23-03-2023

International Corporate Taxation and Tax Planning

8 lezioni

INTRODUCTION

International tax law

- At one time, international tax issues were important only to a rather small circle of tax specialists:
the tax advisers of multinational corporations and their antagonists in the tax departments of a
handful of governments.
- As the countries of the world have become increasingly integrated economically, the importance of
international tax issues has mushroomed. Many small and medium size firm now engage in cross-
border transactions that cause them at their tax advisers to face international tax issues regularly.
- International tax law can be defined as the body of legal provision of different countries that covers
the tax aspects of cross-border transactions.
- It is important to point out that when we talk about international tax law we refer to international
tax laws of a particular country
- There is no definitive, overarching international tax law applicable to countries that choose to
comply with it.
- The scope of what we are calling international tax is extremely broad: it includes all tax issues
arising under a country’s income tax laws that include some foreign element.
- Generally speaking, the international tax law of a country has two dimensions:
1. the taxation of resident individuals and corporations on income arising in foreign countries
(i.e. the taxation of foreign income); and
2. the taxation of nonresidents on income arising domestically (i.e. the taxation of
nonresidents)
- Obviously, what is the taxation of foreign income for one country (generally referred to as the
residence country) is the taxation of nonresidents for another country (generally referred to as the
source country)

Goals of international tax rules

- There are generally four primary objectives underlying a country’s incorporation of international
tax rules into its tax legislation:
a. National wealth maximization: a country should try to ensure that it gets its fair share of
revenue from cross border transactions in order to enhance the well-being of its citizens;
b. Tax equity: a country should try to impose equal taxes on taxpayers with equal income without
reference to the source of the income;
c. Economic efficiency: a country should try to develop the competitiveness of its economy,
ideally ensuring that taxation does not interfere with optimal investment decision-making;
d. International compatibility: a country should try to ensure that its international tax rules are
consistent with those of other countries: a sensible government would not want to impose
significantly harsher international tax rules on investors into its country than those
implemented by other countries, which would result in an outflow of resources from the
country
- These objectives may well conflict: e.g., a coherent national wealth maximization policy may
require that investors of a country who invest abroad pay tax in their home country on an accrual
basis. Such a requirement meets the tenet of tax fairness (it puts such investors on the same
footing as those who invest domestically), but it involves more complex international tax laws and
 greater taxpayer compliance costs. For this reason, a government must decide which objectives are
to prevail in the light of the broader social and economic aims which it is trying to achieve.

Jurisdiction to tax
- States can levy taxes by virtue of their sovereignty. Tax sovereignty, however, is not unlimited: in
order to tax a certain event, there must either be a personal or an objective nexus between the
taxpayer and the State.
- Therefore, a country may impose a tax on income because of a nexus between the country and the
person earning the income: residence jurisdiction
- This kind of personal nexus frequently is based on domicile, on residence or on citizenship for
individuals and on the place of incorporation and on the place of effective management for legal
entities.
- But income may also be taxable under the tax laws of a country because of a nexus between that
country and the activities that generated the income: source jurisdiction
- This kind of objective nexus exists when a part of a certain transaction or activity involve the taxing
State.

The problem of double taxation - Full tax liability in two States

- This “double” jurisdiction to tax can give rise to juridical double taxation, as the same person can be
“connected” to more than one country and thus taxed twice on the same income.
- Under many domestic tax law systems, persons subject to the residence jurisdiction in
consideration of a personal nexus (e.g. residence) are taxable on their worldwide income, without
reference to the source of the income.
- A taxable person can have close personal connections with two (or more) States: the claim of a
country for tax revenue based on residence may overlap the claim of another country based on e.g.
citizenship
- This might lead to severe tax consequences, as the same person may be subject to full tax liability
in two or more States (i.e. levying of taxes on worldwide income in two or more States).
- Example: an individual who lives in Spain (residence) and whose centre of economic interests
(domicile) is in France is subject to full tax liability in both States. If there were no treaties between
France and Spain, both countries would tax the person’s entire worldwide income
- Under many domestic tax law systems, if no close personal connection exists, only the income
earned in that State is taxed.
- Persons are often subject to full tax liability in a State (i.e. residence State) on the basis of a
personal nexus, and they also earn income from another State. In that other State (i.e. source
State), they are subject to limited tax liability, which applies only to the income earned therein.
- As the State of residence levies tax on worldwide income, the income arising in the source State is
taxed twice.
- Example: a person resident in Italy (and subject to full tax liability therein) holds share in a Swiss
corporation. The person does not have a home or domicile in Switzerland and receives dividends
from the Swiss shares.
- These dividends are taxed both in Italy, since the person is subject to tax there on his worldwide
income, and in Switzerland, as limited tax liability exists. Again, double taxation if there were no
treaties between Italy and Switzerland

