The outlook for global tax policy and controversy in …...The outlook for global tax policy and controversy in 2019 |3 Ever since the OECD unveiled its 2015 BEPS recommendations for

The outlookfor global taxpolicy andcontroversy in2019

2 | The outlook for global tax policy and controversy in 2019

The outlook for global tax policy and controversy in 2019 | 3

Ever since the OECD unveiled its 2015 BEPS recommendations for international tax changes, we have been living through a period ofgreat legislative flux.

And with policies implemented in response to the BEPS recommendations still fresh, the global tax communityis already faced with anew phase of work on even more dramatic changes, with new nexus definitions, revised profit allocation rules, and a global minimumtax all being actively discussed in 2019. Tax administrations, too, continue to make changes that affect global businesses,collaborating together on more multilateral approaches, revitalizing programs such as joint audits, expanding procedures such as theInternational Compliance Assurance Programme (ICAP), and all the while digitizing their end-to-end compliance processes at recordspeed.

Worldwide, we see more tax legislative change playing out than ever before. Companies need to be compliant with new tax laws, whichmeans that the more global the company’s footprint, the more tax law change the company faces. Most businesses have already felt theimpact of US tax reform and the effect of global tariff and trade disputes. And in 2019, companies will be feeling the impact of Brexitdiscussions and new calls for public transparency and mandatory disclosure.

Where new legislation finds its genesis is changing too, with more than 40 governments havingturned over in the past 18 months.Many of these new leaders are focusing on tax law changes immediately to deliver on their campaign promises. Tax law is being used asa tool to encourage or discourage particular behaviors, to raise revenues or to stimulate economies the world over. And of course, everytime a country changes its tax laws, companies need to understand the impacts on business. Meeting the evolving demands of taxreform around the world requires deep subject matter expertise and tax technical skills. In addition, it almost inevitably means factoringin new and expanded data requirements and changes to the systems, processesand computationsthat ultimately feed into a myriad offorms and filings.

I believethat paying more active attention to the tax policy field of play can help you, as a tax professional,do more for your organization.By engaging actively with respect to policy developments you can help better prepare for changes, reducing risk through proactivedecision–making and positioning your business for success, with fewer “surprises”.

Today, the global tax environment is arguably more dynamic — and challenging — than it has ever been, with change presentorpromisedin most places in the world. With this in mind, I hope that our Outlookfor 2019 helps you see the swellson the horizon so youcan navigate these stormywaters with more confidence.

Kate BartonEY Global Vice-Chair ofTax

The importance of the tax policyfield of play for business

Kate Barton


The outlook for global tax policy and controversy in 2019 is a surveyof EY tax policy and controversy leaders in 48 jurisdictions. It coversknown and forecasted tax changes in each jurisdiction,spanningall key tax types and including specific information onenforcementtrends and key audit triggers.

Country surveys were collected during December 2018 andJanuary2019. This is the ninth edition of this publication.

About the report


Whether one looks a decade back or forward, the notion of a busybeach with a sizeable series of incoming waves is an apt metaphorfor today’sglobal tax vista.

As with so much of nature, the simplicity of a wave beliescomplicatedmechanicsat work beneath the surface.While it maylook like each wave is a self-contained object, the dynamics arefar more complex; one wave receding feeds energy to the next,and parts of one wave soon find themselves comingled in others.And as they hit the shore,wavesunleash energy,foam and noise.Occasionally, the unique shape of the land may cause a riptide tooccur, creating hidden danger and menace.

Successive waves of global tax reform

High net Baseworthindividuals/ erosion and “Beyond “Sustainable

multinational profit shifting BEPS” society”companies (BEPS)

2008 2010 2012 2014 2016 2018 2020 2022 2024 2028

Tax “waves” behave in a similar manner: the last decade ofchange began with tax and spending stimulus, and a focus onthe tax affairs of both High Net Worth Individuals (HNWIs) andmultinational companies. That focus on HNWIs is swellingagaintoday, illustrated by calls for wealthtaxes.

Five years later, G20 leaders tasked the OECD to issue a far-reaching set of BEPS recommendations, the majority ofwhichcontinueto be implementedin 2019, our surveyssuggest.

In 2019 the next wave is starting to arch higher and will soonrelease its pent-up energy. What first looked like a relative ripple —taxing the digitalized economy and a new round BEPS work hasquickly transformedinto the kind of wave that makes parents jumpup and pull their children tosafety.

Achieving consensus will be time consuming and challenging

Whatever emerges from the 129-member-strong BEPS InclusiveFramework (IF)1 may not match exactly what is being discussedtoday — indeed, that discussion is still being held under theTaxation of digitalized business banner, but as my colleague,Marlies de Ruiterargues on page 15, it goes far further.Taxpayerscertainly seem to agree with the sentiment that consensus will bedifficult; in a February 2019 EY webcast,2just one in six of 1,200online poll respondents felt that there was a “great chance of acomprehensive solution emerging” at OECDlevel.

Looking for the next bigwave

Lookingout to sea, a new swell is already starting to form aroundyet another wave that we think will fuel the next five or even tenyears of tax policydirection.

Five of 48 jurisdictions tracked in this publication are alreadyproposing or forecasting higher top marginal rates of PIT in2019. Countries including the Netherlands are implementingenergytaxes,while in the US, talk of a “GreenNew Deal” iscreating headlines. Outside of tax, too, thegrowing calls forequality can be seen; consider the streets of Paris in early 2019,where the so-called “gilets jaunes” illustrate the depth of publicanger about inequality, almost a decade after the birth of “Theother 99%” movement.

And around the world, rising tax enforcement completes thewavelife cycle, providing energy to the next wave.

A wave theory of global tax policy

1The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) brings together over 125countries and jurisdictions to collaborate on the implementation of the BEPS Package2https://www.ey.com/gl/en/issues/webcast_2019-02-11-1500_global-tax-policy-and-controversy-in-2019


Chris SangerEY Global Tax [email protected] March 2019

Pinpointing the drivers of tax change has always been aninteresting business. BEPS and ATAD are obvious contendersin 2019, as is the election “super cycle,” which continues toproduce unexpectedresults.

