I | EY Tax & Legal News – Issue 10/2014
EY Tax and Legal Services
EY Tax & Legal NewsTax and Legal Services
Issue4-6/2017
2 Corporate and Personal TaxationOECD releases Discussion Draft of implementation guidance on hard-to-value intangiblesAction Plan against tax fraud for 2017 – 2018
4 Value Added Tax Slovak Financial Administration plans to implement Electronic Transport Control System (ETCS) for monitoring cross-border transfer of goods
5 Legal news Amendment to the Commercial Code – the end of “tunnelling”? New faster enforcement of receivables
7 News in brief
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Corporate and Personal TaxationOECD releases Discussion Draft of implementation guidance on hard-to-value intangibles
The Organisation for Economic Co-operation and Development (OECD) recently released a Discussion Draft of its implementation guidance on hard-to-value intangibles (HTVI) in connection with Action 8 of its Base Erosion and Profit Shifting (BEPS) Action Plan.
Summary
The Discussion Draft provides guidance on the implementation of the approach to HTVI which are defined by previous OECD materials as intangibles or rights in intangibles for which, at the time of their transfer between associated enterprises, (i) no reliable comparables exist, and (ii) at the time the transactions are entered into, projections of future cashflows or income expected to be derived from the transferred intangible, or the assumptions used in valuing the intangible are highly uncertain, making it difficult to predict the intangible’s success at the time of the transfer.
In summary, the OECD-recommended HTVI approach authorizes tax administrations to use ex post evidence on the financial outcomes of an HTVI transaction (i.e., information gathered in hindsight about how valuable an intangible has become) as presumptive evidence on the appropriateness of the ex ante pricing arrangements.
The Discussion Draft contains three sections, which present:
• The principles that should underlie the implementation of the HTVI approach
• ►ThreeexamplestoclarifytheimplementationoftheHTVIapproach in different scenarios
• ►TheinteractionbetweentheHTVIapproachandtheaccesstothe mutual agreement procedure under the applicable treaty.
The guidance included in the Draft is aimed at reaching a common understanding and practice among tax administrations on how to apply adjustments resulting from the application of the HTVI approach. The document does not represent a consensus view of the OECD’s Committee on Fiscal Affairs, but it was released in draft form in order to gather public comments on the topic, to be submitted by 30 June 2017.
Implications
The guidance included in the Draft should improve tax administrations’ consistency in applying the HTVI approach and reduce the risk of economic double taxation in cases of intercompany transactions relating to such intangibles. It is therefore important for MNE Groups to continue to monitor developments in this area in the OECD and in the countries in which it operates, and to consider actively engaging with policymakers in this international tax debate.
If you would like to know more about the topic or have any other questions regarding this issue, please contact the author of this article or your EY partner or manager.
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Action Plan against tax fraud for 2017 – 2018
The Slovak Ministry of Finance, together with the Ministries of Justice and the Interior, has published a draft Action Plan against tax fraud for 2017 –2018. The Action Plan contains 21 new measures aimed at eliminating new forms of tax fraud and enabling more effective cooperation between tax authorities engaged in fighting them.
These measures are aimed primarily against fraudulent practices in company mergers and acquisitions (M&A) and to prevent other forms of tax evasion. You can find a summary of all the measures on the Government website.
Below, we briefly describe some of the measures being considered that could have an impact on your business:
Merger of companies
The aim of the measure is to prevent the abuse of M&A regulations stemming from commercial law. The M&A regulation is currently abused by some taxpayers in order to avoid fulfilling their obligations to state authorities and other creditors. In this connection, the Ministry of Justice has already prepared and published a draft amendment to the Commercial Code which should come into effect on 1 October 2017. According to the amendment proposal, the draft plan for a merger agreement or demerger project will have to be submitted to the tax administrator at least 60 days before the planned approval date.
Electronic Transport Control System (ETCS)
The aim of the measure is to develop a new tool that will enable control of the physical movement of goods in real time. The new tool would work together with already established Electronic Tolling System and other supporting systems installed directly into roads (e.g., dynamic weights). The intent of ECTS is to combat fraudulent activities in the areas
of VAT and excise duties, related to the transportation of goods for both intra-community and domestic supplies.
Index of taxpayer’s reliability
The Finance Directorate of the Slovak Republic (FRSR) intends to create its own internal (non-public) index to assess the tax and excise duty reliability of taxpayers. The index information about a particular taxpayer should be known only to that individual taxpayer and the FRSR. Taxpayers will be assessed on publicly known criteria, but the weighting given to individual criteria in determining the index will not be publically available. In the future, it is planned to provide certain benefits for more reliable taxpayers and a stricter regime for those less reliable, based on this index.
Introduction of cumulative protocol
The purpose of the measure is to enable preparation of a single protocol from the tax audits of several taxpayers performed at the same time. Introduction of this cumulative tax audit protocol should ease the audit chain of interconnected business transactions. It should also enable production of a single comprehensive document which could be used for all audited taxpayers participating in the chain of transactions, potentially involving VAT fraud. Thus, situations where a chain of transactions was considered legal in one tax audit and fraudulent in another, should no longer occur.