Juridical double taxation vs. Economic double taxation

- Juridical double taxation: double taxation arising from the taxation of the same person with respect
to the same income in two or more States.
 - It is also possible for the same income to be taxed twice in the hands of different persons. This
situation is known as economic double taxation.
- Example: in the classical system of taxation, corporate profits are taxed once at the company level
and again at the shareholder level when the company’s after-tax profits are distributed by way of a
dividend to its shareholders.

The problem of double taxation - Elimination of double taxation

The OECD Committee on Fiscal Affairs states: “International juridical double taxation can be generally
defined as the imposition of comparable taxes in two (or more) States on the same taxpayer in respect of
the same subject matter and for identical periods. Its harmful effects on the exchange of goods and services
and movements of capital, technology and persons are so well known that is scarcely necessary to stress
the importance of removing the obstacles that double taxation presents to the development of economic
relations between countries” (OECD Committee on Fiscal Affairs, Model Tax Convention on Income and
Capital, 2010, p. 7).

- In order to eliminate double taxation many States enter into bilateral international tax conventions.
These agreements are called double taxation conventions (DTCs). Their aim is to determine which
country will have the taxing right.
- At present, more than 2.000 DTCs exist. The Netherlands is party to over 90 DTCs, while the United
Kingdom has concluded more than 125 DTCs

The problem of double taxation - Double Tax Conventions

- Every DTC is negotiated separately, but many of the existing DTCs resemble each other. This can be
traced to the model tax conventions developed by international organizations.
- These model conventions are usually the starting point for bilateral negotiations: as the parties to
the convention only need to negotiate those points upon which they wish to deviate from the
model.
- Historically the first models tax convention were developed by the League of Nations in the years
between World Wars I and II.
- The OECD (Organization for Economic Cooperation and Development) later continued the work of
the League of Nations, publishing several model tax conventions in the area of taxes on income and
on capital, which had (and still have) great importance in the negotiations of bilateral tax
conventions: OECD Model.
- Also the United Nations published a model tax convention in 1980: UN Model.
- In most respects, the UN Model follows the OECD Model and deviations exist only with respect to
certain issues. Since the UN Model is based on the interest of developing countries, these
differences try to protect their taxing rights (as source-countries).

OECD comprises 34 members, most of which are Western States and major industrial countries: OECD
Model favors capital exporting countries.
Example: the OECD Model provides (art. 12) that royalties are taxed only in the State of the recipient’s
residence, to the exclusion of the source State. According to the UN Model, royalties may also be taxed in
the State in which they arise. The UN Model considers primarily the situation of developing countries, as
knowhow is generally provided by entities of developed countries to companies in developing countries.
Thus, the developing countries want to retain the right to tax remuneration paid in the return for know-
how.

- While using the OECD Model as a basis for negotiations, States usually deviate from the Model on
some points. The Models are in no sense mandatory instruments.
- This is because most States cannot agree with all the rules of the Model and try to take into
consideration their own economic interests and the peculiarities of their law and social system

The effects of DTCs

- DTCs are treaties under international public law: therefore they are subject to the rules of public
international law.
- In particular, DTCs confer rights and impose obligations on the contracting States. They do not
impose tax. Rather, they limit the taxes otherwise imposed by a State, in order to eliminate double
taxation.
- In most countries DTCs do not directly confer rights on citizens or residents of the two States unless
the provisions of the treaty are enacted into law in the same way as domestic legislation.