More subtle are other new drivers; information flows to taxadministrations is starting to have a broader effect on taxpolicy formation, and, with greater visibilityon exactlywhereassets reside, countries now have a better opportunity todesign new regimes to taxthem or for taxpayers tovoluntarily disclose them.

Furthermore, US tax reform is having an influence on othercountries’ tax reforms, with some countries respondingalready, but others waiting more patiently for more completedata to drive policydecisions.

But these drivers alone do not fuel the “new era” ofinternational tax reform of which the OECD’s tax leadertalked in December 2018; that will be the productof a farmore wide-ranging,long-term and deeply ingrained set ofdrivers.

A US Treasuryofficial similarlydescribed his viewson thecomingshifts (also in a December2018 speech), saying:

“I believe that many observers would agree that, overthe last five yearsor so, we haveseen an acceleratingbreakdown of the international consensus as tohowtaxing jurisdiction should be allocated around countries. Ifthis trend continues, it could lead to a serious breakdownin internationalstandards.”

Drivers of change in 2019


What does that really mean in practical terms?Arguably, aseries of recent tax measures in different geographiescollectively express the frustration of governments regardingtheir inability to protect their tax bases. They includediverted profit taxes (DPTs) in a number of jurisdictions; thebase erosion and anti abuse tax (BEAT) and Global IntangibleLow-Taxed Income (GILTI) measures within the US tax reformpackage; digital services taxes (DSTs) bothmultilaterally inthe EU and unilaterallyin a number of jurisdictions;newdigital permanent establishment (PE) concepts; differinginterpretations of key transfer pricing concepts; and, ofcourse, differing applications of BEPS recommendations —ironically adding to disparities in international tax systems,being the very problem the BEPS project itself was trying tosolve.

Underpinning so much material change, some — but certainlynot all — of the trends we had identified in recent editions of thispublication remain present. First, and again showing a clear,unarguable direction, are headline corporate income tax rates. Ineveryedition of this annual publication, we have stated in someform that “headline rates are fallingand tax bases are broadening.”This is no differentin 2019, as the infographicbelow illustrates.

Long-term trends continue to play out“Low rate broad-based tax systems”

None of the 48jurisdictionstrackedare known to beincreasing their\headline CIT rates

5 of the 48 jurisdictions (Brazil,France, Greece, Mexico, Norway) areforecasting lower rates than in 2018

(Canada’s is also lower, but byhundredths of a percentage point,due to Quebec’s-0.1% change)

0

5

BrazilNot yetclear

France33.3%31%

Greece29%28%

Luxembourg26%25%

Norway23%21%

It is interestingto see how the effectiveCIT rates for each countrystack up against the OECD’s2018 average of 23.7% By doingso, one may secure insight into which countries may be the nextmovers. Interestingly, action is already occurring. France andGreece are already partway through multi-phase rate reductions.Brazil has recently made it known that it plans to reduce its 34%rate — but by how much is not known. My colleaguesin India,likewise, report that the government “recognizes the needfor

lowering the tax burden in line with international trends,” and thata phased approach to reductionis expected.On that basis, weadvise readers to also watch for other reductions in 2019,especially among those furthest above the OECD average, asillustrated below.

Corporate income tax rates: where next?

40%

35%

30%

25.0

20%

15%0

OECD average: 23.7%

Spain•

Netherlands•

Chile•

Australia•

United

States•

Luxembourg

•

Canada•

Korea•

Italy•

New

Zealand•

Greece•

Belgium•

Japan•

Germany

•

Mexico

•

Australia•

Portugal•

Brazil•

France•

India•

Jurisdictions where rate cuts are being considered

Jurisdictions undergoing multi-year cuts

5 10 15 20 25

Effective local and national corporateincome tax rate vs. 2018 OECD average

Recent years have seen many countries convene around a rate“corridor” of (roughly) 19% to 25%. It is possible that this corridormay move lower in the future. There will, of course, always be aprice to access a market jurisdiction, but on the flipside, theBEPS project has probably (perhaps unsurprisingly,) increased taxcompetitionvia headline rates.What effecta possible reallocationof taxing rights and the application of some form of global minimumtax might have on the trajectory of headline CIT rates will be a focusfor future editions of thispublication.

Long-term trends are stillplaying out


Headline tax rates are but one element of tax competition, though,and their fall is often accompanied by corresponding tax baseexpansion. That continues to be the case in 2019, where 12 of the48 jurisdictions (25%) tracked anticipate overall CIT base expansionin the year ahead, as shownbelow

CITBurden

9

Baseexpansion

12

12 of 48 (25%jurisdictionsanticipate CITbaseexpansion in2019; onlyAustriaforecasts acontractingcorporate taxbase

9 of 48countries(19%: Austria,Brazil,Belgium,Colombia,France, India,Luxembourg,Netherlands,Norway)anticipate alower overallCIT burden

Nine of 48 jurisdictions (19%: Austria, Brazil, Belgium, Colombia,France, India, Luxembourg, Netherlands, Norway) anticipate alower overall CIT burden this year. This is around the same as2018 (17%) and slightly lower than 2017’s 22%. Five of the 48jurisdictions (10%: Australia, Costa Rica, Italy, Spain and Vietnam)anticipate a higher overall CIT burden in 2019. The remainderexpect the same overall CIT burden in2019.

BEPS and ATADimplementationOur data confirm that 2019 is the year during which BEPS andATAD implementation converge to drive a significantly increasednumber of new or changed laws at the local level. Here, activity isvery much followingthe contoursof the ATADrequirements(anti-hybrid rules, GAAR, interest deductibility rules, CFC rules and exittaxation).

But ATAD-typechanges are not limitedto EU Member States alone;new or changed law is also occurringamong non-EU nations:

• CFC: Changes were implemented by Canada, China, Colombia,Panama and Peru (5 of the 13 implementing change in thisarea).

• Interest limitations: Here, activity was almost exclusivelyoccurring among non-EU Member States, indicating that themajority of Europe had previously implemented either theOECD’s BEPS Action 4 or this part of the EU’s ATAD. Australia,Canada, Colombia, Costa Rica, El Salvador, Malaysia, NewZealand, Peru and Singapore (9 of the 14) are all making new oramended laws on interest limitations. Belgium and Slovenia werethe only EU Member States tracked to be implementingnew lawin this area.

