Abuse in the Internal Market: The Justification for the ATAD 115 §6.03 From the Anti-abuse Case Law of the ECJ to a General Anti-abuse Rule 120 §6.04 A Specific Analysis of the General Anti-abuse Clause of the ATAD Directive 124 [A] The Legal Hypothesis Established by the General Anti-abuse Rule Contained in the ATAD Directive 125 [1] The Subjective Test: The Obtainment of a Tax Advantage as the Main Purpose or One of the Main Purposes of the Arrangement 126 [2] The Objective Test: The Obtainment of a Tax Advantage Must Defeat the Object or Purpose of the Applicable Tax Law 128 Table of Contents xxi [3] The Valid Commercial Reasons Test: A Falsified Arrangement in the Sense That Valid Commercial Reasons Have Not Been Established That Reflect Economic Reality 131 [B] The Legal Consequence of the General Anti-abuse Rule Contained in the ATAD Directive 132 §6.05 Epilogue: An (Unforeseen) Consequence of the ATAD’s General Anti-abuse Clause 134 CHAPTER 7 Interest Limitation Rule Beatriz Parejo 145 §7.01 Introduction 145 §7.02 Existing Measures on the Limitation of Deductibility of Financial Expenses 147 §7.03 Consideration of Costs of Indebtedness 148 §7.04 General Rule of the Fixed Ratio: EBITDA 150 §7.05 Contributors to Those That Are Applicable to the Ratio Rule 152 §7.06 Exempt Minimum Threshold 152 §7.07 Exception Relating to Excessive Expenditure Derived from Certain Loans with Conditions 153 §7.08 Group Ratio 155 §7.09 Treatment of Non-deductible Financial Expenses 156 §7.10 Special Sectors 157 §7.11 Conclusions 157 CHAPTER 8 Harmonization of Controlled Foreign Corporation Rules in the European Union: The Spanish Perspective José Manuel Almudí Cid 159 §8.01 Introduction 159 §8.02 Controlled Foreign Corporation 160 [A] Definition and Object of Control 160 [B] Taxation of the Controlled Foreign Company 162 §8.03 Tainted Income 163 [A] Tainted Income According to Its Legal Nature 163 [B] Tainted Income According to the Capacity and the Means of the Foreign Entity 167 §8.04 Limits to the Inclusion of the Tainted Income in the Taxable Base of the Shareholder 169 §8.05 Temporal Issues 170 §8.06 Rules to Eliminate Double Taxation 171 Table of Contents xxii CHAPTER 9 Hybrid Mismatch Arrangements Silvia López Ribas 173 §9.01 Introduction: From ATAD 1 to ATAD 2 173 §9.02 Concept, Characteristics and Typology of Hybrid Mechanisms 174 §9.03 General Principles of Hybrid Anti-asymmetries Rules 176 §9.04 Hybrid Financial Instrument Mismatch 177 §9.05 Hybrid Entity Mismatch 178 [A] Hybrid Payer Entity 179 [B] Reverse Hybrid Entity 180 §9.06 Hybrid PE Mismatches 182 [A] Disregarded PE 182 [B] Double Deduction 183 [C] Deduction Without Inclusion 183 §9.07 Hybrid Transfers 184 §9.08 Imported Mismatches 185 §9.09 Tax Residency Mismatches 187 §9.10 Reverse Hybrid Mismatches 189 §9.11 Transposition of ATAD 2 189 CHAPTER 10 Exit Taxes: One Size Should Not Fit All Pablo A. Hernández González-Barreda 191 §10.01 Introduction 191 §10.02 Concept and Types of Exit Taxes 194 [A] The Concept of Exit Tax 194 [B] Types of Exit Taxes 197 §10.03 The Court of Justice of the European Union Case Law on Exit Taxes 200 [A] The Impact of Transfer of Seat Jurisprudence on Exit Taxes 201 [B] Proper Exit Taxes and the Court of Justice’s (Negative) Legislative Role 206 [1] Restriction 207 [2] Rule of Reason: Justification of Exit Taxes and the Balanced Allocation of Taxing Powers 209 [3] Proportionality: Deferral, Guarantee and Interests 212 §10.04 Exit Tax and the Anti-tax Avoidance Directive 217 [A] Scope of Application: Transactions Included and Excluded from the Directive Exit Tax 217 [1] Scope of Application 217 [2] Transactions Covered by the Exit Tax 218 [B] Deferral in Instalments, Guarantees and Interests 219 [C] Valuation and Step-Up 222 [D] Minimum Standard 224 Table of Contents xxiii §10.05 Final Comments 225 CHAPTER 11 The Switch-Over Clause in the 2016 Proposal for an Anti-tax Avoidance Directive Félix Daniel Martínez Laguna & Félix Alberto Vega Borrego 227 §11.01 Introduction 227 §11.02 Switch-Over Clauses, Subject-to-Tax Clauses and Exclusion Clauses 229 [A] Preliminary Remarks 229 [B] Switch-Over and Subject-to-Tax Clauses 230 [C] Exclusion Clauses 233 [D] Some Preliminary Conclusions 236 §11.03 The Switch-Over Clause in the ATAD Proposal 236 §11.04 Other Issues Regarding the Switch-Over Clause 240 §11.05 Final Remarks 243 PART III Administrative Cooperation in Tax Matters: A Need for a Full Applicability of European Freedoms and a Guarantee to Tax Effectiveness 245 CHAPTER 12 Administrative Cooperation in the Recovery of Claims: Directive 2010/24/EU – A Spanish Approach José María Cobos Gómez 247 §12.01 Introduction 247 §12.02 Scope of the Directive 249 [A] Subject Matter 249 [B] To Whom the Directive Applies 250 [1] Active Subjects 250 [2] Passive Subjects 252 §12.03 Mutual Assistance Arrangements for the Recovery of Claims 252 [A] Common Issues 253 [1] Standard Forms and Means of Communication 253 [2] Use of Languages 254 [3] Disclosure of Information 255 [4] Refusal to Handle a Request 257 [B] Assistance for Obtaining Information 257 [1] Exchange of Information with Prior Request 257 [2] Spontaneous Exchange of Information or Exchange of Information Without Prior Request 259 [3] Presence and Participation in Acts of Assistance 259 [C] Assistance for the Notification of Documents 261 Table of Contents xxiv [1] Requests for Notification of Documents Made by the Spanish Authorities 262 [2] Requests for Notification of Documents Received by the Spanish Tax Authorities 263 [D] Assistance for the Recovery of Claims or the Adoption of Precautionary Measures 263 [1] Commencement of the Procedure 263 [2] Handling of the Procedure 266 [3] Disputes During the Recovery Procedure 268 [4] Termination of the Procedure 272 [5] Request for Precautionary Measures 273 [6] Limits to the Requested Authority’s Obligations 274 [7] Limitation Periods 275 [8] Costs 276 CHAPTER 13 Combating Tax Avoidance in the European Union: Harmonization and Cooperation in Direct Taxation Antoinette Musilek 279 §13.01 First Automatic Exchange of Financial Account Information: 30 September 2017 279 §13.02 Key Elements of Automatic Exchange of Financial Account Information 281 [A] Legal Basis of AEOI 281 [B] Evolution Towards CRS 283 [C] Content of the CRS 288 [1] Account Holders of Reportable Accounts 288 [2] Financial Accounts and Financial Information to Be Reported 289 [3] Financial Institutions and Due Diligence Procedure 289 §13.03 Implementation of CRS Automatic Exchange of Financial Account Information 291 [A] Political Commitment to the New CRS AEOI Standard 292 [B] International and Domestic Legal Framework 293 [C] Confidentiality and Data Protection 294 [D] Identifying Interested Appropriate Partners 295 [E] Compliance with IT Requirements 295 [F] Global Forum Mandate: CRS Effective Implementation Monitoring and Technical Assistance 297 [1] AEOI CRS Effective Implementation Monitoring 297 [2] Technical Assistance: Developing Countries 297 §13.04 Forthcoming Challenges 298 Table of Contents xxv CHAPTER 14 Amendment of Directive 2011/16/EU as Regards Mandatory Automatic Exchange of Information on Tax Rulings Ascensión Maldonado García-Verdugo 301 §14.01 Introduction 301 §14.02 Background 302 [A] Model Instruction for the Spontaneous Exchange of Information on Tax Rulings (Code of Conduct on Business Taxation) 302 [B] Action 5 of the BEPS Project: Spontaneous EOI on Tax Rulings 303 §14.03 Scope of the Directive 304 [A] Obligation to Exchange Information on Bilateral/Multilateral APAs 305 [B] Obligation to Exchange Information on Audit Settlements 306 §14.04 Type of Information Exchange 306 §14.05 Information Exchanged with Other Member States and the European Commission 307 §14.06 Limits on Exchange 309 §14.07 Periodicity of Exchange 310 §14.08 Directory Where the Information Is Stored 310 §14.09 Exchange Tracking 310 §14.10 Transposition of the Directive into Spanish Domestic Law 311 §14.11 Conclusions 312 [A] Main Challenges for Tax Administrations 312 [B] Main Challenges for Taxpayers 312 CHAPTER 15 Country by Country Reporting María del Mar Barreno Asensio 315 §15.01 Introduction 315 §15.02 European Union Country by Country Reporting 316 [A] Information Covered by the EU CBCR 316 [B] Persons Covered 317 [C] Implementation 318 [D] Automatic Exchange 319 [E] Directive Transposition into the Spanish Law 320 §15.03 Public Country by Country Reporting 321 §15.04 Conclusion 323 Table of Contents xxvi CHAPTER 16 Mandatory Disclosure Rules for Tax Planning Schemes and Automatic Exchange Jorge A. Ferreras Gutiérrez 325 §16.01 Introduction 325 §16.02 Action 12 of the BEPS Action Plan 326 [A] Who Is Obliged to Supply the Information 326 [B] Information to Be Supplied 327 [1] Multi-step System 327 [2] Single-Step System 327 [C] Timing for Providing the Information 328 §16.03 Commission Proposal to Modify Directive 2011/16/EU in Relation to Mandatory Rules for the Exchange of Information in Tax Matters 329 §16.04 Directive DAC 6 330 [A] Preliminary Recitals 330 [B] Personal Scope 331 [C] Concept of Intermediary 332 [D] Objective Scope 333 [E] Hallmarks 333 [F] Content of the Information Exchanged 335 [G] Timing for the Application 336 [H] Final Issues 336 [1] Sanctions 336 [2] Principle of Non-incrimination 337 [3] Principle of Negative Silence 337 §16.05 Conclusion 337 CHAPTER 17 The New Tax Dispute Resolution Mechanisms in the European Union: The ‘Arbitration Directive’ Jaime Mas Hernández 339 §17.01 Background 339 §17.02 Elements of the New Procedural Framework 342 §17.03 Conclusion 350 CHAPTER 18 Code of Conduct on Withholding Tax and the OECD TRACE System Javier Doldán Varela & Plácido Martos Belmonte 353 §18.01 Code of Conduct on Withholding Tax 353 [A] Context 353 [B] Origin and Description of the Code of Conduct 355 [C] Further Actions 360 Table of Contents xxvii §18.02 OECD TRACE System 360 [A] How the TRACE AI System Works 362 [B] Benefits of TRACE 363 [1] Benefits for Governments 363 [a] Source Country 364 [b] Residence Country 365 [2] Benefits for Investors 365 [3] Benefits for Intermediaries 365 [C] Why Now Is a Good Moment to Implement TRACE? 365 §18.03 Summing Up 367 CHAPTER 19 Elimination of Double Taxation in the European Union: Former Article 293 TEEC, EU Competences and Controversial Aspects of the Arbitration Directive Aitor Navarro Ibarrola 369 §19.01 Introduction 369 §19.02 Elimination of Double Taxation in the European Union 370 [A] Double Taxation and Alternative Dispute Resolution: The Origins of the Arbitration Directive 370 [B] MAP and Arbitration: Pros and Cons 375 §19.03 Controversial Aspects of the Arbitration Directive 377 [A] Determining the Scope of the Directive 377 [B] Interaction Between the Involved Tax Authorities and the Taxpayer 383 [C] Interaction of the Procedures Envisaged in the Directive with Domestic Legal Procedures and Other Means of Alternative Dispute Resolution 386 [D] How to Resolve Double Taxation: Enforcement of the Decision 390 PART IV Tax Treaties and the External Dimension of the European Union in Tax Matters 391 CHAPTER 20 The Recommendation on Tax Treaties and the Legal Framework of Tax Treaties Between Member States and with Third States Within EU Law Brian Leonard 393 §20.01 The Role of Supranational Organizations in the Tax Affairs of the Member States: The OECD and the European Union 393 §20.02 The Relationship Between Conventions to Avoid Double Taxation and European Law 395 Table of Contents xxviii [A] Primacy of Community Law 396 [B] Double Taxation and Community Law 398 [C] Freedom of Movement 399 [D] Freedom of Establishment 400 [E] Anti-abuse Provisions 401 [F] The ECJ’s Jurisdiction over DTCs 401 §20.03 Future of Taxation in the European Union 402 CHAPTER 21 The 2016 Communication on the Strategy on External Action and the External Dimension of the EU in Tax Matters: Balancing Internal Market and Tax Sovereignty Edoardo Traversa & Alejandro Zubimendi 407 §21.01 Introduction: External Action in the EU in Tax Matters and the New Paradigm in International Tax Relations 407 §21.02 Legal Foundations for External Action 408 §21.03 Tax Base Erosion and International Tax Competition with Respect to Third Countries 411 [A] Tax Base Erosion: Taxation Where ‘Value Is Generated’ as a New Paradigm to Achieve a Global Level-Playing Field 411 [B] International Tax