The interpretation of DTCs

- As DTCs are treaties under international public law, their interpretation follows the principles of
customary international law, as embodied in artt. 31 and 32 of the Vienna Convention on the Law
of the Treaties (VCLT).
- The basic rule in art. 31(1), states that a treaty must be interpreted in good faith in accordance
with the ordinary meaning to be given to the terms of the treaty in their context and in the light of
its object and purpose.
- Under art. 31(2), the context includes the text of the treaty and any agreements between the
parties made in connection with the conclusion of the treaty, as well as any instrument made by
one of the parties and accepted by the other party.
- In addition, under art. 31(3) subsequent agreements between the parties and subsequent practice
with respect to the interpretation of the treaty, as well as any applicable rules of international law
must be taken into account together with the context.
- These provisions might be regarded as internal solutions to the question of the meaning of words
used in a treaty. They are likely to exclude extraneous supplementary material.
- However, artt. 31(4) and 32 extend the scope of those provisions.
- Pursuant to art. 31(4), a special meaning is to be given to a term “if it is established that the parties
so intended”.
- Art. 32 allows the recourse to supplementary means of interpretation, which include the
preparatory work of the treaty and the circumstances of its conclusion, but only to (i) confirm the
meaning established pursuant to art. 31 or to (ii) establish the meaning if art. 31 produces an
ambiguous, unreasonable or obscure result.
- The OECD Commentary to the Model is also very important for the interpretation of tax treaties.
However, its legal status under the VCLT is unclear.
- At first glance, it appears to be a supplementary mean of interpretation under art. 32.
- The OECD does not intend for the Commentary to have such a limited role: the Commentary “can
be … of great assistance in the application and interpretation of the conventions and, in particular,
in the settlement of any dispute”.
- It is difficult, however, to justify including the Commentary as part of the context of a treaty under
art. 31.
- In any case, the issue appears to be of little practical significance: in treaty cases from virtually all
countries the courts give the Commentary substantial weight.
- In addition to the provisions of the VCLT, tax treaties based on the OECD and UN Model contain an
internal rule of interpretation.
- Art. 3(2) of the OECD and UN Model provides that undefined terms used in the treaty have the
meaning that they have under the domestic law of the country applying the treaty unless the
context requires otherwise.
- Thus, the application of art. 3(2) involves a three-stage process:
a. Does the treaty provide a definition of the term?
b. If the treaty does not provide a definition, what is the domestic meaning of the term?
c. Does the context of the treaty require a meaning different from the domestic meaning?

The structure of DTCs

• The typical DTC - based on the OECD Model - consists of a list of articles, which fall into three
broad categories; namely, those that:
1. deal with the application of the DTC and define the personal and material scope of the treaty;
2. set out the allocation of taxing rights between the contracting State over the persons and
taxes covered;
3. provide the manner in which juridical double taxation will be eliminated.
 24-03-2023

Evolving profiles on the establishment of companies and their taxation in light of the corporate tax
directives

Direct Taxation: Between Positive and Negative EU Integration

THE BROADER PICTURE – A PRIMER ON THE STRUCTURE OF EU LAW AND TAXATION

- Only express reference to direct taxation (was) found in the EC Treaty: Art. 293: “The abolition of
double taxation is one of the aim that Member States shall pursue by entering into negotiations
with each other”
- … but repealed in 2007 by effect of the Lisbon Treaty…

 Principles orienting EU (direct) integration:

- Conferral Principle (Art. 5 TEU)

- Directives in the field of direct taxation for the approximation of tax laws (Art. 115 TFEU vs
Art. 113 TFEU dealing with harmonization, legal basis for VAT and indirect taxation)

- Powers retained by the Member States in taxation shall nevertheless be exercised

consistently with EU law.

- Art. 5 TEU:
1. The limits of Union competences are governed by the principle of conferral. The use of
Union competences is governed by the principles of subsidiarity and proportionality.
2. Under the principle of conferral, the Union shall act only within the limits of the
competences conferred upon it by the Member States in the Treaties to attain the
objectives set out therein. Competences not conferred upon the Union in the Treaties
remain with the Member States

- Art. 115 TFEU: Without prejudice to Article 114, the Council shall, acting unanimously in
accordance with a special legislative procedure and after consulting the European
Parliament and the Economic and Social Committee, issue directives for the approximation
of such laws, regulations or administrative provisions of the Member States as directly
affect the establishment or functioning of the internal market.

 Principles orienting EU positive integration:

- Subsidiarity (Art. 5(3) TEU and Protocol 2): safeguarding the ability of the Member States to
take decisions and action and authorizing intervention by the Union when the objectives of
an action cannot be sufficiently achieved by the Member States but can be better achieved
at Union level.