• Anti-hybrid rules: Colombia, Costa Rica, El Salvador, Israel andNew Zealand are non-EU jurisdictions that are putting in placenew or tightened anti-hybrid rules. Belgium and the UK amongthe EU Member States are tightening anti-hybridlegislationin 2019.

InterestlimitationsCFC

13

13 of48(22%)ofjurisdictionswith a CFCregime areeither creatingrules ortighteningexisting laws.

14 of 48jurisdictions(29%)anticipate ahigher burdenas a result ofnew interestlimitations.

Hybrids

14 7

9 of 48jurisdictions(19%) anticipatea higher burdenas a result ofnew anti-hybridrules.

BEPS and ATAD implementationNot just a European phenomenon• Non-EU activity

• CFC: Canada, China, Colombia, Panama andPeru• Interest limitations: Australia, Canada, Colombia, Costa Rica, EI Salvador, Malaysia, New Zealand,

Peru and Singapore• Anti-hybrid rules:Colombia, Costa Rica, EI Salvador and New Zealand


Transfer pricing (TP) is an area of BEPS where muchimplementation activity has already occurred, but is not yetcomplete. “This is the end of the beginning, not the beginningof the end,”said LuisCoronado,EY Asia-Pacific TransferPricingLeader, during a February EYwebcast.

While only 12 of 48 jurisdictions (25%) are anticipating a higherTP burden in 2019, against 45% in 2018 and 32% in 2017, ourdata indicate that transfer pricing risks areincreasing.

Transfer pricing is not the measure with the highest incidence ofburden-increasing measures, however — new digital taxes, higherlevels of tax enforcement, changes to CFC regimes and interestlimitation changes all demonstrate a higher incidence of change.But that does not mean that transferpricing risks are slowing;theopposite is true, indicate ourdata.

What continues to be concerning, however, is continuedunilateral action and inconsistent interpretation and applicationof the transfer pricingstandard.

Tax enforcementLooking to tax enforcement more widely, 21 of 48 jurisdictions(44%) forecast a higher business tax burden as a result ofenforcement in 2019, results were similar in 2018. When oneconsiders the depth and duration of this trend, coupled with thesheer volume of new and untested changes occurringin 2019, thisdoes not bode well for thefuture.

Seven of 48 jurisdictions (15%) say that their tax authority isviewed as “generally aggressive with taxpayers, applying highlysubjective and/or retroactive interpretations or threatening/usingcriminal sanctions” in2019.

Tackling the shadow economy is a target in many emergingmarkets, and in a newlyemergenttrend, many of our respondentsbelieve that double taxation arising from unilateral digital taxmeasures will rise in the coming years. Continued implementationof BEPS — includingthe new Principal Purpose Test in BEPS Action6 and the new GAAR in the EU’sATAD— is also a factor.

TransparencyWhether transparency is to the tax authorities, such as providedby CbCR, or to the public, as the outgoing European Parliamentwould like, transparencyhas already had a major impact onbusinessentities in the “post-BEPS”era.

In 2019, we expect the most significant developments in this areato come from the multilateral organizations; 2019 will be the firstfull year in with the new Mandatory Disclosure Rules in the EU,and very soon the OECD-level debate on expanding and revisingCbCR reports will heat up, in orderto meet a 2020 deadline.

All things considered, tax authorities will have more informationabout taxpayers in 2019 than they have everhad before. Together,this also adds up to a recipe for further controversy and for a freshrise in reputation risk, as revenue authorities juggle huge volumesof data, new analytics solutions, and ongoing public and politicaldemand for aggressive treatment oftaxpayers.

New or unexpected issues in thedataOur first new or unexpected issue actually finds its genesis in2018 — that of new, unilateral digital taxes. According to countrydata, 22 of 48 jurisdictions(46%; 2018: 37%) anticipate a higherburden as a resultof new digital taxation laws. Since our initial datawas sourced, many countries, including Belgium and New Zealandas recent examples, have moved ahead with public consultationsorlegislative proposals — thought ironically, both have slowed theirpace in recent weeks.

A second key change concerns R&D incentives. In 2018 wecommented that focus was “shifting onto improving or creatingmore ‘acceptable’ incentives.” That trend looks to be deceleratingquite quickly in 2019. Although 9 of 48 jurisdictions (19%) aremaking their R&D incentivesmore favorable,this is almost half thenumber than in 2018 (35%) and more similar to the 22% figureof 2017. Indeed, not only are fewer countries issuing new orimproved R&D incentives in 2019, butsome countries (Costa Rica,El Salvador, Honduras and Italy) also making existing incentivesless generous. The fact that three of these four are CentralAmerican countries, illustrates how policy positions can quickly bereplicated among nearbycountries.

On the tax administrationside of the equation, too,R&D incentivesare under pressure; respondents note that R&D incentivecompliance issues are also now starting to trigger tax audits, aphenomenon not present in prior years’ data. Argentina, Finlandand Turkey all mention thisphenomenon.

Our final change point is the loss of two items from our top 10 listof most prevalent issues, the tax treatment of losses and capitalgains tax (CGT). It will be interesting to see if CGT makes a strongreappearance in coming years as part of countries’ “sustainablesociety”efforts.

What form will corporate tax change take in2019and beyond?

All things considered, a major new phase of reformlooks to be onthe horizon.Whetheror not it was the primary objective,much ofthe major change in corporate tax being debated at multilaterallevelscenterson digital, as discussedin depth in our next article.

The potential new measures and approaches includechanges tothe allocation of taxing rights, nexus, some form of globalminimum tax and, importantly, potential changes to theinternationally accepted transfer pricing framework. Thesechanges are complicatedand interlinked, and in many cases arelikelyto requireamendments to income tax treaties and changesto transfer-pricing norms. That, in turn, would seem to indicateamultiyear timeline in advance of significant local tax law changearound the world.

Further, with the involvement of the United States, as well asFrance, Germany and the United Kingdom, the practicallikelihood of this discussion moving forward has increased.


The here and nowActivity is not limited to the future though. In 2019, major tax reform is already playing out in many jurisdictions. As illustrated in Image 1 onpage 8, sixteen of the 48 (33%) jurisdictions tracked by this publication are undergoing what they describe as either “significant” or“comprehensive” tax reform thisyear.