Avoidance Within the EU and Its Implications with Respect to Third Countries 414 [C] Tax Competition by Third Countries 417 [1] Tax Good Governance Criteria Update 418 [2] European List of Non-cooperative Countries and Sanctions 419 [D] Conclusion 421 §21.04 Limits to EU External Action Against Tax Avoidance: Community Freedoms 423 §21.05 Conclusion 427 CHAPTER 22 The EU List of Non-cooperative Jurisdictions for Tax Purposes Manuel Santaella Vallejo 429 §22.01 Introduction 429 §22.02 Background 430 [A] An EU Common Approach Regarding Non-cooperative Tax Jurisdictions: The Platform for Tax Good Governance 430 [B] The Pan-European List of Non-cooperative Jurisdictions of Third Countries Compiled by the European Commission from Member States’ National Lists 431 §22.03 The EU List of Non-cooperative Jurisdictions for Tax Purposes 433 Table of Contents xxix [A] Criteria for the Preparation of the EU List of Non-cooperative Jurisdictions 434 [B] Process of Screening of Jurisdictions with a View to Establishing an EU List of Non-cooperative Jurisdictions for Tax Purposes 436 [C] The EU List of Non-cooperative Jurisdictions for Tax Purposes 439 §22.04 Other Relevant Issues Associated with the EU List 443 [A] Defensive Measures 443 [B] Differences with the List of the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes: Criterion 2.2. – Facilitation of Offshore Structures 444 [C] Future Considerations 446 PART V Other European Measures to Prevent Tax Avoidance: State Aid and the Code of Conduct for Business Taxation 447 CHAPTER 23 The Revision of the Code of Conduct for Business Taxation Domingo Jesús Jiménez-Valladolid de L’Hotellerie-Fallois 449 §23.01 Introduction 449 §23.02 The Code in the Pre-BEPS Period (1998–2012) 450 [A] Objectives and Measures Affected by the Code 451 [B] Political Commitments Arising from the Code 453 [C] Effects of the Code in Relation to Harmful Tax Competition in the Pre-BEPS Period: An Examination of Unilateral Measures 454 [D] Other Results of the Code: Horizontal Measures and Relations with Third States 457 §23.03 The Role of the Code in the Anti-tax Avoidance Action Plan in the EU 459 [A] The EU Anti-tax Avoidance Package and the BEPS Project 459 [B] Revision of the Code: New Tools for Combating Harmful Tax Competition 460 [C] Work Areas and Recent Results of the Code in the Post-BEPS Framework 463 §23.04 Conclusions 464 CHAPTER 24 Application of the State Aid Regime to Tax Rulings Juan Salvador Pastoriza Vázquez 467 §24.01 Introduction 467 §24.02 Preliminary Notes on the Concept of State Aid 469 Table of Contents xxx §24.03 The Concept of Selectivity in Tax Aid 471 §24.04 Selectivity in Relation to the Tax Rulings 474 [A] The Example of the Decision in Apple 477 §24.05 Implementation of BEPS in the EU 479 §24.06 Conclusions 482 CHAPTER 25 The Commission’s State Aid Decisions on Advance Tax Rulings: Criticisms and Potential Impact on the Future of Direct Taxation Within the European Union Giulio Allevato 483 §25.01 Harmful Tax Competition: National and Supranational Reactions 483 §25.02 The Commission’s Recent State Aid Decisions 486 §25.03 Requirements for State Aid Assessment 489 §25.04 Main Criticisms Against the Commission’s Decisions 490 [A] The Arm’s Length Principle as a Counterfactual 490 [B] The Conflation of the Advantage and the Selectivity Requirements 493 §25.05 Final Remarks 494 CHAPTER 26 The Difficult Relationship Between the Fundamental Freedoms and the Nexus Approach as a Criterion for Applying Preferential Regimes Within the European Union: Special Reference to IP Boxes María Cruz Barreiro Carril 497 §26.01 Introduction 497 §26.02 Problems Arising from Patent Box Regimes as Regards the Functioning of the Internal Market 498 §26.03 Solutions Adopted Within the EU for the Problems Arising from Preferential Regimes: A Similar Path to That Taken by the OECD 501 [A] First Steps 501 [B] The Reactivation of the Fight Against Harmful Tax Competition Created by Preferential Regimes: The Nexus Approach 503 §26.04 Adoption of a Nexus Approach Based on Entity Instead of Jurisdiction in the Search for a Balance Between Fundamental Freedoms and the Need to Prevent BEPS in the Context of IP Boxes: Difficulties in Reconciling the Nexus Approach with the European Legal Order 505 [A] The Nexus Approach Based on the Entity 505 [B] Compatibility Problems with EU Law in the Nexus Approach Based on the Entity 509 Table of Contents xxxi §26.05 The CCCTB as an Alternative to Patent Box Regimes: A Better Solution for Aggressive Tax Planning Behaviours Through IP Boxes Within the EU 515 §26.06 Concluding Remarks 517 PART VI The Future of European Taxation 519 CHAPTER 27 Case Law of the Court of Justice of the European Union: A Reflection for the Future Elena Rodríguez Ruiz de Alda 521 §27.01 Introduction 521 §27.02 The Court of Justice 522 [A] Composition 522 [B] Types of Proceedings 523 [1] Preliminary Rulings 523 [2] Actions for Failure to Fulfil Obligations 525 §27.03 Overall Review of Judgments 527 §27.04 Fundamental Freedoms 528 [A] Free Movement of Persons (Articles 18 and 21 TFEU) 528 [B] Freedom of Movement for Workers (Articles 45–48 TFEU) 529 [C] Right of Establishment (Articles 49–55 TFEU) 529 [D] Freedom to Provide Services (Articles 56–62 TFEU) 530 [E] Free Movement of Capital (Articles 63–66 TFEU) 530 §27.05 Overriding Reasons of Public Interest 531 [A] To Ensure a Balanced Allocation of the Power to Tax Between the Member States 531 [B] Preventing Tax Evasion and Avoidance 532 [C] Coherence of the National Tax System 532 [D] The Need to Guarantee the Effectiveness of Fiscal Supervision 533 [E] The Need to Ensure the Effective Collection of Taxes 533 §27.06 Significant Preliminary Rules 534 [A] Anti-abuse Rules in Directives 534 [1] Judgment of 8 March 2017, Euro Park Service, Case C-14/16 534 [2] Judgment of 7 September 2017, Eqiom SAS and Enka SA, Case C-6/16 535 [3] Judgment of 26 October 2017, Argenta Spaarbank NV, Case C-39/16 536 [B] Administrative Cooperation 537 [1] Judgment of 16 May 2017, Berlioz Investment Fund SA, Case C-682/15 537 Table of Contents xxxii [C] Exit Tax 538 [1] Judgment of 14 September 2017, Trustees of the P Panayi Accumulation, Case C-646/15 538 §27.07 Conclusion 539 CHAPTER 28 Study of the Proposal for a Council Directive on a Common Corporate Tax Base Eduardo Tapia Tejedor 541 §28.01 Introduction 541 §28.02 Subject Matter, Scope and Definitions 542 [A] Subject Matter 542 [B] Scope 542 [C] Definitions 543 §28.03 Calculation of the Tax Base 543 [A] General Principles 543 [B] Calculation of the Tax Base 543 [C] Interest Limitation Rule 546 §28.04 Timing and Quantification 547 [A] Temporary Allocation Rules 547 [B] Valuation Rules 548 §28.05 Depreciation of Fixed Assets 549 §28.06 Losses 550 §28.07 Rules on Entering and Leaving the System of the Tax Base 551 §28.08 Relations Between the Taxpayer and Other Entities 551 §28.09 Operations Between Associated Companies 552 §28.10 Anti-abuse Rules 552 [A] General Clause 553 [B] CFCs 553 [C] Hybrid Mismatches 554 §28.11 Transparent Entities 555 §28.12 Administration and Procedures 555 §28.13 Final Provisions 555 §28.14 Prospects for the Future and Some Conclusions 556 CHAPTER 29 A Preliminary Assessment of the EU Proposal on Significant Digital Presence: A Brave Attempt That Requires and Deserves Further Analysis Eva Escribano 559 §29.01 Introduction 559 §29.02 Policy Goals Pursued by the Proposal 562 [A] The Alignment Between Taxation and Value Creation 564 [B] The Contribution of Users to Value Creation 565 Table of Contents xxxiii [C] The Challenge to Build a Proposal Based on These Parameters 567 §29.03 The Proposed Significant Digital Presence Threshold 569 [A] The Taxpayer 570 [B] Supply of Digital Services 571 [1] Concept of Digital Services and Requirements 571 [2] Digital Services That Are Deemed to Be Covered by the Clause 574 [3] Consistency with the Alleged Policy Goals 580 [C] Quantitative Thresholds 583 [1] Revenue 584 [2] Number of Users 590 [3] Number of Business Contracts 591 [4] Consistency with the Alleged Policy Goals 592 [D] Attribution of Profits to the Significant Digital Presence 594 §29.04 Conclusions 598 Index 601 Table of Contents xxxiv CHAPTER 21 The 2016 Communication on the Strategy on External Action and the External Dimension of the EU in Tax Matters: Balancing Internal Market and Tax Sovereignty Edoardo Traversa & Alejandro Zubimendi §21.01 INTRODUCTION: EXTERNAL ACTION IN THE EU IN TAX MATTERS AND THE NEW PARADIGM IN INTERNATIONAL TAX RELATIONS EU action in tax matters is mainly aimed at ‘internal’ goals relating to the European Union territory. In concrete terms, the tax policy of the Union pursues two distinct objectives.1 The first objective concerns the creation of an internal market without distortions, free of externalities that may present barriers to the exercise of an economic activity within the European Union. To this end, European actions are focused on securing the effectiveness of the freedoms of movement. A second goal is the consecration of an effective tax system able to prevent erosion of the Member States’ tax bases. Among the measures pursuing this aim, we can also find those actions aimed at tackling harmful tax competition practices. In recent years, the new paradigm in international relations, based on coopera- tion among countries (rather than competition), has favoured the direct involvement of the European Union with respect to the elaboration and application of an external tax policy. This has emphasized even more, the existing tension between Member States’ 1. P. Pistone, Smart Tax Competition and the Geographical Boundaries of Taxing Jurisdictions: Countering Selective Advantages Amidst Disparities, 40 Intertax 2, p. 85 (2012). 407 tax sovereignty, enshrined in the Treaty on the Functioning of the European Union (TFEU),2 and the increasing trend of the Union to expand its internal policies beyond the European territory and to strengthen the internal market.3 The analysis of the legal basis justifying the external action of the European Union therefore ultimately requires a proportionality and opportunity test to be carried out with respect to the foundation goals of the Union and the new global standards in international taxation. §21.02 LEGAL FOUNDATIONS FOR EXTERNAL ACTION The first matter to consider regarding external action of the European Union is the determination of the legal basis for the Union to issue legislation with repercussions on third countries. This question, beyond technicalities, may raise some doubt since the main goal of the Union is the creation of an internal market.4 EU external relations are mainly regulated by EU internal rules and international conventions. The legal foundations for the European Union to adopt internal rules in tax matters with repercussions on third countries do not set out specific problems other than analysing their compatibility with the goals of the Union and the subsidiarity principle.5 Nevertheless, the EU competence to enter into treaties with third countries in the framework of direct taxation deserves special attention.6 The European Union was granted express legal personality by the Treaty of Lisbon and therefore has full legal subjectivity to conclude international agreements.7 Nevertheless, over time, free trade agreements have gained complexity and nowadays they cover a broad range of subjects. These agreements therefore govern subjects that are within the exclusive competence of the European Union as well as other subject areas on which competence is shared between the Union and its Member States. The distinction between exclusive competence and shared competence areas has to be 2. Tax competition among the Member States, protected by their tax sovereignty, has clashed with the efforts of the Community institutions to strengthen the internal market by means of coordination and harmonization of domestic tax rules. 3. According to Avery Jones, the Economic and Monetary Union has left the Member States little scope for action apart from direct tax. J.F. Avery Jones, Flows of Capital between the EU and Third Countries and the Consequences of Disharmony in European International Tax law, 7 EC Tax Rev. 2, p. 95 (1998). 4. J.A. Taha, The External Implied Competence of the European Union and the Impact of Bilateral Treaties on the Taxation of Cross-Border Savings, 38 Intertax 3, p. 157 (2010). 