FRSR will be entitled to enter into final building approval process
The main aim of this measure is to combat tax avoidance in the real estate sector. During the final building approval process, the tax administrator will be able to participate in the proceedings and check whether the taxpayer (construction firm and also direct or indirect suppliers) has fulfilled all accounting and tax obligations and also if they are able to prove the use of all
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material consumed and services received in connection to the building’s construction.
Other planned changes include:
• ►Broadeningtheuseofelectroniccashregisterswithon-lineconnection to the tax authorities
• ►Expandinguseoftheso-calledsuper-seizuremeasure(superzaisťovacípríkaz)
• ►Thepossibilityofcancellingabusinesslicenseforrepeatedbreach of obligations under the Accounting Act
The measures published in the draft Action Plan show the direction the fight against tax fraud will take in the near future. The way in which individual measures will be adopted depends on the form and scope of implementation of concrete legislative regulations. We will monitor the implementation of individual measures and inform you about important legislative changes connected to this topic in following editions of EY Tax and Legal News.
If you wish to obtain further information, or have any questions regarding the above, please contact the author of this article or your partner or manager at EY.
Value Added Tax Slovak Financial Administration plans to implement Electronic Transport Control System (ETCS) for monitoring cross-border transfer of goods
As a consequence of persistent tax fraud and the high level of VAT gap below expected revenues (28.6% in 2015), the Financial Administration of the Slovak Republic (FASR) intends to streamline the system of VAT fraud identification. Inspired by the Hungarian EKÁER system, FASR will focus on monitoring cross-border transfer of goods.
The Ministries of Finance and Transport and Construction have committed to preparing a draft analysis on implementing the ETCS as part of an update to the Action Plan for combating tax fraud. FASR believes that implementation of the ETCS could significantly reduce tax fraud in cross-border transfers of goods.
The objective of the system will be to monitor goods movements within the territory of the Slovak Republic connected to the existing toll system, cameras and dynamic weights. It is expected
that after its implementation, fictitious transfers of goods and tax fraud will decrease. At the same time, online monitoring of goods movement will be assured, cooperation between tax authorities and taxpayers will improve and the repayment period for VAT deductions will be shortened.
Implementation of the ETCS will bring additional obligations on the taxpayers’ side. Notification obligations will apply to taxpayers who order, purchase or own goods and arrange their transport in and out of the EU, or are involved in goods transfer via N1 vehicle category road transport. Data related to transfer of goods will have to be registered even prior to a transfer, including identification of parties, carrier, vehicle information and goods data, as well as countries of departure and destination.
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The system assumes some exemptions from notification obligation and penalties for non-compliance.
The draft of the system implementation was only introduced within preparation of non-legislative material as part of an Action Plan update and the date of its introduction cannot be reliably estimated at the moment. We assume that it might be put into effect in 2018 or 2019.
In conclusion, several queries arise as to what to expect from implementation of the ETCS:
• ►WillitreducetheVATgap?
• ►Whatwillbethecostofimplementationforthestateandtaxpayers?
• ►Willtaxpayershavesufficienttimetoestablishsystemstoenablesuchasignificantchangetotheirday-to-daybusiness?
We will monitor the legislative process of the ETCS and inform you of all important developments.
Should you wish to obtain more information or if you have any questions relating to this topic, please contact the author of this article or your EY partner or manager.
Legal news Amendment to the Commercial Code – the end of “tunnelling”?
An important amendment to the Commercial Code was submitted into legislative procedure at the beginning of April. If adopted by the Slovak Parliament, it should become effective as of 1 October 2017.
The aim of the amendment is to prevent fraudulent company mergers and to extend the liability of statutory body members and shareholders, where they perform legal acts harming a company. It also seeks to clarify the rules for the creation and distribution of capital funds.
Below is a brief summary of the most important planned changes:
Mergers and company splits
Companies in liquidation or in cancellation proceedings may not participate in mergers and splits and the surviving entity cannot be in a negative equity position. Additionally, an auditor’s report will be required, proving that as a result of the merger or split,
the equity of the surviving entity will be positive. This report will form an obligatory annex to the application to the Slovak Commercial Register regarding the merger/split registration. Moreover, the draft merger agreement and the split project plan will need to be submitted to the tax authorities, prior to their approval by the companies’ bodies.
Capital funds
Until now, the creation and use of capital funds has not been properly regulated by in Slovakia. The planned legislation aims to improve upon this and proposes two separate capital fund groups: The first one can be used only to cover a company‘s losses, and the second one, which can be distributed among shareholders in compliance with legal requirements.
Transfer of ownership interests in limited liability companies
The tax authority’s consent will be required for all ownership interest transfers in limited liability companies and not only for
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transfer of a majority ownership interest, as has been the case so far. Transfer of ownership interest in a company that does not meet the statutory requirements (for example, if it does not have registered its company bodies in the Slovak Commercial Register or has not filed its financial statements in the relevant register) will no longer be possible.