Eleven of the 16 say they are undergoing significant tax reform; perhaps that number will be higher in 2020, when a little more time haspassed to measure impacts on FDI and tax revenues. Austria, Belgium, Brazil, Costa Rica and New Zealand, meanwhile, say their reform iscomprehensive.

For many of the European jurisdictions within the group of 16, much of their reformis being driven by implementationof the EU’s Anti-TaxAvoidance Directive, under which Member States had to legislate for a series of related measures by 31 December 2018. But this is not theonly driver. Take Latin America, for example, where6 of the 16 jurisdictions tracked are undergoingreform.Here, the drivers are widely agreedto be populism and politics.

Non-corporate considerations

VAT and GSTAccording to the 2018 OECD Revenue Statistics publication, general consumption taxes presently account for 20.8% oftotal taxrevenues — compared with 13.3% of total tax revenues for corporate income taxes. And while they may not be borne by business asthe “final consumer,” this “color-blind” tax (i.e., it has to be paid whether the bottomline is black or red!) is of key importance tobusiness as itscollector.

Six of the 45 jurisdictions with a federal VAT/GST report a rate increaseahead in 2019, in either the headline/standardrate or thesecondaryrate. That is a distinct change from 2018, when none of our tracked countries reported an increase.

Additionally, 8 of 45 jurisdictions forecast VAT/GST baseexpansion in 2019. As a result, 10 of 45 jurisdictions forecast higher VAT/ GSTburden while 6 forecast a lower burden overall. So after a couple of relatively quiet years for indirect taxes, changes seem to be front andcenteragain.

Personal income taxesPIT is a further area where we forecastmore activity in 2019 than in recent years. We believe that attempts to reduce inequality(typically by raising top marginal rates while providing more generous tax-free thresholds) foreshadow a wider push in the coming years,which will see wealth taxes, CGT and inheritance taxes all enter the policy discussion. More immediately, 5 of 48 jurisdictions are alreadyproposing or forecasting higher top marginal rates of PIT in 2019, although a different 5 are lowering top marginal rates! Eight of 48jurisdictions, meanwhile, believe their overall PIT base will contract in 2019, while 11 of 48 jurisdictions are forecasting reduced overallPIT burden in2019.

So, while the picture is not entirelyclear, we expectthis to be a busyfield of play in comingyears. That will likelyimpact both corporateexecutives and their expatriate populations in someway.

Many major tax reforms occurring

Finland

Belgium

Spain

Russia

Hong Kong

Malaysia

Singapore

Australia

New Zealand

Panama

Costa Rica

Honduras

Brazil

Peru

El Salvador

Chile

Significant tax reform Comprehensive taxreformImage 1


Stay safe in the waterAll data and insight considered, weexpect 2019 to be another year ofchange; and while the beach may stillbe open, the “High hazard” red flagsare flying to indicate a high hazardlevel. Significant local and multilateralpressures will impact taxpayers, and the“Beyond BEPS” debate will play outata high pace and have spill-over effectson EU tax policies. Again, this not alsoindicates change for digital companies,but potentially also any company usingintangibles to createvalue.

Tax professionals need to be aware of theincoming waves and taking action. Thatmeans increasing monitoring of all keymarkets; engaging and influencing atbothnational and multilateral levels; lookingover the horizon for the occasional wavethat may be bigger than the others; andtaking all precautions — by managingcontroversies in a global, strategicmanner — to stay safe in thewater.

One other element for the future istheexpansion of the EY Global Tax Policyteam, with the return to EY of BarbaraAngus to take over the lead on GlobalTax Policy, as we widen our work inthepolicy arena. I’m sure with Barbara at thehelm, we’ll continue to steer successfullythrough all the turmoil. Meanwhile, thatprovides me with the opportunity tospend more time with governments asthey too navigate their wayforward.


In 2019 the OECD sees itself back in the exactspot it wants to be — relevant, in demand androlling up its sleeves to try and help countriesfashion a major global consensus out of thinair.

Addressing the tax challenges brought by thedigitization of the economy is at the forefrontof OECD activity in 2019, andmuch movementis underway to try and build a consensusamong countries before 2020. In fact, it willbeinteresting to see whether the whole project iseven referenced as “digital” by then, given itsever-widening impacts.

Back where it wants tobe:the OECD in 2019

Marlies de RuiterEY Global InternationalTaxServices Policy [email protected] March 2019


Recent progressAs a resultof a January 2019 meeting,the BEPS IF issueda publicconsultation document2ahead of the March meeting of the TaskForce on the Digital Economy(TFDE), during whichpublic commentwas invited. The consultation document described two main pillarsfor discussion. Pillar I focuses on how existing rules should bemodifiedto address the right to tax in light of digitization, includingnexus rules. Pillar II focuses on what are described as remainingBEPS issues, including a jurisdictional remedy for income subjectto no, or only very low,taxation.

While these meetings and consultations do not accelerate theoverall timeline for recommendation and then implementationof a solution, theydo offerclarity into that solutionsoonerthanexpected, with a preliminary report expected this summer, inadvance of the G20 finance ministers’meeting.

So stakeholderswill not be in the dark waitingfor a final report in2020, and they have also been invited intothe discussion.

The interim timeline serves to split up the issues to be addressedin order to try and secure a consensus. In light of this, 2019 ispoised to be a very active year for digital and wider discussions. Itis significant that the US is joiningin thesediscussions,heighteningthe likelihood of a concrete outcome. How concrete that outcomeis remains to be seen, though; there are three proposals on thetable, and only one will shine through (though it may “borrow”elements of the others if that is the price to pay for buildingconsensus). With the US bringing the “marketing intangibles”3proposal to the table, this proposal has already attracted muchattention, with the OECD confirming that the “significant economicpresence” proposal was added to the discussion very much at thelast minute, by agroup of 24 emerging markets.

To reach any kind of consensus,the OECD will have to tread a fineline, particularly as one US official has already said that he “feelsthat countrieswould not agree to full formulary apportionment oratax only on highly digitalized business models.”

Whatever the outcome, it will also be interesting to see what theEU proposes in response. Ripe for debate in particular is the EUminimum tax perspective, and how that relates to and influencesthe global system. Thiscalls into question the whole notion behindtax treaties, the EU internal market, import and export neutrality,worldwide and territorial tax systems, and whether this is a movetoward more harmonization.