5. Concerning EU competence in tax matters, see F. Amtenbrink & H. Raulus, Contribution to: Fiscal Policy in the European Union Context – The Semi-detached Sovereignty of Member States in the European Union in Fiscal Sovereignty of the Member States in an Internal Market: Past and Future pp. 13 et seq. (S.J.J.M. Jansen ed., Kluwer Law International 2011); L. Cerioni, The European Union and Direct Taxation: A Solution for a Difficult Relationship pp. 19 et seq. (Routledge 2015). 6. The supremacy of Community law over domestic law (of which treaties entered into by the Member States take part) is confirmed by Case C-6/64, Costa v. ENEL, ECR [1964] 585, and Case C-26/62, Van Gend, ECR [1963]. However, this supremacy is not enforceable with respect to third countries with which the Member States sign treaties potentially incompatible with European law. In this sense, see Taha, supra n. 4, at pp. 160 and 161. 7. Article 47 of the Treaty on European Union (TEU). See A.C.M. Zaidan, The External Tax Treaty Making Powers of the Member States: Defining Limits and Obligations under the Current European Legal Order, 41 Intertax 5, p. 275 (2013) Until the Lisbon Treaty, the subjectivity to conclude international agreements was in the hands of the European Community. Edoardo Traversa & Alejandro Zubimendi§21.02 408 made separately for each component of the agreement negotiated by the Union. In this regard, the European Court of Justice (ECJ) has recently issued an Opinion whereby the future Free Trade Agreement between the European Union and the Republic of Singapore must be signed jointly by the Union and its Member States (in the form of a ‘mixed agreement’), although the majority of the provisions are within the scope of the common commercial policy (exclusive competence of the Union). The participation of the Member States in the conclusion of international agreements may be seen as a democratic requirement as well as a brake on the efficacy of EU external action.8 The Treaty of Lisbon also represented a great advance in the codification of ECJ doctrine on the right to conclude international agreements by the Union. The Treaty of Lisbon introduced the new Article 216 of the TFEU, which is considered as the ‘general external competence provision’.9 Article 216 of the TFEU provides that the European Union has express compe- tence to conclude agreements with third countries ‘where the Treaties so provide’ or where ‘provided for in a legally binding Union act’. Therefore, EU external compe- tences emanate directly from the exercise of its internal competences and thus the legality of the external action will be determined by the study of the appropriateness of the internal rules to achieve the Community goals. Nevertheless, Article 216 prescribes two situations of implied competence to conclude international agreements, thus codifying the ECJ doctrine.10 The Union therefore has the right to conclude interna- tional agreements where the conclusion of an agreement is necessary to achieve one of the goals referred to in the Treaties or is likely to affect common rules or alter their scope. Article 17(2) of Council Directive 2003/48/EC (Savings Directive) provided for the extension of its measures to Andorra, Liechtenstein, Monaco, San Marino and Switzerland. Nevertheless, the agreement with Switzerland11 ultimately went beyond that provision and established in its Article 15, measures equivalent to those contained in Council Directive 90/435/EEC (Parent-Subsidiary Directive) and Council Directive 2003/49/EC (Interest and Royalty Directive). Thus, the Community made use of its implied competence to conclude international agreements in matters not provided by Community law.12 However, the fact that international agreements in tax matters 8. ECJ Opinion 2/2015, ECLI:EU:C:2017:376, paras 240–244. 9. See Zaidan, supra n. 7, at p. 275. 10. Case C-22/70, Commission v. Council, ECLI:EU:C:1971:32, which concerned the European Agreement on Road Transport (AETR) and established implied external competence (AETR competence) in cases where external action of the Member States may affect the common rules already adopted by the Union. On the other hand, the ECJ Opinion 1/76, 26 Apr. 1977, ECLI:EU:C:1977:63, established an implied external competence, even in the absence of common internal legislation, whenever external action of the Union is necessary for the attainment of one of its objectives. 11. Agreement between the European Community and the Swiss Confederation providing for measures equivalent to those laid down in Council Directive 2003/48/EC on taxation of savings income in the form of interest payments (26 Oct. 2004), OJ L385, 29 Dec. 2004, pp. 28–49. This Agreement was amended on 27 May 2015 to adapt it to the new standards of exchange of information (EOI) on financial accounts, OJ L333, 19 Dec. 2015, pp. 12–49. 12. The fact that the agreement with Switzerland was expressly provided for in the Savings Directive, with the exception of Art. 15 of the agreement, means that this was the exercise of express external competence according to Art. 216 of the TFEU (‘provided for in a legally binding Union act’), and consequently it does not imply any attribution problem (see the principle of Chapter 21: External Action of the EU in Tax Matters §21.02 409 concluded by the Union must be authorized by unanimity in the Council (Article 218(8) of the TFEU) makes irrelevant, from a practical point of view, the determination of the source, express or implied, of the external competence in tax matters. Analysis of the existence of such external competence (express or implied) therefore leads us, as a last resort, to the principle of subsidiarity and the necessity of establishing measures relating to third countries in matters affecting the internal market.13 The most important question is determining whether a matter on which there is implied external competence could be a matter within the exclusive competence of the Union and thus prevent the Member States from concluding agreements in tax matters with third countries, i.e., whether the nature of the implied external powers of the Union is exclusive or shared with its Member States.14 In this regard, Article 3(2) of the TFEU reflects the ECJ doctrine, establishing that the Union shall have exclusive competence to conclude an international agreement when ‘its conclusion … is necessary to enable the Union to exercise its internal competence, or in so far as its conclusion may affect common rules or alter their scope’. With regard to the first type of situation, the implied external competence arising from a necessity ratio (competence deriving from ECJ Opinion 1/76)15 only exists as long as the Union has not yet exercised its competence, otherwise we would be before an AETR competence. In the field of the fundamental freedoms (the field which usually affects matters of direct taxation), there is no exclusivity because it is a shared competence (Article 4 of the TFEU). Consequently, there is no exclusivity in taxation where the competence is exercised by reason of the ‘necessity to enable the Union to exercise its internal competence’. The ECJ has settled that in regard to the fundamental freedoms, only the competence due to the affect ratio (AETR competence) may give rise to exclusivity.16 Once the European Union exercises its competences, whether express or implied, and establishes a common policy on a certain matter, it acquires an implied external competence based on the affect ratio (AETR competence). The ECJ has established that this type of implied competence is always exclusive for the Union. Nevertheless, the existence of several tax directives does not mean that the Union has a settled common tax policy with respect to third countries. Hence, we cannot conclude that the Union has exclusive powers to conclude tax agreements with third countries. The cases known as the ‘Open Skies’ decisions of the ECJ suggest that distortions in the internal attribution enshrined in Art. 5(2) of the TEU). Nevertheless, the internal Community law from which this express competence derives (i.e., the Savings Directive) is the measure that should be subjected to control according to the principle of subsidiarity (Art. 5(3) of the TEU) that governs the shared competences (such as taxation). See sec. 24.3. for an analysis concerning the suitability of the external actions of the European Union in tax matters in the light of the subsidiarity principle. In this regard, see Taha, supra n. 4, at p. 158. 13. See sec. 24.3. 14. See R. Holdgaard, External Relations Law of the European Community: Legal Reasoning and Legal Discourses p. 54 (Kluwer Law International 2008). According to the first part of Art. 3(2) of the TFEU, the express external competence (expressly ‘provided for in a legislative act of the Union’) shall always be exclusive competence of the Union, in coherence with the application of the principle of primacy of EU law. 15. ECJ Opinion 1/76, supra n. 10. 16. ECJ Opinion 1/94, 15 Nov. 1994, ECLI:EU:C:1994:384, paras 86–88. Edoardo Traversa & Alejandro Zubimendi§21.02 410 market produced by agreements concluded between the Member States and third countries do not affect the EU common rules adopted in tax matters and consequently they cannot not give rise to implied external competence based on an affect ratio (and to exclusive competence).17 Although it is true that conclusion of tax agreements by the Member States might hinder the goals of an internal market, this effect is not intense enough to interfere with the scope of a tax directive (of an intra-Community scope). This is the reason why the competence of the Member States to conclude their own tax agreements with third countries remains intact.18 However, this non-harmonization constitutes a source of tax competition between the Member States, favouring the phenomenon of tax base erosion (referred to as ‘channelling’).19 §21.03 TAX BASE EROSION AND INTERNATIONAL TAX COMPETITION WITH RESPECT TO THIRD COUNTRIES [A] Tax Base Erosion: Taxation Where ‘Value Is Generated’ as a New Paradigm to Achieve a Global Level-Playing Field It is necessary to contextualize the current external strategy of the Union in tax matters. The recent Communication on an External Strategy for Effective Taxation20 is inserted into the framework of the Anti-Tax Avoidance (ATA) Package.21 The external tax policy of the Union therefore requires not only that harmful tax competition from third countries is analysed, but also that the ATA Package is analysed from a more global perspective. Only in this way is it possible to build a coherent framework of external relations and to assess the legitimacy and legality of the adopted measures. It might seem that the fact that the Union has to adopt its tax rules by unanimity (Article 115 of the TFEU) grants an ex ante legitimacy and consequently an analysis of the EU competence would lack practical utility. Nevertheless, national parliaments do 17. For example see Case C-476/98, Commission v. Germany, ECLI:EU:C:2002:631, para. 111. In this regard, the affect ratio is interpreted strictly, considering that agreements with third countries do not affect the Community common rules when the scope of the latter is limited to intra- Community situations. Nevertheless, for the first time, the recent Anti-Tax Avoidance Directive (ATAD) extends the scope of a tax directive to certain extra-Community situations. However, it is unlikely that this situation grants the Union exclusive competence in tax treaties considering that the ECJ has required that the content of EU rules covers ‘to a large extent’ the scope of such treaties, such as it is established in para. 108 of the referred ECJ decision and in ECJ Opinion 1/03, 7 Feb. 2006, ECLI:EU:C:2006:81, para. 126. 18. K. Vogel, D. Gutmann & A.P. Dourado, Tax Treaties Between Member States and Third States: ‘Reciprocity’ in Bilateral Tax Treaties and Non-Discrimination in EC Law, 15 EC Tax Rev. 2, p. 90 (2006). The authors state that the fact that tax directives have been adopted to eliminate withholding taxes at source, does not mean that the Union has established a common policy with respect to the allocation of taxing rights with third countries. 