- Proportionality (Art. 5(4) TEU): The content and form of Union action shall not exceed what
is necessary to achieve the objectives of the Treaties.

 Principles orienting EU integration in the area of direct taxation:

- Effectiveness
- Equivalence
 - National procedural autonomy: EU MS are free to establish own national procedural rules
to govern the exercise of EU Law insofar as the principles of equivalence an effectiveness
are respected (see ECJ Rewe 33/76)

 Secondary law: whole of the rules issued by EU Institutions

Art. 288 TFEU: “The European Parliament, acting jointly with the Council and the Commission, shall
make regulations and issue directives, take decisions, make recommendations or deliver opinions.
Recommendations and opinions shall have no binding force.

 Characteristics of regulations:
- have general application
- binding in their entirety and directly applicable in all Member States (art. 288).
- Regulations are used in the field of indirect taxation but not in connection with direct
(income) tax matters

 Characteristics of Directives:
- A directive shall be binding upon each Member State to which it is addressed, as to the
result to be achieved
- but shall leave to the national authorities the choice of form and methods.

If the Commission considers that a Member State has failed to comply with the Directive the
Commission may bring the matter before the Court of Justice (Art. 258)

 Directives could have direct effect if the following requirements are met:
- They are sufficiently definite and unconditional;
- Member States have no discretional power in enacting them;
- The term for the adoption is expired.

Parent Subsidiary Directive (An Introduction)

Background

- Council Directive 90/435/EEC on the common system of taxation applicable in the case of parent
companies and subsidiaries of different Member States (23 July 1990).

- Extension of the original scope Directive 2003/123/EC - The new Directive (as amended by Directive
2003/123/EC), contains three main updates: expanded list of companies that the Directive covers;
reduction of the participation threshold; elimination of double taxation for subsidiaries of
subsidiary companies

- “Update” and consolidation with Directive 2011/96/EU

- Anti-abuse update with Directive 2015/121/EU

- EU Freedom goal: Promoting free movement of capital (although with an intra-EU focus) by
abolishing tax obstacles on intra-EU corporate profit distributions

- Economic policy goal: Further promoting cross-border corporate groups within the EU
 - Tax Policy goal:
 Addressing the company-shareholder integration issues (in an EU-wide perspective)

Scope of application Art. 1(1)

- Profit distributions between subsidiary and parent companies residing in different Member States.

- Profit distributions connected with a Permanent Establishment (PE):

 Application to profit distributions received by the PEs of companies of other MS from their
subsidiaries of a third MS;
 Distributions of profits by companies of a MS to PEs situated in another MS of companies of
the same MS of which they are subsidiaries

- Why PEs in the picture?

- EU fundamental freedoms (in particular, right of establishment, Art. 49 TFEU) requires that the PEs
of companies of MSs in the state in which they are situated should not be treated detrimentally
compared to the resident companies of that state [leading case law of the CJEU in this area:
Commission v. France a.k.a. “Avoir fiscal” case (270/83) and Saint-Gobain (C-307/97)]

Scope of application Art. 2(1)

- Subjective scope of application – all the following criteria need to be met in at least one MS
Company of a Member State:
1. taking one of the forms listed in the Annex to the Parent-Subsidiary Directive;
2. considered to be a resident of a Member State for tax purposes according to the national laws
of that state and is not considered to be a resident for tax purposes outside the European
Union under the terms of a tax treaty with a nonMember State; and
3. is subject to one of the taxes listed in the Parent-Subsidiary Directive or to any other tax that
may be substituted for any of the expressly mentioned taxes, without the possibility of an
option or of being exempt.

Scope of application Art. 3(1)

- Notion of parent-subsidiary:
 Parent: any qualifying company of a MS which has a direct minimum holding of 10% in the
capital of another qualifying company of a MS
 Timing issue: holding in the capital needs to be met at the time of distribution (based on
Art. 3(2) some States have introduced a holding period of up to 2 years).
 Note: Since a Directive is just a blueprint: Some MS implemented the PSD relying on
holding of voting rights threshold rather than capital.
Mechanics

 Two-pronged approach:
- exempting profit distributions from the withholding tax in the state of residence of the
subsidiary (juridical double taxation: same income, same person);
- eliminating double taxation in the state of residence of the parent company (economic
double taxation: same income, different persons).