That’s one part of the OECD debate that still requires clarity,and the intentionbehind this minimumtax is unclear: will it bequite low,and thus akin to an anti-abuse measure?And if theminimum tax is successful, will it result in leaving the sovereigntyof countries behind and forcing them to create more worldwidesystems, in pretty much direct contrast to the current direction oftravel?

The question also arises as to whether the European Commissionwill continue its attempt to progress both the proposed directivefor an EU-wide Digital Services Tax (DST) and the seconddirectiveon a “Significant Digital Presence.” The former, while notwithdrawn, certainly did not pass any further at the most recentFORMAL ECOFIN meeting inMarch.

While these issues and more are being debated, it is currentlyunclear as to what form any finished OECD recommendation willtake. Will it be issuedas a minimumstandard, a recommendation,a leading practice or as something else altogether? Will it requiresignificant amendment to the OECD’s transfer pricing guidelines?And to what level will it require the MLI as an implementationvehicle? These all remain open questions, and thepositioningof the recommendationwill dependupon the strength of theconsensus.


Broader application

While digital (and beyond) is the undeniable“topic of the year” forthe OECD,the issuesarising apply to the broader tax landscapein 2019, with the conversation also focused on minimum taxelements.

This is apparent with the OECD already focusing on the US taxreform provisions of foreign-derived intangible income (FDII), BaseErosion and Anti-Abuse Tax (BEAT) and global intangible low-taxedincome (GILTI) with the Harmful Tax Practices group. A globalversion of GILTI was already in the original BEPS plan but wasdismissed — but of course, the global minimum tax proposal seemsto be gathering momentumagain.

The issues, however, are far broader than a minimum tax. As thesame US Treasury official said in February, “I think it could makesense to focus this proposal on businesses that ultimately, directlyor indirectly, are dealing with individual consumers rather thanwith other businesses just because I think marketing intangiblesare most relevant in thatcontext.”

The conversation could therefore be better classified as notdigital, then, but rather a wider reallocation of taxing rights withmany considerations, including market-facing intangibles, userparticipation, and how to define and thenallocate residual profits.

The question, like BEPS before it, is how will this be implemented,should consensus re reached? Will they use the existing MultilateralInstrument (MLI) or a similar mechanism? The MLI is now startingto have the desired effect of changes coming through, so by thenwe shouldknow whether it works. But how long after consensuson this reallocationof taxing rights will there be until enforcementarises, double taxation rears its head and we see a steady streamof MAP cases? Many countries among our 48 surveyed for thisreport are already listing double taxation on digital tax issues as akey audit trigger.

In 2019, it is possible that we are three to four years out fromfinal implementation. But this vacuum of available consensus isalready leading to unilateral actions by many countries. Weshouldall hope that the ongoingmessagingfromthe OECD will discourageunilateralaction.


Addressing harmful tax practices

US tax reform measures aside, the OECD’s process of addressingharmful tax practices is movingforward,with momentumin severalareas. The OECD’s last report focused attention on zero or near-zero tax jurisdictions3, a topic that was already on the radar of theEuropean Commission. Outside of the formal OECD review process,the focus seems to be on pushing countries with preferentialregimes to abolish them and move instead toward general regimes.The new regimes couldbe territorial, “box”type or another generalregime.

A further quandary is on aggressive territorial regimes that couldbe de facto ring-fencing, but concern remains about jurisdictionswith zero or near-zero tax. Any global minimum tax proposal willhave a huge effecton the new regimesof countriesthat are underconsideration as harmful. It will be interesting to see if all thesecountries are able to meet theirobligations.

3https://www.ey.com/gl/en/services/tax/international-tax/alert--oecd-releases-2018-progress-report-on-preferential-regimes-under-beps-action-5

Tax administration

The focus on digital will without doubt keep the members of theOECD’s Centre for Tax Policy & Administration (CTPA) busy throughthis year and next.

As I write this piece, the OECD has asked for public input on itseighth batch of Mutual Agreement Procedure (MAP) peer reviews.As the earlier-reviewed countries move from stage 1 (review) tostage 2 (remediation and improvement), it will be interesting tosee whether the number of open MAP cases comes down and thenumber of cases closed continues to go up. The latest data fromthe OECD, unfortunately, show that, while more cases are beingclosed than before, the growth rate of new cases is more thandouble that of case closures! Likewise, it will also be interesting tosee the results of these later batches of reviews, particularly assome of the smaller, emerging markets are now underreview.

I also expectto hear newsfrom the CTPA on how the 2018/19International Compliance Assurance Programme (ICAP) pilotwent.I very much hope that it will describe some of the

key challenges experienced, as well as having a meaningfuldiscussionon how such challengesmight be resolved.It will also befascinating to hear individual countries’ views on the future of thisinnovative pilot program. Whether or not it survives in its current,administration-heavy form remains to be seen. But for sure, thetax world needs new and novel ways to drive higher levels of taxcertainty,a key focusof the G20 and OECD in recentyears.

I also understand that we should expect to see a new report onjoint and simultaneous audits in 2019. This is welcome news, andis far overdue after the framework for these important processeswas first set out some eight years ago.4 I very much hope that theglobal assessment of why joint audits are not more prevalent hasunearthed some interesting viewpoints and resulting actions. In myview, these are an under-used dispute resolutiontool,

And, far from being something a taxpayer should avoid, theyare in fact invaluable processes. At a minimum, joint audits canpave the way for an Advance Pricing Agreement (APA), if notmemorializing themselves into an APA in thefirst place!

Transparency is the final topic where I expect to see OECD outputthis year. Several developments will occur around Country-by-Country Reporting (CbCR). First, I expect the OECD will soonpublish consolidated and anonymized summary data with a viewto giving what Pascal Saint-Amans, OECD tax leader, has describedin December 2018 as “an idea of where profits are located.” I verymuch hope this does not lead to uninformed speculation abouttaxpayers.

Second, I expectthe OECD to meet the G20’srequest for the OECDto develop a list of non-cooperative jurisdictions, which will havestrengthenedcriteria – includingfailingto sign the OECD’s

multilateral convention [on Mutual Administrative Assistance in TaxMatters] or failing to exchange information. This list is scheduledfor June 2019 delivery.