Disqualification of the statutory body
If members of statutory bodies or liquidators of companies breach their obligation to file a bankruptcy petition, or are not cooperative during bankruptcy or execution proceedings or tax audits, they can be disqualified by a court’s decision for up to five years. This means that they cannot act as members of statutory or supervisory bodies for up to five years.
New measures to extend shareholders‘ liability
Part of the measures to extend shareholders‘ liability should also be their status as guarantors for the obligations of the companies controlled by them. This status will be applicable, if the controlled company has given security in favor of the controlling shareholder or concluded an agreement in its favor
and their performance was to the detriment of the controlled company’s creditors’ receivable enforceability or if the controlling shareholder enforces decision within the controlled company resulting in weakening the enforceability of the controlled company’s creditors’ receivable.
The end of “straw men”?
The planned legislation also seeks to combat the use of so-called straw men (e.g., homeless people). The appointment of a statutory body or its member would require the consent of that person and its notarized signature.
New criminal offense of unlawful liquidation
The amendment also introduces the criminal offense of unlawful liquidation, which intends to punish persons involved in actions related to the transfer of ownership of a legal entity in favor of straw men, with the intention of thwarting the proper liquidation of such a legal entity.
For more information or if you have any questions related to this issue, please, contact your partner or manager in EY.
New faster enforcement of receivables
New streamlined notice proceedings, providing for a fast execution title in monetary claims, have been introduced to the Slovak legal system. Under these proceedings, the court issues a payment order within 10 working days of receipt of a motion for issuance of payment order, with a 50% discount on normal administrative fees.
The proceedings should be faster, thanks mainly to mandatory electronic communication with the court, using standard forms, and delivery directly to the official electronic mailboxes of the procedural parties. Short statutory response times also motivate the parties to prompt action. Failure to meet the court’s deadlines leads to rejection of the motion for issuance of payment order, statement of objection, or payment in instalments and ultimately, cessation of entire proceedings.
The District Court Banská Bystrica is the only specialized court to issue payment orders for notice proceedings, during which it should scrutinize whether the claim might be reasonably expected. For example, the court may accept that along with the filed motion for issuance of payment order, the claimant furnishes an invoice and statement declaring that it was not paid. Nevertheless, we recommend attaching additional evidence.
The court can also issue a payment order, based only on reasonable expectation of a receivable’s existence. Therefore, timely submission of a statement of objection is the defendant’s key means of protection against such a claim. A reasoned statement of objection, submitted within a statutory 15-day period, renders the payment order void.
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Subsequently, the court requests the claimant to apply, also within 15 days, to continue in civil proceedings before the relevant general court. If they fail to do so, the proceedings will cease. These statutory time limits make it essential that
companies regularly check their official electronic mailboxes.
If you wish to know more or have any questions on this subject, please reach out to your EY partner or manager.
News in brief• ►Practical Manual on Transfer Pricing for Developing
Countries On 7 April 2017, the UN released the second edition of its “Practical Manual on Transfer Pricing for Developing Countries”. This revised edition of the 2013 manual provides detailed guidance on application of the arm’s length principle for developing countries, with the objective of addressing base erosion risks and issues such as lack of comparable data to determine market prices. The revision primarily incorporates changes to the OECD Transfer Pricing Guidelines, following the final papers of the OECD/G20 BEPS initiative released in October 2015. Apart from addressing the BEPS recommendations, the UN’s manual also contains detailed descriptions of the transfer pricing regimes of countries such as India, Mexico, China, South Africa and Brazil.
• ►Amendment to the Act on Regulation of Network Industries It is expected that during its June session, the National Council of the Slovak Republic will re-approve the Government’s bill amending the Act on Regulation of Network Industries, which was vetoed by the President. The bill introduces several significant changes concerning:
• Separation of the functions of Chair of the Office for Regulation of Network Industries (“the Office”) and Chair of the Regulatory Council
• Appointment of the above functions
• Price proceedings
Pursuant to the proposed amendment, regulated entities will be obliged to include in price proposals, an assessment of their impact on particular groups of consumers. Such an assessment will be also a mandatory part of justification of a price decision issued by the Office.
• Changes to the law on third-country employees in Slovakia The amendment to the Act on Residence of Aliens, effective from 1 May 2017, has introduced, inter alia, new rules concerning intra-corporate transfer of employees. These are cases where an employer, established outside the EU, transfers an employee for more than 90 days to a branch within a Member State (including those covered by the EEA Agreement and the Swiss Confederation). From there they may be further seconded to another affiliate in a different Member State. Employees who are third-country nationals will be allowed to work in the Slovak Republic on the basis of a residence permit, previously issued by another Member State, for the purposes of an intra-corporate transfer (mobility scheme) i.e., without a temporary residence permit issued in Slovakia. The main beneficial effect of these new rules is to reduce the administrative burden associated with intra-corporate transfers of workers from third countries to Member States.
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