19. H. Koot & M. de Rijke, The Netherlands Court of Audit: An Audit on Tax Avoidance, 69 Bull. Intl. Taxn.11 (2015). 20. Communication from the Commission to the European Parliament and the Council on an External Strategy for Effective Taxation, COM (2016) 24 final (28 Jan. 2016). 21. Communication from the Commission to the European Parliament and the Council: Anti-Tax Avoidance Package: Next steps towards delivering effective taxation and greater tax transpar- ency in the EU, COM (2016) 23 final (28 Jan. 2016). Chapter 21: External Action of the EU in Tax Matters §21.03[A] 411 not grant the consent, it is the governments that do so.22 Consequently, it is important to secure compliance with the rule of law principle23 in the adoption of Community tax measures and to assess whether the adoption of such measures is framed within the competences granted by the TFEU in light of the subsidiarity, opportunity and proportionality principles. Thus, external action of the Union must be monitored and duly pondered in order that Member States’ sovereignty not be violated. Currently, EU external action in tax matters is focused on aggressive tax planning and tax base erosion.24 This increasing interest in tax avoidance has led the OECD to develop the colossal BEPS (Base Erosion and Profit Shifting) Project. The Union, whose Member States generally form the leadership in the OECD, has echoed this project and has started to work on implementing the OECD measures. The fact that tax policy of the Union should be aimed at securing the internal market suggests, at first glance, that the fight against tax avoidance should be limited to having an intra-Community scope. However, Member States’ relations with third countries may give rise to distortions in the internal market. Consequently, the Union has included in the ATA Package not only a set of anti-avoidance rules (that have been crystallized in the Anti-Avoidance Directive, or ATAD),25 but also its external strat- egy.26 The ATAD has fixed a common framework in order to ensure that Member States implement anti-avoidance measures to combat tax base erosion. The criterion that underlies the BEPS Project and the ATA Package is the territorial alignment of taxation with the location where the economic activity takes place.27 This principle does not mean an obligation on the Member States to effectively tax the economic activities carried out within their territories, but the evolution towards a fairer tax system where income derived within a given state may not be diverted to other jurisdictions by means of artificial structures. We should not forget that, currently, international tax compe- tition is accepted by the Union, allowing its Member States to tailor their tax systems to their preferences and necessities, and the Member States are by no means obliged to maintain a minimum level of taxation. At the intra-Community level, the policy aimed at mitigating tax base erosion is guided by the broader goal of securing equality in business competition, without 22. For A.P. Dourado, International Standards, Base Erosion and Developing Countries, in Tax Design Issues Worldwide p. 187 (G.M.M. Michielse & V. Thuronyi eds, Kluwer Law International 2015), the legitimacy of the international tax standards depends to a large extent on the debate in the national parliaments. 23. The legality principle in tax matters has its roots in the principle of ‘no taxation without representation’. 24. About the definition of aggressive tax planning, see A.P. Dourado, Aggressive Tax Planning in EU Law and in the Light of BEPS: The EC Recommendation on Aggressive Tax Planning and BEPS Actions 2 and 6, 43 Intertax 1, pp. 43 et seq. (2015). 25. Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market, OJ L193, 19 July 2016, pp. 1–14. 26. COM (2016) 24 final (28 Jan. 2016). 27. Paragraph 1 of the ATAD’s Preamble lays down that ‘the current political priorities in international taxation highlight the need for ensuring that tax is paid where profits and value are generated’. Edoardo Traversa & Alejandro Zubimendi§21.03[A] 412 distortions or barriers that erode the ‘level playing field’. The increasing harmonization of the anti-avoidance measures, mainly enshrined in the ATAD, has a double objective. The first one is to combat the misuse of the fundamental freedoms. Fundamental freedoms (and the tax directives that develop them) must be effective, ensuring a true common market. The fundamental freedoms may not be used as a tool for multina- tionals to artificially shift income from one Member State to another. The Union considers that tax avoidance distorts the free competition between companies in the internal market.28 On the other hand, the intention of the ATAD, in order to create legal certainty within the EU for citizens, companies and the Member States, is to fix a common and coordinated framework for the implementation of anti-abuse measures. This way, anti-abuse measures will not violate EU fundamental freedoms29 and will not create additional distortions in the internal market (e.g., in the form of double taxation).30 Nevertheless, that assumption, on which the legitimacy of the Union to legislate in tax matters is settled, is not completely acceptable when analysing the tax measures adopted by the Union in relation to third countries. Tax sovereignty of the Member States is even more intense with respect to their relations with third countries in so far as it does not affect Community rules and goals. Consequently, Member States have more freedom to establish tax measures affecting income streams with third countries. Member States have more autonomy in establishing the distribution of taxing rights with third countries (in part because the harmonization of withholding taxes by tax directives only affects intra-Community income streams, and in part because of the non-application of the non-discrimination principle, with the exception of the free movement of capital), but they also have more autonomy to establish anti-avoidance rules with respect to third countries. The first step to address this tension between the external tax sovereignty of the Member States (and their freedom to establish an adequate balance between tax collection requirements and the need to be competitive) and the realization of the EU internal market is to recall the new paradigm of the international tax system: the alignment of taxation with the place where value of the business activities is generated. This first step is fundamental to understanding how this new principle has been established and spread to the international community from the OECD and the 28. COM (2016) 23 final (28 Jan. 2016), p. 2. 29. In a situation where there was no coordination (in the absence of the ATAD), where each Member State can establish its own anti-avoidance measures on an autonomous basis, there would be a risk that such measures violate the Community principle of non-discrimination. 30. A.P. Dourado, The EU Anti Tax Avoidance Package: Moving Ahead of BEPS?, 44 Intertax 6/7, p. 442 (2016). According to this author, the de minimis character of the ATAD entitles Member States to broaden the scope of the anti-avoidance rules, which might put at risk the non- discrimination principle, to the detriment of legal certainty. Nevertheless, if the ATAD had adopted a de maximis approach, it would not have been effective with respect to the goal of combating aggressive tax planning. Besides, a de maximis ATAD would have meant maintaining an uncoordinated situation between the Member States, giving rise to double taxation risks. In the context of the ATAD measures aimed at third-country situations, this double taxation risk persists because of the non-binding nature of the BEPS Project with respect to third countries, which are free to design and apply anti-avoidance measures. This double taxation risk with respect to third-country situations is even stronger with respect to the anti-hybrid rules. Chapter 21: External Action of the EU in Tax Matters §21.03[A] 413 European Union. Assuming this new paradigm, the external tax policy of the Union can be analysed from two dimensions: international tax avoidance within the Union and harmful tax competition carried out by third countries. [B] International Tax Avoidance Within the EU and Its Implications with Respect to Third Countries Diplomatic tax relations between the Union and third countries depends largely on the attitude of the Union towards aggressive tax planning. The main problem is not that income sourced within the Union is not taxed in any Member State, since the will to collect taxes is an attribute belonging to Member States’ sovereignty. The main problem lies in the fact that the erosion of the Member States’ tax bases gives rise to distortions in the EU internal market in the form of competitive advantages for certain multinational companies. The ATAD has included several anti-abuse rules applicable to transactions with third countries, particularly the interest limitation rule (Article 4), exit taxation rule (Article 5), controlled foreign company (CFC) rule (Articles 7 and 8) and the anti- hybrids rule (Article 9).31 The obligatory or de minimis nature of these rules (Article 3 of the ATAD) is justified by the need to avoid distortions in the EU internal market, since tax avoidance, wherever it comes from, gives rise to market distortions in the form of competitive advantages for the companies that take advantage of legal gaps. Nevertheless, the anti-avoidance rules may give rise to other distortions in the form of double taxation.32 Whereas the Union, acting as though it was a unique state, has established anti- avoidance rules for its transactions with third countries, the latter are not bound by the ATAD (not even by the BEPS Project). The reason is that if a third country does not coordinate with the Union on the application of those measures, a double taxation risk arises. This potential effect is evident in the context of hybrid mismatches, where it is essential that every involved country applies the uniform criteria established by the OECD and the European Union in order to maintain a proper balance in the allocation of taxing rights and not to generate double taxation outcomes.33 As long as there is no full coordination in the application of anti-avoidance measures throughout the inter- national community, there is some risk of international double taxation. This risk might harm investments between the Union and third countries and favour intra- Community investments. The most-developed regions (such as the European Union), which are the source of capital in most cross-border investments, have imposed their conception of ‘inter-nation equity’34 whereby a ‘fair’ allocation of taxing rights is 31. Article 9 of the ATAD was amended by Council Directive (EU) 2017/952 of 29 May 2017, OJ L144, 7 July 2017, pp. 1–11, in order to extend its scope to hybrid mismatches resulting from third-country situations. 32. See Dourado, supra n. 30. 33. Exit taxation rule (Art. 5 of the ATAD) also sets out some double taxation risks where the recipient country is a third state. 34. P. Musgrave & Richard Musgrave, Inter-nation equity in Modern Fiscal Issues: Essays in Honor of Carl Shoup (University of Toronto Press 1972); K. Brooks, Inter-Nation Equity: The Development Edoardo Traversa & Alejandro Zubimendi§21.03[B] 414 characterized by a territorial alignment between taxation and the value generation (even though this concept is somewhat ambiguous).35 This means that less-developed regions, dependent on capital from wealthier regions, are compelled to accept those principles and to adapt in order not to give rise to more distortions (double taxation) that could undermine their attractiveness to receive foreign investment. It is relevant to point out that the final draft of the ATAD has not included certain anti-abuse rules that would have applied on an automatic basis, such as the switch- over clause.36 Nevertheless, the ATAD does include other types of clauses with automatic application, such as the interest limitation rule, the anti-hybrids rule, and the CFC rule when applying to subsidiary companies located in third countries.37 These are clauses that apply automatically to structures or transactions where certain objective conditions are met (such as the condition that the state where the income is sourced has a tax rate below a certain threshold), turning those transactions automatically into abusive, a sort of a iuris et de iure presumption. Beyond their compatibility with the EU fundamental freedoms (particularly with the free movement of capital, which also applies to third-country situations), the existence of measures applying without real abuse means the annulment of the tax benefits granted by third countries, taxing extra-Community income at the same level as the Member States tax it. In the current context where the European Union is a capital exporter, limiting the ability of less-developed countries to attract capital might be seen as a sort of indirect protec- tionism carried out by the Union.38 On the other hand, these types of rules applying automatically (not requiring real abuse) and the exit taxation rule, in so far as they have an imperative or de minimis character, should be understood as an instrument to allocate taxing powers between of an Important but Underappreciated International Tax Policy Objective in Tax Reform in the 21st Century (R. Krever & J.G. Head eds, Kluwer Law International 2009). 