Finally, I expect that there will at least a couple of developmentsin relation to CbCR. The first was telegraphed by Pascal Saint-Amans back in December 2018 where at a video address to anevent in India, he described how the OECD would “soon” publishaggregated CbC data (anonymized) ontheir stats website, with aview to “showing the public where company profits are located.If that is the case, then I have little doubt that economists,statisticians, academia, the media, and NGO’s will all start usingthis information and drawing their ownconclusions

Second, is the OECD’s planned 2020 review of CbCR which willcommence in 2019. Potentially setting the stage (or at least,part of the stage) for thenext half-decade of global transparencyrequirements, this will be an important issue for taxpayers toprovide input on, shouldthey be given the chance to do so.

All things considered, it isheating up to be another landmark yearfor the OECD. March will see much activity, and, I hope, shed lighton the direction of the “digital” work; June, meanwhile will nodoubt see the OECD publish a series of papers in advance of theG20 Finance Ministers'meeting in Osaka,Japan.

So the OECD tax unit has definitely “caught its breath” afterdeveloping the BEPS project itself, and is now looking tocompletethe as-yet-unfinished work on digital and beyond. And, as noted,that may yet turn out to deliver a far wider set of global taxreforms.But it will take time and it will not be easy.

4 Editor’s note both reports were published since this article was initially drafted. Analysis can be accessed athttps://www.ey.com/gl/en/services/tax/international-tax/alert--oecds-forum-on-tax-administration-announces-international-compliance-assurance-programme---icap---2-0-and-publishes-new-pilot-handbook andhttps://www.ey.com/gl/en/services/tax/international-tax/alert--oecds-forum-on-tax-administration-announces-international-compliance-assurance-programme---icap---2-0-and-publishes-new-pilot-handbook respectively.



2019 is the last year of the current European Commission’s mandate, andit is therefore unlikely that any major new proposals will emerge over thecoming 12 months. However, that in no way means it will be a quiet year onthe tax front within the European Union (the EU). On the contrary, in fact!

The debate in 2019 will be as complex and political, if not more so, than ithas ever been. Illustrating this are the ongoing discussions in the Councilconcerning the Commission’s two digital tax proposals, where theoutcomesare as much linked to the politics of the rest of the world as they are toEurope’s own political ebbs and flows.

Stepping back, it can be useful to stop and make a high level assessment ofthe overall role any group is playing on the overall tax landscape. Here are afew key points to consider in Europe:

• In 2018, the Commission drove a large part of the global taxtransparency agenda; with the implementation of the MandatoryDisclosureRequirements (MDR) program and also the EU listing of non-cooperative jurisdictions for tax purposes (the so-called “tax blacklist”)it was very much on the front foot. In that regard, it will be interestingto see if the new European Parliament’s members are as keen as theprevious group to push forward with those kindsof demands.

• The EU seized the anti- tax avoidance agenda with the EU-wide Anti-TaxAvoidance Directive (ATAD) driving significant implementation of newlawin the second half of 2018 in particular. That will continue as elements ofATAD II continue to be implemented.

• The EU was largely responsible for kicking off the digital tax debate in2018. While a large part of global focus is now on how the OECD Is takingthis debate forward, potential outcomes may in turn unblock theCommonConsolidated Tax Base (CCTB) debate.

With these points all in mind, what might the year ahead hold for the EU?

Tax in theEuropean Union in 2019

Klaus von BrockeEU Direct Tax Leader,International Tax Services+49 89 14331 [email protected] March 2019

Steve BillTax PolicyServices+44 20 [email protected] March2019


4http://europa.eu/rapid/press-release_IP-19-225_en.htm

5ECOFIN is an Economic and Financial Affairs Council configuration – made up of the economics and finance ministers from all memberstates. Relevant European Commissioners also participate in meetings.

6https://www.consilium.europa.eu/en/meetings/ecofin/2019/02/12/

A move to qualified majority voting ontax matters?One of the most significant developments for 2019 may be a newtax per se, but a change to the overall legislativeprocessesthat arefollowed in respect of tax proposals, with the notion of QualifiedMajority Voting (QMV) is again under discussion in the EuropeanCommission.

The Commission has consistently tried to persuade the Council toaccept QMV in the tax area whenever the EU Treaties have beenmodifiedbut this has neverbeen acceptedby the Member States.

As background, all EU legislative proposals — on both direct andindirect tax matters — must achieve unanimity in order to pass.This requirement for unanimity has historically made it difficultfor many EU tax proposals, including the Common ConsolidatedCorporate Tax Base (CCCTB),now nearly a decade on the draftingtable, to pass.

There is an opportunity for legislative proposals proceed with asubset of Member States (“enhanced cooperation”), but it isveryrarely used, and has only been tried once in the tax area and infact, has only a couple of times at all.

This is a procedure that can be enacted if the Council fails tosecure the necessary level of agreement but a group of nine ormore Member States indicate that they still want to do somethingin the relevant area. The Commission may withdraw its initialproposal and come forward with a new proposal that would onlybe applicable within those Member States who want to be boundby the new rules. It will only really be used when the discussionshave halted, but there has been significant agreement between asignificantnumber of Member States on the type of rules that theywould like to seeintroduced.

Ongoing examples of difficulty in achieving unanimity in taxpolicies – including perhaps most visibly, the desire for an EU-wideDigital Services Tax - are leading the European Commission to lookfor alternative methods via which to achieve itsgoals.

The Commission is now proposing a staged approach. TheCommission is suggesting that QMV could be introducedprogressively in fourstages:

• In respect of measures designed to improve cooperation andmutual assistance between Member States in fighting tax fraudand evasion, as well as for administrative initiatives whichwouldbenefit EU businesses, e.g. harmonized reportingobligations

• For measures in which taxation supports other policy goals,e.g., fighting climate change, protecting the environment orimprovingpublic health

• For proposals designed to modernize already harmonizedEUrules such as VAT and excise dutyrules

• For major new tax projects, suchas the CCCTB and a new systemfor the taxation of the digitaleconomy

The Commission has signaled that it would like this issue to bediscussedat a summit meetingof EU leaders on 9 May. That’s achallenge, and may get subsumed by both Brexit and EuroepanParliament electionsthemselves


Back to business

In the absence of any new legislative proposals through 2019,the spotlight will fall on the ECOFIN Council and its efforts toadopt, or at least make progress in discussing, the proposalswhich are already on its table. In this context, a distinction canbe drawn between two majorproposalswhich it is safe to say areextremely unlikely to be agreed upon during 2019 — the CCCTBand a Definitive VAT system based on taxation in the country ofdestination — and other, more targeted proposals where progresscould be morepossible.