 Elimination of juridical and economic double taxation (Art. 4 – 6):

- Juridical double taxation is already eliminated because the subsidiary state has no right to
levy dividend withholding taxes;
- Art. 6 of the requires that the state of residence of the Parent refrains from levying tax on
the profits received by the parent company from its subsidiary;
- Elimination of economic double taxation concerns the parent company. The Member State
commit not to even indirectly tax the received dividends: obligation to either apply
exemption or credit to the inbound qualifying dividends (see Art. 4).

Caveat

Some open and some settled questions:

- Notion of profit distributions

- Notion of withholding tax:

 Article 5 of the Parent-Subsidiary prohibits expressly only withholding taxes;
 The term “withholding tax” is considered to cover any tax levied on the basis of a
distribution of profits from a company (including, for example, inheritance or gift taxes),
irrespective of the nature or the name of the tax.

- Notion of withholding tax (Cont’d):

 Any tax levied in the subsidiary state on income is a withholding tax on distributed profits if
the chargeable event for the tax is the payment of dividends or of any other income from
shares, if the taxable amount is the income from those shares and if the taxable person is
the holder of the shares.
 Based on the recent judgments of the EU Court, it seems that in order for a tax to
constitute a prohibited withholding tax, the tax subject, i.e. the taxpayer, must be the
parent company and not the profitdistributing subsidiary. (compare Burda (C-284/06),
paras. 52-64 vs Athinaïki Zythopoiïa (C-294/99), paras. 28-29)

- Double non-taxation/hybrid mismatch

 Anti-hybrid mismatch measure introduced with Council Directive 2014/86/EU:
o limitation of the exemption of payments received from hybrid financing
arrangements.
o Dividend exemption applicable only to the extent that the distributed profits are
not tax deductible by the subsidiary.
 Hybrid/transparent entities:
o Art. 4(2): Hybrid subsidiaries that are treated as separately taxable entities in the
state of residence of the subsidiary but as transparent entities in the state of
residence of the parent company
o If the state of residence of the parent company treats the hybrid subsidiary as a
transparent entity and therefore taxes the parent company for the subsidiary
 profits, the parent company state must refrain from taxing the distributed profits
of the subsidiary

- Relationship with anti-abuse clauses

 General principle: “No one may benefit from the rights of EU law for abusive or fraudulent
ends.” (Eqiom and Enka (C-6/16), para. 26)
 Addition of the new Art. 1(2) with Directive 2015/121
 Abuse: The new Art. 1(2)
o “Member States shall not grant the benefits of this Directive to an arrangement or
a series of arrangements which, having been put into place for the main purpose or
one of the main purposes of obtaining a that defeats the object or purpose of this
Directive, are ntax advantage ot genuine having regard to all relevant facts and
circumstances.”
 Abuse: The new Art. 1(2) (cont’d):
o “An arrangement or a series of arrangements shall be regarded as not genuine to
the extent that they are not put into place for valid commercial reasons which
reflect economic reality.”
o “This Directive shall not preclude the application of domestic or agreement-based
provisions required for the prevention of tax evasion, tax fraud or abuse.”

Interest Royalty Directive (An Introduction)

BACKGROUND AND GOALS

- Council Directive (2003/49/EC) on a Common System of Taxation Applicable to Interest and Royalty
Payments Made between Associated Companies of Different Member States.
- The cross-border payments must not lead to international double taxation and they must not be
subject to more burdensome administrative formalities than payments in one MS.
- The objective is to ensure that intragroup interest and royalty payments are taxed only once in a
MS.

SCOPE OF APPLICATION

- The Directive applies to both companies and PEs.