35. COM (2016) 23 final (28 Jan. 2016), p. 5. In the same line, the OECD establishes that there should be an alignment of taxation and economic substance; OECD, Action Plan on Base Erosion and Profit Shifting (2013), p. 13. About the difficulties of determining the value generation in the digital economy, see M. Olbert & C. Spengel, International Taxation in the Digital Economy: Challenge Accepted?, 9 World Tax J. (2017). 36. Article 6 of the Proposal for a Council Directive laying down rules against tax avoidance practices that directly affect the functioning of the internal market, COM (2016) 26 final (28 Jan. 2016). 37. The anti-hybrids rule (Art. 9 of the ATAD) and the CFC rule (Arts 7 and 8 of the ATAD) when applying to subsidiaries established in third countries, may have similar problems to those of the switch-over clause. Although with an optional or de maximis character, the ATAD establishes in Art. 7(2)(a) that where the CFC is resident or situated in a third country that is not party to the European Economic Area Agreement (EEAA), Member States may apply the CFC rule even though such subsidiary company has economic substance. 38. Nevertheless, if the rest of the international community does not follow the path of the European Union, opting not to implement the BEPS standards, the Member States might be at a competitive disadvantage with respect to other competing countries not applying the BEPS rules. In this sense, A. Navarro, L. Parada & P. Schwarz, The Proposal for an EU Anti-avoidance Directive: Some Preliminary Thoughts, 25 EC Tax Rev. 3, pp. 122 and 129 (2016); Dourado, supra n. 30, at p. 441. Chapter 21: External Action of the EU in Tax Matters §21.03[B] 415 countries,39 so that it is questionable that the Union may claim, according to the subsidiarity principle, powers to interfere in the allocation of taxing rights between Member States and third countries, at least with respect to the switch-over clause, where there does not seem to be any avoidance or aggressive tax planning element that may justify the intervention of the Union. Besides, the existence of these clauses may raise treaty override problems with respect to tax treaties signed by Member States with third countries.40 Lastly, the binding nature of the ATAD measures with regard to third-country situations resolves the uncertain and precarious juridical situation over the Member States that had opted, as a strategy to attract foreign investment, for a relaxed attitude towards tax avoidance.41 Since the Commission has considered as forbidden State aid those tax benefits granted to extra-Community investment,42 it would appear to be a coherent approach to put a stop to any possibility of Member States facilitating, by means of the absence of anti-abuse rules, the shift of tax bases or mobile activities out of the European Union.43 In this sense, when a Member State does not close legal gaps, 39. See Dourado, supra n. 30, at p. 441; G. Bizioli, Taking EU Fundamental Freedoms Seriously: Does the Anti-Tax Avoidance Directive Take Precedence over the Single Market?, 26 EC Tax Rev. 3, p. 172 (2017). 40. Navarro, Parada & Schwarz, supra n. 38, at p. 123. 41. R.H.C. Luja, Do State Aid Rules Still Allow European Union Member States to Claim Fiscal Sovereignty?, 25 EC Tax Rev. 5/6, p. 323 (2016). According to this author, it is not for the European Union to fill, through the application of the State aid regime, the gap created by the absence of anti-avoidance measures to combat non-taxation because otherwise it would put at risk the tax sovereignty of the Member States and the principle of legality. In line with this, De Broe considers that the State aid regime should not be used as a method to harmonize direct taxation or to combat the double non-taxation resulting from the hybrid structures; see L. De Broe, The State Aid Review against Aggressive Tax Planning: ‘Always Look a Gift Horse in the Mouth’, 24 EC Tax Rev., 6, p. 293 (2015). Conversely, Rossi-Maccanico considers that the State aid regime is competent to combat international tax avoidance and that it is even more effective than anti-avoidance measures; see P. Rossi-Maccanico, Fiscal State Aids, Tax Base Erosion and Profit Shifting, 24 EC Tax Rev. 2, p. 63 (2015). 42. Although the final judicial resolution before the Community instances is currently pending, the Spanish rule permitting the deductibility of the financial goodwill for acquisitions of foreign companies (including non-EU companies), was declared a prohibited State aid by Commission Decisions 2011/5/EC, 28 Oct. 2009 (OJ 2011 L7, 11 Jan. 2011, p. 48) and 2011/282/EU, 12 Jan. 2011 (OJ 2011 L135, 21 May 2011, p. 1). 43. Pistone, supra n. 1, at p. 86, has coined the expression ‘smart tax competition’ to refer to those situations where a State legislates in a very permissive manner with respect to tax avoidance in order to favour cross-border investments and avoid the application of the State aid regime. See also E. Traversa & A. Flamini, The Impact of BEPS on the Fight Against Harmful Tax Practices: Risks … and Opportunities for the EU, British Tax Rev. 3, p. 398 (2015). For these authors, the regimes that traditionally have been considered as harmful tax competition within the European Union have been eradicated through the parallel action of the Code of Conduct Group and, in relation to State aid, the Commission. Nevertheless, Member States have adapted to this circumstance and designed preferential tax regimes that are less recognizable, such as the issuing of tax rulings for particular multinational companies, forcing the interpretation of the domestic law beyond the reasonable or through the establishment of advantageous tax regimes that although nominally of a general application, de facto are only capable of being accessed by certain multinational companies (e.g., large technology-based multinational groups) may apply them. Edoardo Traversa & Alejandro Zubimendi§21.03[B] 416 multinational companies operating in that territory are the most favoured. Ireland was subjected to some pressure by the Union to introduce effective rules against transfer pricing. The lack of effective transfer pricing rules, along with an opaque tax policy with respect to tax rulings, has put Ireland under continuous scrutiny with respect to its commitment to eliminate any harmful tax competition and State aid practices. Thus, the ATAD means an ex ante control of tax avoidance, which results in more legal certainty. [C] Tax Competition by Third Countries The efforts by the European Union to fight against harmful tax competition have traditionally been focused on the intra-Community scope, instigating Member States to eliminate any unfair tax measure aimed at attracting investment (usually very mobile investments and therefore sensitive to tax stimulus) at the expense of other Member States that, because of their dimension and collection needs, cannot compete on an equal footing. This commitment to eliminate disloyal tax practices within the Union, though not binding, has been reinforced by the EU State aid rules, which have permitted the Union to fight against many harmful tax practices. However, until recently, Member States have not enjoyed a robust Community programme encouraging third countries to comply with good governance in tax matters.44 Even though the European Commission has issued some recommendations to Member States in this regard,45 the autonomous or unilateral path followed by Member States has turned out ineffective. A common and coordinated EU approach is needed. Backed by the BEPS Project, the European Union has therefore decided to assume a predominant role and a firmer attitude against those third countries that do not comply with tax good governance standards. In this regard, the recent Communication from the Commission to the European Parliament and the Council on an External Strategy for Effective Taxation (2016) has designed the framework for the EU external action against harmful tax competition in third countries.46 44. See Traversa & Flamini, supra n. 43, at pp. 404–406. According to these authors, the EU attitude with respect to tax good governance in third countries has varied lately. At first, the Commission suggested the cooperative channel as a means to spread its tax good governance standards to third countries. In this regard, see the Communications from the Commission to the Council, the European Parliament and the European Economic and Social Committee, COM (2009) 201 final, on Promoting Good Governance in Tax Matters (28 Apr. 2009) and COM (2010) 163 final, on Tax and Development (21 Apr. 2010). This cooperation strategy was soon abandoned by the Commission to promote the punitive channel, through the elaboration of blacklists by Member States, towards third countries not complying with the tax good governance standards. In this respect, see the Commission Recommendation of 6 Dec. 2012 regarding measures intended to encourage third countries to apply minimum standards of good governance in tax matters (2012/771/EU), OJ L338, 12 Dec. 2012, pp. 37–40. 45. Commission Recommendation, 6 Dec. 2012 (2012/771/EU). 46. COM (2016) 24 final (28 Jan. 2016). Chapter 21: External Action of the EU in Tax Matters §21.03[C] 417 [1] Tax Good Governance Criteria Update The Commission has reinforced tax good governance criteria by incorporating the new international standards that have arisen in recent years in the OECD context.47 First of all, the transparency criterion should reflect, as a minimum, the new global standard for the AEOI relating to financial accounts.48 On the other hand, the fair tax competition criterion requires third countries to embrace the new anti-avoidance rules developed through the BEPS Project. Even though the fair tax competition criterion has been updated, the Commission has not substantially altered the extent and scope of what the Code of Conduct has considered as harmful tax competition. In this sense, for the Commission there does not seem to be a distinction between preferential tax regimes and State aid, since both phenomena encompass selective tax advantages according to which a selective group of taxpayers benefits from a lower tax burden than the regular tax burden in the reference country.49 The goal is to avoid situations where European exporters cannot compete on an equal footing with third-country companies. We can therefore see how the Union follows the path of punishing those tax systems referred to as ‘production tax havens’.50 Besides, even though the selectivity criterion is not met in a formal sense, the permissiveness of certain countries towards tax avoidance results in benefits for multinational compa- nies, which have structures that let them reduce their tax bills very much below the nominal tax rates.51 The Commission therefore considers as unfair tax practices, not only those tax benefits deliberately granted to a selective group of taxpayers or companies, but also those country practices that in an indirect manner, let multina- tional companies therein located benefit from an effective tax rate lower than the nominal tax rate by means of narrowing tax base techniques.52 47. COM (2016) 24 final (28 Jan. 2016), at sec. 2 and Annex 1. 