Insight

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The Government Proposal on Changes in Taxation of Electricity Storage
8 Nov 2018 The Government Proposal regarding amendments to energy taxation has been submitted to the Parliament on 18 October. The most significant changes relate to electricity storages. Pursuant to the Proposal, electricity would be transferred to electricity storages without any excise duty on electricity. The excise duty would be paid when electricity is transferred to be consumed. The need for electricity storages has arisen since more and more electricity has been produced by using renewable energy sources such as wind and solar which are not flexible. The electricity storages can be used to even out the variation in supply and demand of electricity and prices. However, current legislation does not recognize electricity storages at all. Therefore, the excise duty on electricity has been paid twice, for example, in circumstances where the storage has been first charged from the grid and later supplied back to the grid to be consumed. The purpose of the Proposal is that transmission of electricity to the electricity storage would be duty free. The excise duty would be paid when electricity is transferred to be consumed from the duty free electricity storage. The condition would be the electricity storage is deemed to be a part of the grid or a power plant; or an owner of the electricity storage has a permission from the Tax Administration to uphold the duty free energy storage. In order to meet the purpose of the Proposal the definition of the grid would be broadened. The electricity storage would be deemed to be a part of the grid if the electricity storage is connected to the grid and no electricity can be transferred to be consumed from the electricity storage. In addition, the definition of a power plant would be changed. In the future, the power plant would mean a fixed functional unit which acts in a certain area and its purpose is to produce electricity (and heating) and store electricity in the electricity storage. Owners of electricity storages which are not a part of a grid or a power plant in accordance with the law should apply permission of the Tax Administration in order to be owners of a duty free electricity storage. Consequently, the Proposal allows duty free electricity storage for different operators as power plants, grid companies or end consumers or storage service providers. The recast electricity market directive, currently under legislative process in the EU, seeks to promote market based energy storage. It would limit the distribution and transmission systems operators (DSO and TSO) involvement with energy storage facilities. Among others, DSOs and TSOs would be prohibited from owning and operating storage facilities, except in cases where no other parties have expressed interest, or where the storage facility is necessary for fulfilling the DSO's or TSO's obligations. Exceptions are subject to approval of the regulator. Member States would have to re-assess whether third parties would be able to own, develop and manage or operate the storage facilities, in which case the operations of DSOs and TSOs would be phased out. We welcome the removal of double taxation. However, according to the Proposal, the electricity storage means only a unit of equipment, machines and buildings which are required in order to temporary store electricity electrochemically. Our view is that the definition of an electricity storage should not be limited only to storages based on electrochemical technology. The limitation might delay development of new technology and its adoption to use. Taxation should be neutral for all technology solutions. With the current wording, storage solutions based on for example power-to-gas or kinetic technology would not be duty free. The purpose of other, more technical, changes to energy taxation is to promote the use of natural gas instead of coal, which is part of the Government's plan to encourage the early phase-out of combined heat and power plants using coal by 2029. The proposed changes would enter into force in the beginning of 2019. Due to developments in technology and promotion of the transfer towards more sustainable energy system, changes in energy taxation as well as energy storages in general can be expected also on the EU level. We are happy to discuss in more detail the proposed legislation in concrete situations.
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Draft Government Proposal on International Tax Dispute Resolution Mechanisms
29 Aug 2018 The Ministry of Finance of Finland has issued a draft government proposal on international tax dispute resolution mechanisms on 27 August 2018. The draft proposal implements the Directive on Tax Dispute Resolution Mechanisms in the European Union (2017/1852, the "Directive"). In addition, the proposed new legislation addresses certain other tax dispute resolution mechanisms related to the interpretation of tax treaties. The aim of the new legislation is to enhance the resolving of international tax disputes and to avoid double taxation in cross-border context. Summary of the Proposed Tax Dispute Resolution Mechanisms The following table illustrates the main changes to the current processes and contents of the draft proposal on a high level.   Timing of the Legislative Process The draft proposal is currently under public consultation. The contents of the proposal are therefore subject to change. The new legislation is proposed to apply to applications filed on 1 July 2019 or thereafter which concern tax years started on 1 January 2018 or later. However, part of the new legislation, such as the obligation to choose between the tax dispute resolution mechanisms and the domestic appeal process, is applicable to all applications filed on 1 July 2019 or thereafter. Reflections on the Draft Government Proposal Many of the proposed changes provide long-awaited procedural rules for tax disputes relating to the interpretation of tax treaties. Currently, most of the relevant procedural provisions are outdated and not explicitly applicable to international tax dispute resolution processes. Implementation of the Directive provides more effective means for taxpayers to eliminate double taxation between EU countries since the threat of binding arbitration can be expected to encourage the competent authorities to negotiate, and ultimately double taxation should be eliminated through arbitration. This type of process is currently only applied in transfer pricing disputes involving EU countries. The draft proposal also includes certain changes to the current processes which can in many cases limit the taxpayers' legal remedies. The taxpayers would in practice need to choose whether to refer the case to a tax dispute resolution process under the proposed legislation or the domestic appeal process. This would increase the importance of the strategic decisions taken during a tax audit phase regarding potentially threatening cross-border tax disputes. Since this provision is proposed to apply to all applications filed on 1 July 2019 or thereafter, regardless of the tax year the application covers, the draft proposal may have great relevance in many of the cross-border tax disputes pending today. One aspect which the draft proposal seems to ignore is the extension of the suspension of tax enforcement to the tax dispute resolution processes under the proposed legislation. Currently, it is possible to request the temporary postponement of the payment of taxes only during domestic appeal processes. If this discrepancy is not fixed, it may render the use of tax dispute resolution mechanisms a less attractive alternative in many cases. We are happy to discuss the implications of the proposed legislation in concrete situations as well as keep you updated on the legislative process.