- Most definitions relevant for scope are in line with those in the PSD.
- In contrast to the definition of the PSD PE notion, the IRD does not require that the PE is subject to
taxes in the MS in which it is situated.
- The notion of “associated companies” is broader than under the PSD.
- Associated companies (Art. 3(b)):
A company is an associated company of a second company if at least:
 the first company has a direct minimum holding of 25% in the capital of the second
company (vertical association); or
 the second company has a direct minimum holding of at least 25% in the capital of the first
company (vertical association); or
 a third company has a direct minimum holding of 25% both in the capital of the first
company and in the capital of the second company (horizontal association)
- Beneficial ownership requirement [Art. 1(4)]:
  Convergence with OECD Commentary understanding.
 The beneficial owner of the interest or royalty is the entity that benefits economically from
the interest or royalty received and, accordingly, has the power to freely determine the use
to which it is put (see Joined cases N Luxembourg et al. (C-115/16, C-118/16, C-119/16 and
C-299/16), paras. 88-89).
 The beneficial owner concept of the Directive does not refer to any domestic law meaning
of a MS.
- Notion of interest (Art. 2(a)):
 “The term “interest” means income from debt claims of every kind, whether or not secured
by mortgage and whether or not carrying a right to participate in the debtor’s profits. In
particular, the term “interest” means income from securities and income from bonds or
debentures, including premiums and prizes attaching to such securities, bonds or
debentures. Penalty charges for late payment are not regarded as interest.”
- Notion of royalty (Art. 2(b)):
 “The term “royalty” means a payment of any kind received as a consideration for the use
of, or the right to use, any copyright of literary, artistic or scientific work, including
cinematograph films and software, any patent, trademark, design or model, plan, secret
formula or process. The term “royalty” also covers a payment of any kind received as a
consideration for information concerning industrial, commercial or scientific experience.
Also, payments for the use of, or the right to use, industrial, commercial or scientific
equipment are regarded as royalties.”
- Interaction with the Arm’s Length (transfer pricing) Standard (Art. 4(2)):
 “The provisions of the Interest-Royalty Directive do not need to be applied in the case of a
payment in excess of an arm’s length royalty or an arm’s length interest.”

ABUSE

- Art. 5(2): MS may withdraw the benefits of the directive or refuse to apply the directive in the case
of transactions for which the principal motive or one of the principal motives is tax evasion, tax
avoidance or abuse.
- Art. 5(1): The directive does not preclude the application of domestic or agreement-based
provisions required for the prevention of fraud or abuse.

Abuse of Law and Direct Taxation: Negative and Positive Integration

EU TAX LAW ABUSE

Cadbury-Schweppes and the Role of “Wholly Artificial Arrangements”

Key provisions in the ATAD Directive (Directive 2016/1164):

- General Anti-Abuse Clause

- Interest Deductibility Limitations
- CFC Rule
- Exit Taxation
- Hybrid Mismatch
Cadbury-Schweppes (C-196/04)

- The motive test foresaw that CFC would not be triggered where:
o the transactions which gave rise to the profits of the CFC produced a reduction in UK tax,
such reduction was not the main or one of the main purposes of the transactions; and
o it was not the main reason or one of the main reasons for the CFC’s existence to achieve a
reduction in UK tax.
- Cadbury Schweppes, a UK resident company indirectly owned two subsidiaries in Ireland, Cadbury
Schweppes Treasury Services (CSTS) and Cadbury Schweppes Treasury International (CSTI).
- CSTS and CSTI were established in the IFSC in Dublin and were subject to a 10% tax rate.
- CSTS and CSTI were indeed subject to a “lower level of taxation” within the meaning of the UK CFC
legislation.
- For HMRC, none of the CFC exceptions applied and CIT from one of the group companies resident
in the UK on the profits made by the Irish subsidiaries was claimed.
- Cadbury Schweppes appealed against a tax notice and contested the application of UK CFC
legislation, arguing, in particular, its incompatibility with EU law.

- The Special Commissioner of Income Tax stayed the proceeding and set forth an articulated set of
questions, which the Court of Justice received and summarized as follows:
o Do Art. 43 (establishment), 49 (services) and 56 (capital) EC preclude national tax legislation
such as that in issue in the main proceedings, which provides in specified circumstances for
the imposition of a charge upon a company resident in that MS in respect of the profits of a
subsidiary resident in another MS and subject to a lower level of taxation?
o Is Cadbury Schweppes abusing of those freedoms?

- The key legal basis identified by the Court lies in the right of establishment: the UK CFC rules apply
to resident companies that have more than a 50 % shareholding in their foreign subsidiaries - they
have a definite influence on the subsidiary's decisions and allow them to determine its activities.

- Any restrictive effects on the two other freedoms invoked in the request for preliminary ruling are
an unavoidable consequence of any restriction on the freedom of establishment.