The EU approach to taxation of the digitaleconomyThe challenge related to taxing the profits of digitalized businessmodels is probably the most politically sensitive issue of taxationpolicy globally in2019.

At the request of the Council, the Commission presented a DigitalTaxation Package in March 2018 which contained, inter alia, twolegislative proposals5. The first was a proposal to establishwhat iseffectively a “digital permanent establishment” — the SignificantDigital Presence or “SDP”) as part of the overall CCTB exercise,whichwould enable the levyingof corporate income tax wherea company has significant digital presence. The second was aproposal for an interim measure, consisting of an indirect digitalservices tax on revenues from the provision of certain digitalservices.

To date, the Council has concentrated its efforts on the second,interim proposal, but despite the efforts of the outgoingAustrian Presidency, no agreement has yet been reached,whilesome supporting Member States have already movedforwardunilaterally. Givenits political importance,this matter will be givenhigh priority by the new Romanian Presidency, but agreement stillseems distant. At the last ECOFIN Council meeting in, the formalconclusion noted that “Some delegations maintain reservationseither on some specific aspects of the proposal or morefundamental objections.”

The issue at stake now is largely political, not technical, and thereshould be a decision one way or another in the Council within thefirst half of 2019. The discussions are, of course, taking placeagainst the backdrop of discussions at a wider level within theOECD, which plans to adopt afinal report and recommendations onthe tax challenges of digitalization by2020.

Nevertheless, numerous announcements of proposals on DST-type legislations by Member States (see for example, Italy, France,Spain and UK) demonstrate the willingness by some governmentsto execute such a move when driven by the political pressure ofits population. This is exactly the scenario the Commissionstrivedhard to avoid and which would drive further compliance complexitynot only for tech industry tax directors, but many others who maybe unsureof whetherthey are in or out of scope.

More widely, the outcome of discussions in the OECD are morelikelyto influencethe directionin whichthe EU moves in respectofboth the application of corporate taxation on the digital economyand also on its CCTBdeliberations.

5https://www.ey.com/gl/en/services/tax/international-tax/alert--european-commission-issues-proposals-for-taxation-of-digitalized-activity


Common (Consolidated)Corporate Tax Base (C(C)CTB)

In 2016 the Commission submitted two proposals – onefor a Common Corporate Tax Base (CCTB)and the secondfor a Common Consolidated Corporate Tax Base (CCCTB).The CCTB proposal lays down proposed common rulesfor computing the tax base of multinational companiesoperating within the EU, whilst the CCCTB proposalcomplements the CCTB proposal by introducing rulesforconsolidation. For its part, in December 2016, the ECOFINCouncil took the view that work on the CCTB proposalshouldfocus as a priority on the “elements of a common tax base”and invited Member States, to “concentrate their efforts onthe rules for calculating the tax base and, in particular, onnew elementsof the relaunchedinitiative (chaptersI to V)”.

In respect to the CCCTB proposal, the Council agreedthat it would only be examined at a technical level oncediscussions on the CCTB proposal have been successfullyconcluded. Against this background, and with a view toadvancing discussions, the Austrian Presidency (1 July to31 December2018) drew up compromisetexts on CCTBchapters I to V, which incorporate the results of discussionsthroughout 2017 and 2018. Work will no doubt continue inthe Councilworking Groupthroughout2019 on this issue.

One of the more relevant changes in the compromise textcomparedto the original versionis the mandatory inclusionof all entities subject to corporate taxation. In order toconsider the specificities of small and medium- sizedenterprises (SMEs), additional provisions should be drafted.In 2019 it will be interesting to see how the Romanian(current) and Finnish (next) presidencies will copewiththe heavily discussed matter of reconciling the German-French declaration dated June 2018 with the newly-proposed compromise text. The German-French declarationexpressly deleted all tax incentives, while the compromisetext foresees a super deduction for R&D expenses. Thedevelopments around the CCTB should be closelymonitoredby business, even though there is still notsufficientappetite by almost all EU Member States to agree on acommon solution. Again, a move to some form of differentapportionment of taxing rights among market jurisdictionsas part of the OECDconsensusthat they hope will arise fromtheir digital work may fostermomentumin this direction.

It is very unlikely though, that the CCTB will be “put to bed”in 2019; instead, we are more likely to see one more year ofdebate ahead, resulting in a ten-year-oldproposal.


Definitive VAT System

In May 2018, the Commissiontabled a detailedproposal for adefinitiveVAT systembased on taxation in the country ofdestination. However, the Council has not proceeded on anarticle-by-article examination of this proposal, but has insteadfocused its discussions onthe design of the proposed system.Member States have confirmed their support for the concept oftaxation in the country of destination, but are concerned about thepossible administrative burdens for taxable persons, the problemof collecting tax from non-established traders, and the risk of newtypes of fraud. Discussions in 2019 are likely to continue in thesame vein and focus on the key elements of the Commission’sproposal and the possible development of flanking measures suchas the introduction ofsome form of joint and severalliability,whichcould restrict the customer’s right of deduction. An alternative,which has been floated and which will undoubtedlybe discussedin 2019, is the idea of a split payment whereby the customerwould withhold the VAT and pay it directly to the tax authorities.It appears that detailed discussions on the draft text will continueto be shelved until consensus on the framework for a new VATdefinitive system is reached. Though closer now than it ever hasbeen in the past, the introduction of the definitive VAT systemtherefore still appears to be aconsiderable way off.