48. The OECD Council approved on 15 July 2014 the new rule of automatic exchange of information on financial accounts, known as the Common Reporting Standard (CRS). The Global Forum on Transparency and Exchange of Information for Tax Purposes is tasked with monitoring the compliance with this new standard in the international community. 49. The European Commission considers as State aid the fact that ‘third countries grant support to certain local companies through preferential tax regimes, administrative practices or individual tax rulings’ because ‘it can limit market access for EU exporters, by putting them at a disadvantage compared to the subsidised local companies’, COM (2016) 24 final (28 Jan. 2016), sec. 3.2. See also Dourado, supra n. 30, at p. 444. 50. R.S. Avi-Yonah, Globalization, Tax Competition, and the Fiscal Crisis of the Welfare State, 113 Harv. L. Rev. 7, pp. 1586 et seq. (2000). 51. According to Pistone, supra n. 1, at p. 90, state inactivity against tax avoidance gives rise to de facto selective advantages. Nevertheless, from an economic and global perspective, there is no consensus about the purported harms of a non-neutral tax system that permits tax advantages to certain multinational companies. In this regard, corporate income tax is a naturally inefficient and non-neutral tax that is intended to tax income. In line with this, O. Marian, Meaningful Corporate Tax Residence, 140 Tax Notes, p. 473 (2013). For B. Bracewell-Milnes, Is Tax Avoidance Harmful?, 31 Intertax 3, p. 96 (2003), tax avoidance permits countries to retain their competitiveness, being able to attract investment without having to reduce the general tax rates. Mobile investments should be treated with more tax deference. 52. According to the Commission, the international community should adapt to the new tax standards established by the BEPS Project in combating tax avoidance, COM (2016) 24 final (28 Jan. 2016), sec. 2.2. Edoardo Traversa & Alejandro Zubimendi§21.03[C] 418 At the intra-Community level, the phenomenon of ‘smart tax competition’53 moves across the legal limbo located between the EU fundamental freedoms and the State aid regime.54 We cannot forget that in an ex post control context, there is no principle in international law that prohibits non-taxation, which would challenge the sovereign decision of a parliament.55 The Union has therefore had to adopt an ex ante approach, obliging Member States, by means of the ATAD, to comply with the OECD standards relating to tax avoidance. In the same way, at an extra-Community level, the Union has considered the multilateral approach to be a more effective means of spreading those new standards. [2] European List of Non-cooperative Countries and Sanctions The European Union has assumed a negotiating role with third countries in order that they embrace, by entering into international agreements with the Union, the minimum rules of tax good governance. This is a negotiating power that the Union has often already been exercising with certain countries, as much in free trade agreements as in specific tax agreements on EOI.56 In cases where the cooperative approach does not work, the Union has assumed the competence to create a common blacklist of non-cooperative jurisdictions,57 due to the ineffective, fragmentary and non-uniform application of these kinds of lists by Member States.58 The assumption by the Union of the competence to ‘tag’ (‘name-and-shame approach’) those countries that refuse to embrace the tax good governance creates the same traditional problems relating to these lists.59 On the one hand, despite the fact that certain Member States have been carrying out unfair tax practices, the Member States have excluded themselves from the scope of the EU list. It is also unlikely that the EU Council will include in the list third countries with which it maintains close commercial and diplomatic relations. After the recent publication of the ‘Paradise Papers’ by the media,60 the Council has 53. Supra n. 43. 54. Pistone, supra n. 1, at p. 86. See also supra n. 41. 55. See Luja, supra n. 41, at p. 323; W. Schön, Tax Legislation and the Notion of Fiscal Aid: A Review of Five Years of European Jurisprudence in State Aid Law and Business Taxation p. 5 (I. Richelle, W. Schön & E. Traversa eds, Springer 2016). 56. Supra n. 11. 57. COM (2016) 24 final (28 Jan. 2016), sec. 5. 58. The Commission Recommendation of 6 December 2012 (2012/771/EU) encouraged Member States to draft lists of non-cooperative jurisdictions; lists that were later consolidated through a pan-EU list. This initiative has failed due to the political and diplomatic interests of Member States, which have refused to include in such a list their associated territories that do not comply with tax good governance. Other countries, such as the Germany and the United Kingdom, have directly refused to draft such a list. See C. HJI Panayi, Is Aggressive Tax Planning Socially Irresponsible?, 43 Intertax 10, p. 556 (2015). 59. The European Council approved and provided in detail the tax good governance criteria proposed by the Commission (supra n. 47) according to which it will analyse and select those countries that eventually will be part of the list. See Council Conclusions on the criteria for and process leading to the establishment of the EU list of non-cooperative jurisdictions for tax purposes (8 Nov. 2016), OJ C461, 10 Dec. 2016, pp. 2–5. 60. See https://www.icij.org/investigations/paradise-papers/ (accessed 15 Jun. 2018). Chapter 21: External Action of the EU in Tax Matters §21.03[C] 419 rushed through the blacklist elaboration61 and recently published the first version of the list, which should be updated once a year.62 This first version of the list demon- strates the reluctance of the Union to mark as tax havens those countries with which it has closer relations. With respect to developing countries, beyond the cooperation and provision of development aid to improve their tax infrastructures in the framework of the Addis Ababa Tax Initiative,63 the Union has adopted a flexible approach. The Union has made flexible the negotiation process with those countries that, due to deficiencies in their public infrastructures, lack the capacity to adapt to the new standards of tax good governance. In this sense, some authors have suggested the possibility, as a temporary alternative to the introduction of the new tax good governance clauses, of signing agreements with developing countries that oblige them to impose a minimum WHT on passive income for a temporary period,64 just like the Union has done in the past with certain Member States and other associated countries (such as Switzerland). Never- theless, this preferential treatment granted by the Union to developing countries requires a greater rigour and certainty with respect to the definition of ‘developing country’.65 The inclusion in such a list entitles Member States to apply defensive counter- measures,66 which would usually dissuade European companies from investing in the 61. In a first phase, the Commission published in September 2016 a ranking of third countries drafted over a set of economic indicators (such as the economic ties with the Union, financial activity or stability) that without prejudging compliance with the tax good governance criteria, established the need to carry out a second phase aimed at monitoring those countries and negotiating with them, https://ec.europa.eu/taxation_customs/sites/taxation/files/2016-09-15 _scoreboard-indicators.pdf (accessed 15 Jun. 2018). In February 2017, the Council sent a letter to those countries that had been included in this preliminary selection in order to communicate to them that they would be subjected to scrutiny and to involve them in the promotion of tax good governance. In December 2017, as a result of the third and last phase, the Council decided which countries become part of the final list. 62. See Council Conclusions of 5 December 2017 on the EU list of non-cooperative jurisdictions for tax purposes, OJ C438, 19 Dec. 2017, pp. 5–24. In this document the Council identified seventeen non-cooperative jurisdictions (either because they do not comply with the EOI standards or because they maintain preferential tax regimes or because they have not imple- mented the BEPS measures). This list has changed over the last few months because some listed countries have committed to adapting to the tax good governance standards, so that at present (July 2018) the list comprises the following seven countries: American Samoa, Guam, Namibia, Palau, Samoa, Trinidad and Tobago, and the US Virgin Islands. There having been excluded from this list those countries that even though they do not comply with tax good governance standards, have committed to modifying their tax policies. 63. See European Commission, A Contribution to the Third Financing for Development Conference in Addis Ababa, https://ec.europa.eu/europeaid/sites/devco/files/com_collectmore-spendbetter _20150713_en.pdf (accessed 15th June 2018). 64. See Dourado, supra n. 22, at p. 194. According to this author, the introduction of the EOI standards in countries with an ineffective democracy and without an effective system to protect taxpayers, might be counterproductive (at pp. 185 and 187–193). 65. Dourado, supra n. 30, at p. 444. 66. Among the defensive measures, not only ATAD measures are included, but also whatever domestic measures that Member States consider appropriate, such as the switch-over clause, the non-deductibility of payments to non-cooperative jurisdictions, high withholding taxes, etc. According to COM (2016) 24 final, sec. 5.3, ‘options could include withholding taxes and non-deductibility of costs for transactions done through listed jurisdictions. This would make it Edoardo Traversa & Alejandro Zubimendi§21.03[C] 420 listed countries.67 Traditionally, the application of these defensive measures was at the discretion of the Member States, but since the approval of the ATAD, Member States have lost the sovereign power to decide, in consideration of their international competitiveness, whether they want to permit the erosion of their own tax bases. The execution of defensive measures against non-cooperative third countries, in so far as those measures are not subjected to any supranational control of legality (whereas at the Community level the EU fundamental freedoms are a counterweight and a limit),68 leaves those countries defenceless. This discrimination by the Union towards countries who are not willing to eliminate advantageous tax regimes might be seen rather than as a defensive means of ensuring the effectiveness of their taxing rights, but instead as an alteration of the taxing rights allocation criterion whereby taxation should take place where value is generated.69 This attitude of the Union is of a sanctioning character and, might be interpreted as indirect protectionism, a stance clearly in contradiction with its fundamental values.70 In light of this situation, third countries have only two options. They can embrace the principles of tax good governance, giving up part of their sovereignty for the benefit of the most-developed countries that have led the formation of the new BEPS paradigm. Or, they can reinforce their protectionist attitude, applying defensive countermeasures against the Union. This second option is less probable, however, given the current dependence of these countries on the capital of wealthier countries. [D] Conclusion In recent years, two patterns have emerged in the new framework of international relations in tax matters. Firstly, multilateralism has surfaced as the new paradigm in the formation process of the international tax rules, replacing bilateral negotiation. Secondly, the substantive criterion whereby taxation must be territorially aligned with the place where companies generate value has turned into the new paradigm for the allocation of taxing rights; thus, giving rise to an international tax law more oriented to substantive criteria than purely formal ones (such as the juridical qualification of income and person categories). With respect to the ‘place where value is generated’, even if it is a prima facie fair principle, its implementation may not satisfy all of the international community. Each country has its own distinct needs and preferences and thus certain countries depend on offering an attractive tax system to attract investment and develop. Therefore, encouraging the entire international community to adopt this standard under penalty much less attractive for companies to invest or do business in these jurisdictions, as the administrative burden and risk of double taxation would be higher.’ 