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State Aids in Taxation
22 Jun 2017 The Commission has been investigating the tax ruling practices of Member States since 2013 and a number of fairly traditional international tax practices have been challenged by the Commission. As a consequence, the risks related to many established structures have manifestly increased, also since an unlawful state aid can be recovered with a compound interest for a ten-year period. This certainly marks international tax structures a board level issue. Background The Commission set up a dedicated Task Force Tax Planning Practices in summer 2013 to follow up on public allegations of favorable tax treatment of certain multinational companies, in particular in the form of tax rulings, voiced in the media and by politicians. The list of final decisions can be found on the Commissions website. Unlawful State Aid A preferential tax treatment can constitute unlawful state aid under Article 107 of the Treaty on the Functioning of the EU. The qualification of a measure as aid within the Article therefore requires the following cumulative conditions to be met: (i) the measure must be imputable to the State and financed through State resources, (ii) it must confer an advantage on its recipient, (iii) that advantage must be selective, and (iv) the measure must distort or threaten to distort competition and have potential to affect trade between the Member States. The requirements (i), (ii) and (iv) can generally be met if the recipient operates its business in various Member States. The crucial question is what constitutes a preferential tax treatment that gives the recipient an advantage on a selective basis, for example to specific companies or industry sectors, or to companies located in specific regions. Thus far, the Commission has focused on favorable tax rulings provided by Member States to a specific company, but also widely available beneficial tax elements of a tax system may be targeted. Although the investigations have focused on large multinational groups, no monetary threshold has been defined. Tax Practice as a Selective Measure It can be argued that part of the Commission's decisions and open investigations relate to fairly ordinary tax practices of Member States regarding e.g. tax treaty interpretation or profit allocation. For example, the structures adopted by Apple and McDonald's 1 have been based on established rules on international taxation on one hand, and the variety of domestic rules in different countries on the other. It could be argued that, in principle, these rules are applied without selectivity and that e.g. non-inclusion situations arising from different domestic tax systems should not be deemed selective. As Apple has stated in its defense, there are no selective elements if all non-resident taxpayers are treated in the same way (A summary of Apple's appeal can be found here). New Arm's Length Principle under EU State Aid Rules According to the Commission, EU state aid rules include the "arm's length principle" which is based on a general principle of equal treatment. It is noteworthy that the Commission specifically states that when examining a tax case under the State aid rules, the Commission applies Article 107(1) of the Treaty and the arm’s length principle, as interpreted by the Court of Justice. The Commission does not directly apply Article 7(2) and/or Article 9 of the OECD Model Tax Convention or the guidance provided by the OECD on profit allocation or transfer pricing, which the Commission considers only to consist of non-binding guidance that do not deal directly with matters of state aid. Effectively, this results in the creation of a separate arm's length standard for state aid purposes. The Commission considers that any transfer pricing ruling that does not reflect the "reliable approximation of a market-based outcome" may constitute a selective advantage. For example, the Commission considers transfer pricing arrangements that adopt a one-sided approach (such as the transactional net margin method (TNMM)) particularly problematic. It is clear that such interpretation extends the powers of the Commission in the area of international taxation giving rise to significant uncertainty in e.g. transfer pricing matters, as dealings that are "at arm's length" for transfer pricing purposes do not necessarily stand the arm's length test for state aid purposes. Finnish Tax Practice Also the Finnish tax system includes elements that could become under investigation by the Commission. Examples of such elements could include e.g. basically any advance rulings, the discretionary powers of the Tax Administration in granting exemption orders relating to tax losses, industry exemptions in the CFC rules, the non-applicability of interest limitation rules to certain industries, or the established practices involving deviations from the arm's length principle or the deemed dividend rules. Remarkable Risks The aid to be recovered pursuant to a recovery decision includes a compound interest and it is payable from the date on which the unlawful aid was at the disposal of the beneficiary until the date of its recovery. The limitation period for recovery is ten years. Therefore, risks related to unlawful state aids may often be higher than traditional tax risks. "The creation of a separate "arm's length standard" for state aid and transfer pricing purposes may create significant uncertainty." 1 The Commission's decision regarding state aid implemented by Ireland to Apple (SA.38373) and the Commission's formal investigations regarding alleged aid to McDonald's (SA.38945).

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