Other VAT proposalsA number of targeted VAT proposals were discussed by the Councilin 2018, and several were adopted. Two, however, remainon

the Councils’ table. The first is the proposal put forward by theCommission in January 2018 to amend the rules which MemberStates must follow regarding the setting of VAT rates. Thisproposal is intrinsicallylinkedto the proposal for a definitiveVATsystem and is therefore very unlikely to make progress in 2019.The second concerns the simplification of VAT rules forSMEs.It is a stand-alone proposal containing simplification measureswhich the Commission considers necessary under the existing VATsystem. Whilst Member States are not in principle opposed to thesimplification of VAT obligations for SMEs, they are concernedthat they should be accompanied by appropriate safeguards toensure that tax controls are not weakened with a consequentincrease in fraud or evasion. Discussions willtherefore continuein 2019 and provided that appropriate safeguard measures canbe incorporated,there is a good chance that this proposalwill beadopted.

In addition to these two proposals, in December 2018 theCommission tabled implementing provisions for the new VATsystem which will apply for distant sales of goods from 1 January2021 together with draft provisions clarifying the situations inwhich on-line platforms will be considered to have facilitated salesof goods between non-EU suppliers and EU consumers.Discussionof these proposals will be given high priority in the Council in2019 since their rapid adoption is essential to allow a smoothintroduction of the new distant sales regime in2021.


Financial Transaction Tax(FTT)Little progress was made on this proposal in 2018 and little, if any, can be expected in 2019 since the political impetus appears to havesubsided. Despite the fact that there are now only 10 Member States participating in the Enhanced Co-operation group which hasbeen established in the Council,agreementappears to be as far off as ever.

A year of transitionOutside the work of the Council— not least due to the fact that the will be a new Commissionas well as a new compositionof the EuropeanParliament, it can be expected that the focus of the Commission´s tax work in 2019 will lie less on drafting new legislation, and more onmonitoring and supervising Member State’s implementation of newly-adopted tax directives. Prominent examples to steer the watchdogfunction of the Commissionwill be the DAC directivesand the ATAD I directive,as well as first support in implementingthe new mandatorydisclosurerules.

Code of Conduct Group (BusinessTaxation)This Council Group provides a forum for discussing whether tax measures of Member States are consistent with the political undertakingsthat had been given. It was very active in 2018, and will continue to be so in 2019. Its current main priority is to monitor commitmentstaken by countries on the EU list of non-cooperative jurisdictions. Most recently, the Council added 10 new jurisdictions which either didnot commit to addressing the EU’s concerns or did not deliver their commitments on time, bringing the total number of jurisdictions listedto 15. Also, the Council amended the list of countries included in Annex II of the Council conclusions of 5 December 2017 (jurisdictionswith pending commitments) by moving 10 jurisdictions to the EU List, removing 21 and adding 2 new jurisdictions. The Annex II listingwas reducedfrom 63 jurisdictionslistedto 346. In addition, it works on the standstilland rollbackof harmful preferentialtax regimes.As concernsits ongoingwork on the so-called“black” and “grey”lists in 2019, the Groupcan be expectedto focus on the politicalcommitmentsgiven by the numerous countriescurrentlylistedunder the greycategory.

6https://www.ey.com/gl/en/services/tax/international-tax/alert--ecofin-publishes-updated-list-of-non-cooperative-jurisdictions-for-tax-purposes---fails-to-gain-agreement-on-digital-services-tax


ALP: arm’s-lengthprinciple

APA: Advance Pricing Agreement

ATAD: Anti-Tax AvoidanceDirective

BAPA: Bilateral Advance Pricing Agreement

BEAT: Base Erosion Anti-AbuseTax

BEPS: base erosion and profitshifting

BEPS IF: BEPS Inclusive Framework

CA: competentauthority

CbCR: Country-by-Country Reporting

CCTB: Common Corporate TaxBase

CCCTB: Common Consolidated Corporate TaxBase

CFC: controlled foreigncompany

CIT: corporate incometax

CRS: Common ReportingStandard

CTPA: Centerfor Tax Policy and Administration— a unit ofthe OECD

DPT: Diverted Profits Tax

DST: Digital Services Tax

EC: EuropeanCommission

EP: European Parliament

EU: EuropeanUnion

FA: formulary apportionment

FDI: foreign directinvestment

FDII: foreign-derived intangibleincome

GAAR: General Anti-Abuse Rule (may also refer toGeneralAnti-AvoidanceRule)

GILTI: global intangible low-taxedincome

GDP: Gross domesticproduct

GST: goods and services tax

HNWI: high-net-worthindividual

ICAP: International Compliance Assurance Programme

IMF: International MonetaryFund

IP: intellectualproperty

MAP: Mutual AgreementProcedure

MAPA: Multilateral Advance Pricing Agreement

MBTA: Mandatory Binding TaxArbitration

MLI: Multilateral Instrument

MNC: multinational company

MNE: multinationalenterprise

OECD: Organisation for Economic Co-operationandDevelopment

PE: permanentestablishment

PIT: personal income tax

PPT: principal purposetest

R&D: research and development

SME: small or medium-sizedenterprise

TCJA: Tax Cuts and JobsAct

TP: transfer pricing

UN: United Nations

VAT: value-added tax

WB: World Bank

WHT: withholdingtax

Glossary of terms


On-demand webcast replay:Global Tax Policy andControversy Outlookfor 2019


The global tax environment in 2019 continues to be uncertain, with controversy on the rise. Disruptions abound and the taxlandscape is changing as technological advances bring taxpayers and tax administrations new ways of doing business. Tradepolicy also continues to disrupt the business landscape.

Additionally, the base erosion and profit shifting (BEPS) action plan and Europe’s Anti-Tax Avoidance Directive (ATAD) bothcontinue to drive significant change across multiple tax areas, while countries continue to search for ways to use their taxrates and base to maintain a competitive stance. At the multilateral level, a new debate is opening on whether fundamentalchanges to nexus and the allocation of taxing rights will address not only digital challenges, but may deliver morefundamental modernization of the international tax system.

Join our panel of EY leaders as they talk through the most significant trends and discuss some leading practices forresponding, including

· Corporate income tax rates and base broadening trends in 2019?

· The impact of BEPS and ATAD-related changes in 2019

· The outlook for digital tax policies and the wider post-BEPS tax framework

· The outlook for G20, OECD and European Commission activity in 2019

· How other governments may consider responding to US international tax reform

· Key enforcement trends and audit triggers around the world

Download the on-demand replay here: go.ey.com/2FN9iwT

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