67. Dourado, supra n. 30, at p. 443. 68. The non-discrimination principle means a brake for the intensive use of defensive or compen- satory measures by Member States against unfair tax practices carried out by other Member States. See L. De Broe, International Tax Planning and Prevention of Abuse pp. 925 and 926 (IBFD 2008). 69. Dourado, supra n. 30, at p. 444. 70. Supra n. 38 and accompanying text. Chapter 21: External Action of the EU in Tax Matters §21.03[D] 421 of application of defensive countermeasures might be seen as a display of a certain protectionist bias by Europe. On the other hand, countries have lost negotiating power in the new multilater- alist context.71 With bilateralism, each country retains its sovereignty so that it decides in each tax treaty the concrete extent to which it is willing to give up this power. However, under multilateralism (of which the highest expression has taken place in the BEPS Project and in the multilateral agreements of EOI), states have their negotiating power diluted in favour of international organizations and forums.72 The benefit of international cooperation is a greater efficiency and coordination, eliminating exter- nalities. Thus, bilateralism is the breeding ground for tax avoidance (and particularly treaty shopping), since the non-harmonization of taxes and legal asymmetries and mismatches are only possible in a bilateral context. Consequently, these new interna- tional cooperation processes make it easier to advance towards common international tax principles able to eliminate such distortions. In the context of the European Union, where Member States have similar economic structures and similar idiosyncrasies, multilateral cooperation and growing tax harmonization have contributed to stop tax avoidance, to improve the level playing field and to advance towards an internal market without barriers.73 Nevertheless, this consensus reached at the European level is not necessarily applicable at a more global level, where each region has different and particular needs and preferences. In this global context, those countries with lower participation in international forums (such as the OECD) might feel that new tax rules do not fulfil their needs.74 Tax harmonization at a global level erodes the sovereignty of many countries that are not involved in these international organizations. Thus, the extension of the State aid regime to third countries, through international agreements, may be seen as interference in the tax policies of such countries.75 Moreover, due to the unpopularity of granting express tax privileges to certain sectors or certain companies (or even due to the application of the prohibited subsidies regime to members of the World Trade Organization),76 many countries might prefer to grant less-transparent tax benefits in the form of rules that are more permissive with regard to tax avoidance.77 In this sense, tax privileges for foreign investment may take forms that are less transpar- ent but more effective in maintaining the competitiveness of the country. Although 71. P. Pistone, Coordinating the Action of Regional and Global Players during the Shift from Bilateralism to Multilateralism in International Tax Law, 6 World Tax J. 1, p. 3 (2014). 72. To the extent that the new BEPS paradigm and the tax good governance standards are expanding over more countries, keeping isolated is more harmful for the ‘rebel’ countries. Multilateralism bases its power on the unity and cooperation in the international community. 73. P. Pistone, R. Julien & F. Cannas, Can the Derivative Benefits Provision and the Competent Authority Discretionary Relief Provision Render the OECD-Proposed Limitation on Benefits Clause Compatible with EU Fundamental Freedoms? in Base Erosion and Profit Shifting (BEPS): The Proposals to Revise de OECD Model Convention p. 213 (M. Lang et al. eds, Linde 2016). 74. It is important to keep in mind that these new supranational legislative processes have been driven by the most-developed countries, particularly by the G20 group and the European Union, which have imposed a vision favourable to their interests. 75. Dourado, supra n. 30, at p. 444. 76. Supra n. 43. About the prohibited subsidies regime of the WTO, see P.W. Jessen, State Aid and Taxation in Relation with Third Countries, 40 Intertax 2, p. 134 (2012). 77. Supra n. 43. Edoardo Traversa & Alejandro Zubimendi§21.03[D] 422 these practices may be contrary to the principles of legality and equity, they are domestic concerns, over which neither the European Union nor the OECD should exercise a paternalistic attitude.78 The main advantage of multilateralism occurs in the context of EOI and trans- parency. Whereas opposing countries to the BEPS Project stress the loss of sovereignty, EOI permits countries to reclaim sovereignty over their taxpayers that hide income in opaque jurisdictions.79 The European Union may be more effective in achieving taxpayer compliance with tax obligations through agreements on EOI with third countries.80 Besides, the increase in tax transparency is encouraging a public debate about the international tax system and how to move towards a fairer allocation of taxing powers among countries.81 Although it might seem that the European Union is one of the main beneficiaries of this multilateralism due to the spread of its tax principles towards the rest of the international community, which is true in the current economic situation, in future, it is possible that due to the growing economic development of other regions, the Union might lose weight in international forums such as the OECD. In that case, the Union would suffer what today is already becoming a reality: that even the Union has lost autonomy in favour of international organizations. The ATAD is not the only unavoid- able consequence of the BEPS Project, the current EOI standards implemented by the Union through directives, are also a consequence of the agreements reached at the heart of the Global Forum on Transparency and Exchange of Information for Tax Purposes. §21.04 LIMITS TO EU EXTERNAL ACTION AGAINST TAX AVOIDANCE: COMMUNITY FREEDOMS The European Union has designed its external action in tax matters on the same integration principles underlying the intra-Community scope. Thus, the EU external action seeks, though less stressed than the internal policy, global economic integration and the creation of an international market without barriers based on a level playing field. The Community policy of tax integration is reflected to some extent in this external policy. On the one hand, there is growing positive integration, which looks for third countries to implement the new international tax principles developed by the 78. From a purely legal perspective, according to Pistone, supra n. 1, at p. 90, states do not have any obligation to combat tax avoidance, but rather a right. Nevertheless, for this author, this right may turn into an obligation where, in application of the EU State aid regime, the absence of anti-avoidance rules in cross-border situations results in de facto privileges for certain companies. 79. When tax bases are diverted into opaque jurisdictions, anti-avoidance measures are not effective. Commission Recommendation of 6 December 2012 (2012/771/EU), OJ L338, 12 Dec. 2012, p. 37, states that low level of income tax is ‘not necessarily undesirable as such, as long as the State participates in international cooperation in order to allow other States to enforce their tax policy’. 80. See Taha, supra n. 4, at p. 159, with respect to the conclusion of agreements on EOI between the European Union and third countries. 81. Traversa & Flamini, supra n. 43, at p. 399. Chapter 21: External Action of the EU in Tax Matters §21.04 423 OECD and the European Union; in the previous section, we have seen how the Union is trying to move towards positive tax integration beyond the European borders by promoting the OECD principles in third countries. On the other hand, there is negative integration. The Union, either through the EU fundamental freedoms enshrined in the TFEU or through the free trade agreements entered into with third countries,82 places some limits on Member States’ tax sovereignty with respect to their relations with third countries. In this section, we will briefly look at how the EU fundamental freedoms limit the autonomy of Member States to establish certain barriers to commerce with third countries. When analysing the effect of the EU fundamental freedoms on the relations between Member States and third countries, it is necessary to distinguish between two kinds of effects. On the one hand, Article 63 of the TFEU has a direct impact on the movement of capital with third countries. On the other hand, the other EU freedoms, even though they do not affect extra-Community relations, could have an indirect impact on certain situations where third countries are involved.83 As a result of the EU desire to liberalize the global capital market, the Maastricht Treaty extended the scope of the free movement of capital to flows of capital between Member States and third countries.84 Thus, Article 63 of the TFEU has a more global scope than that of the other freedoms. Article 64(1) of the TFEU establishes a grandfather clause whereby all restrictions on capital movements with third countries in force at 31 December 1993 (prior to the entry into force of the aforementioned extension of the freedom of capital movements to third countries) shall be permitted.85 On the other hand, Article 65(1) of the TFEU, codifying the ECJ doctrine, establishes the lawfulness of restrictions on the free movement of capital that are justified on a legitimate basis and apply according to the proportionality principle.86 In the context of the present analysis, it is interesting to analyse the compatibility with the EU freedoms of the recent measures approved in the framework of the ATA Package.87 The ATAD measures have been subjected to many studies in this regard. 82. See F. Sicard & O. Debat, The EU and Third Countries: Any New Tax Opportunities Under Association Agreements?, 45 Intertax 5, p. 402 (2017). See also P. Pistone, The Impact of European Law on the Relations with Third Countries in the Field of Direct Taxation, 34 Intertax 5, p. 234 (2006). With regard to the relation between the TFEU and the free trade agreements concluded by the Union with other regions or countries, in Case C-464/14, SECIL, ECLI: EU:C:2016:896, the ECJ takes the implicit position of giving primacy to the TFEU. Conversely, however, the Opinion of Advocate General Wathelet in SECIL, ECLI:EU:C:2016:52, para. 57, advocates for the application of the rules of public international law provided for in the Vienna Convention on the Law of Treaties (1969), placing the TFEU and the free trade agreements on the same level but giving priority to the free trade agreements in application of the general principles of lex specialis and lex posterior. The present authors believe that the position adopted by the ECJ makes more sense because the competence to conclude international agreements by the Union derives from the EU founding Treaties. 83. See E. Traversa, National Report: Belgium in The EU and Third Countries: Direct Taxation pp. 158 et seq. (M. Lang & P. Pistone eds, Linde 2007). 84. D.S. Smit, Capital Movements and Third Countries: The Significance of the Standstill-Clause ex-Article 57(1) of the EC Treaty in the Field of Direct Taxation, 15 EC Tax Rev. 4, p. 203 (2006). 85. See Case C-464/14, SECIL, ECLI:EU:C:2016:896, para. 92. 86. See Traversa, supra n. 83, at p. 151. 87. Supra n. 21. Edoardo Traversa & Alejandro Zubimendi§21.04 424 The fact that many of those measures do not combat abusive situations but merely presume abuse, has given rise to debate about the legality of those measures that, applying to transactions with third countries, affect the free movement of capital. For instance, Article 5 of ATAD on exit taxation, does not require the source Member State to allow deferral of payment when the recipient country does not belong to the European Economic Area. Even though exit taxation has traditionally been analysed from the freedom of establishment perspective,88 the ECJ has left the window open for the application of the free movement of capital.89 It does not seem that problems could arise with respect to the interest limitation rule (Article 4 of the ATAD) and the CFC rule (Articles 7 and 8 of the ATAD). The interest limitation rule may affect the free movement of capital but it applies to domestic transactions as well as cross-border transactions, thereby it should be compatible with the TFEU.90 Regarding the CFC rule, even though the ATAD permits Member States to apply this rule in a more extensive way91 (disregarding the existence of an artificial structure that justifies such a measure, as the ECJ requires)92 when the subsidiary company is established in a third country, it is difficult to hold that free movement of capital is applicable.93 Lastly, the anti-hybrids rule (Article 9 of the ATAD) might affect the free movement of capital. In such a case, some scholars have suggested the potential discriminatory nature of this rule to the extent that qualification conflicts only arise in the cross-border context.94 Since the application of this measure is not dependent on the existence of real abuse that could justify such a measure,95 such a restriction could only be justified in the event that the ECJ accepts that it is intended to preserve the ‘coherence of the tax system’.96 88. Case C-9/02, Lasteyrie, ECLI:EU:C:2004:138. 89. Case C-164/12, DMC, ECLI:EU:C:2014:20. See Navarro, Parada & Schwarz, supra n. 38, at p. 120. 90. Bizioli, supra n. 39, at p. 173. G. Ginevra, The EU Anti-Tax Avoidance Directive and the Base Erosion and Profit Shifting (BEPS) Action Plan: Necessity and Adequacy of the Measures at EU level, 45 Intertax 2, p. 123 (2017). 91. Supra n. 37. 92. Case C-196/04, Cadbury Schweppes, ECLI:EU:C:2006:544. 93. Nevertheless, as long as the ATAD is a de minimis rule, Member States could design certain CFC rules so that they extend their scope and affect the free movement of capital. Such would be the case where the CFC did not require an effective control over the foreign company, sufficing a small shareholding over the foreign entity to trigger the CFC rule. In this sense, see Joined cases E-3/13 and E-20/13, Olsen, 2015/C 68/05, paras 114–116; Case C-112/14, Commission v. United Kingdom, ECLI:EU:C:2014:2369, paras 16, 17 and 20. It is established in both cases that the CFC rules affecting the free movement of capital are compatible with the TFEU to the extent that they only target wholly artificial arrangements. See A.P. Dourado, Free Movement of Capital: The European Union Anti-Tax Avoidance Package and Brexit, 44 Intertax 12, p. 874 (2016). 94. A. Rust, BEPS Action 2: 2014 Deliverable–Neutralising the Effects of Hybrid Mismatch Arrange- ments and its Compatibility with the Non-discrimination Provisions in the Tax Treaties and the Treaty on the Functioning of the European Union, British Tax Rev. 3, p. 320 (2015). See also Navarro, Parada & Schwarz, supra n. 38, at p. 128; Christiana HJI Panayi, The Compatibility of the OECD/G20 Base Erosion and Profit Shifting Proposals with EU Law, 70 Bull. Intl. Taxn. 1/2, pp. 98–101 (2016). 95. In the context of VAT, the ECJ has established that the exploitation of the qualification conflicts by taxpayers may not constitute an abuse as long as there is no wholly artificial arrangement. Case C-277/09, RBS Deutschland, ECLI:EU:C:2010:810, paras 50–54. 96. At the present time, it is unlikely that the ECJ may accept as a justification the ‘coherence of the tax system’ because the Court only accepted this justification motive in cases where the direct Chapter 21: External Action of the EU in Tax Matters §21.04 425 Out of the ATAD, but within the framework of the ATA Package, are other measures that might potentially affect EU fundamental freedoms. Anti-treaty shopping clauses, such as the principal purpose test (PPT) or limitation on benefits (LOB) clauses, may be incompatible with the TFEU in so far as they apply automatically without assessing whether there is a ‘genuine economic activity’.97 Therefore, all clauses in tax treaties that disregard the assessment of the economic substance of a transaction are susceptible of being considered incompatible with EU fundamental freedoms. Such incompatibility may arise either when the clause is applied by a Member State with respect to payments to third countries98 or when the clause is applied by a third country with respect to payments to a Member State.99 Lastly, the potential defensive measures that Member States could adopt against countries that are listed in the EU list of non-cooperative jurisdictions might be incompatible with the TFEU to the extent that they affect the free movement of capital. Such restrictive measures would be justified if the Member State applying them does not have sufficient EOI instruments and such measures are applied with proportional- ity.100 Nevertheless, whereas it is possible to justify defensive measures against third countries not cooperating in EOI, it is more difficult to justify defensive measures taken against third countries which, while complying with international EOI standards, maintain practices deemed as ‘unfair’ tax competition. In this regard, the fact that link between the offsetting restriction and the tax benefit takes place within the same taxpayer. In this regard, see Case C-204/90, Bachmann, ECLI:EU:C:1992:35, para. 21 and Case C-157/07, Krankenheim, ECLI:EU:C:2008:588, paras 42 and 43. In Case C-559/13, Grünewald, ECLI:EU:C:2015:109, para. 49, the Court denied this direct link where the tax benefit and the offsetting restriction take place in two different taxpayers. 97. In the framework of the ATA Package, the Commission issued a Recommendation on the implementation of measures against tax treaty abuse, C(2016) 271 final (28 Jan. 2016), in which the Commission suggests the introduction of a PPT clause that would not apply as long as there is a ‘genuine economic activity’. 98. In this regard, Case C-6/16, Eqiom and Enka, ECLI:EU:C:2017:641, paras 30–33, states the discriminatory character of a domestic PPT clause (only applicable to cross-border situations) because it applied on an automatic basis without assessing whether there was a wholly artificial arrangement. This decision is susceptible of being applicable to the tax treaty signed between a Member State and a third country to the extent that the PPT clause affects the free movement of capital. 99. Despite the fact that the ECJ does not have sovereignty over third countries with respect to the restrictive measures applied by them, this type of clause might be incompatible with the TFEU if it is contained in a treaty concluded with a Member State. In this regard, a limitation on benefits (LOB) clause, although applied by a third country to its outbound payments to a company resident in a Member State, is only applied to companies controlled by a non- resident entity established in another Member State, giving rise to a discrimination with respect to the companies controlled by domestic shareholding. See the set of ECJ decisions referred to as Open Skies (e.g., Case C-466/98, Commission of the European Communities v. United Kingdom, ECLI:EU:C:2002:624). See also Traversa, supra n. 83, at p. 160. 100. E. Nijkeuter, Exchange of Information and the Free Movement of Capital Between Member States and Third Countries, 20 EC Tax Rev. 5, p. 241 (2011). See Case C-101/05, A, ECLI:EU:C:2007:804, paras 55 and 56. The Court recognizes that ‘the need to guarantee the effectiveness of fiscal supervision constitutes an overriding requirement of general interest capable of justifying a restriction on the exercise of freedom of movement guaranteed by the Treaty’. Thus, the ECJ has admitted that a Member State may establish a defensive measure against a third country as long as no EOI agreement exists between them. Edoardo Traversa & Alejandro Zubimendi§21.04 426 certain third countries have preferential tax regimes that may harm the competitive- ness of European companies, does not justify in any way the adoption of measures that could break the free movement of capital with third countries.101 This last idea gives rise to one of the main problems of Article 63 of the TFEU. The fact that free movement of capital is only applicable to Member States means an asymmetry and a competitive disadvantage of the European Union with respect to third countries.102 Thus, a company established in a third country can invoke Article 63 of the TFEU in order to avoid restrictive measures imposed by a Member State, but a European company cannot require a third country to abstain from applying measures that amount to a restriction on the free movement of capital. §21.05 CONCLUSION The external action of the European Union in tax matters does not follow the same guidelines as the EU ‘internal’ tax policy. Currently, the integration in this field is not sufficient to achieve an external tax policy that is truly effective in combating tax fraud and tax avoidance. This situation gives rise to a sort of vacuum in EU external tax policy, whose implementation and application falls on the Member States: – Even though the ATA Directive has established a set of measures against aggressive tax planning, including some that apply to third-country cases, the application and interpretation of such measures are in the Member States’ hands. This means there is a risk of a heterogeneous and fragmentary implementation and application.103 – On the other hand, this fragmentary application of EU tax law may continue perpetuating some tolerance of the Union towards harmful tax competition practices carried out by third countries. In this regard, the requirement of unanimity in the exercise of EU tax competences, internal or external,104 is liable to maintain a conservative and moderate attitude, permanently sub- jected to the diplomatic and economic interests of Member States with respect to non-cooperative countries. – Furthermore, the autonomous and uncoordinated exercise of tax sovereignty by Member States in their relations with third countries is a source of continuous distortions in the internal market, affecting not only Member 101. Supra n. 96. See Case C-294/97, Eurowings, ECLI:EU:C:1999:524, paras 43–44. 102. Pistone, supra n. 82, at p. 236; A. Cordewener, Free Movement of Capital Between EU Member States and Third Countries: How Far Has the Door Been Closed?, 18 EC Tax Rev. 6, p. 261 (2009). According to Smit, supra n. 84, at p. 204, the grandfather clause provided for in Art. 64(1) of the TFEU was introduced to preserve the principle of reciprocity for Member States with respect to third countries. 103. The more paradigmatic example of this problem is the general anti-abuse rule (GAAR), which has been included in the ATAD (Art. 6). See Navarro, Parada & Schwarz, supra n. 38, at p. 125. See also L. De Broe & D. Beckers, The General Anti-Abuse Rule of the Anti-Tax Avoidance Directive: An Analysis Against the Wider Perspective of the European Court of Justice’s Case Law on Abuse of EU Law, 26 EC Tax Rev. 3, p. 144 (2017), p. 144; Dourado, supra n. 30, at p. 442. 104. Supra n. 8 and accompanying text. Chapter 21: External Action of the EU in Tax Matters §21.05 427 States’ competitiveness,105 but also the exercise of EU fundamental free- doms.106 Nevertheless, if the EU external action is analysed from a more global perspec- tive, avoiding a purely ‘Europeist’ vision, it is possible to conclude that countries of the international community are losing sovereignty in favour of international organiza- tions, such as the OECD. In the negotiation processes in international forums, the most powerful regions, such as the European Union, have imposed their criteria, eroding the ability of developing and small countries to attract capital through fiscal instruments. Whether those criteria will end up as part of the international tax law remains to be seen. 105. Supra n. 19 and accompanying text. 106. Supra n. 99 and accompanying text. Edoardo Traversa & Alejandro Zubimendi§21.05 428