- Abuse of a fundamental freedom

 On the abuse of the fundamental freedom: the fact that a company was established in a
MS for the purpose of benefitting from more favourable legislation does not in itself suffice
to constitute abuse of that freedom (Centros C-212/97, Inspire Art C-167/01).
 The Court then refocuses the question on whether the respect of the right of establishment
preclude the application of CFC legislation such as the British one.

- Presence of a restriction (The Court of Justice would seem to imply that comparability is present)
 The Court found that the British CFC legislation involved a difference in the treatment of
resident companies on the basis of the level of taxation to which their subsidiaries are
subject.
 This conclusion is not altered, according to the Court, by the circumstance that such a
resident company did not pay on the profits of a CFC more tax than that which would have
been payable on those profits if they had been made by a subsidiary established in the UK.
 On this basis, the Court found a restriction on the right of establishment.

- Causes of Justification
 The UK Government set forth a justification based on: - the prevention of tax avoidance
The Court set forth a qualified acceptance of this cause of justification:
 The mere fact that a resident company establishes a subsidiary in another EU MS could not
give rise to a general presumption of tax evasion.
 A national measure restricting the right of establishment with the purpose of preventing
tax avoidance may only be justified if it specifically relates to wholly artificial arrangements.

- On “wholly artificial arrangements”

 In order to assess if there are “wholly artificial arrangement”, the objective pursued by the
right of establishment has to be taken into account.
 The objective of the right of establishment is the actual pursuit of an economic activity
 As a consequence, wholly artificial arrangements are those that “do not reflect economic
reality, with a view to escaping the tax normally due on the profits generated by activities
carried out on national territory

- Proportionality
CFC rules are proportionate if they allow the resident company to produce evidence:
 that the CFC is actually established (the presence of the subsidiary has to reflect an
economic reality); and
 that its activities are genuine (this has to be based on objective factors: e.g.: physical
presence; staff; equipment)

The ATAD (Directive 2016/1164)

BEPS as a background context

 Minimum standards have been agreed:

o Preventing treaty shopping;
o Country-by-Country Reporting;
o Fighting harmful tax practices (disclosure, incentives);
o Improving dispute resolution (arbitration).

 In other areas, such as recommendations on hybrid mismatch arrangements and best practices on
interest deductibility, countries have agreed a general tax policy direction (“common approaches”)
but are NOT considered “minimum standards”.
 “Best practices” are being developed in the areas of mandatory disclosure initiatives or CFC
legislation. These areas are also NOT considered “minimum standards”.

The view from Brussels

- On 28 January 2016 published an Anti-Tax Avoidance Package.

- The Package included, among other measures, a proposal for an Anti-Tax Avoidance Directive
- The Directive was approved by the Council on July 12 2016 as Council Directive (EU) 2016/1164
(generally referred to as “ATAD”). This timing is an absolute record for this area as “unanimity”
applies…
- Council Directive (EU) 2017/952 of 29 May 2017 – introducing amendments about hybrid
mismatches with third countries.
Overview of the ATAD:

 Key provisions dealing with:

o interest deduction limitation;
o exit taxation;
o a general anti-avoidance provision;
o a controlled foreign corporation regime and an anti-hybrid mismatch provision;
o (hybrid mismatch arrangements with third Countries pursuant to Directive 2017/952)

 Interest deduction (Art. 4):

o Excess interest expenses are deductible in the year they are incurred only up to 30% of the
taxpayer's earnings before interest, tax, depreciation and amortization (EBITDA). MS are
free to allow a smaller percentage to be deductible.

 Exit taxation (Art. 5):

o Exit taxation subjects unrealized appreciation of assets on the basis of the market value to
taxation the moment the assets leave a tax jurisdiction.
o taxpayers are given the right to defer payment of the exit tax in certain situations (National
Grid Indus!)

 GAAR (Art. 6):

o ATAD introduces a general anti-avoidance rule (GAAR) for all MS.
o MS shall ignore an arrangement or a series of arrangements which fall under the scope of
the GAAR
o The GAAR is based on a main purpose test, so to target: “arrangements or series of
arrangements that have been put in place for the main purpose or one of the main
purposes of obtaining a tax advantage that defeats the object or purpose of the applicable
tax law and that are not genuine having regard to all relevant facts and circumstances.”

 CFC rules (Art. 7-8)

o applies to companies in which another company resident in a MS holds a direct or indirect
interest of 50%
o applies in case of lower taxation: lower than the difference between the corporate tax that
would have been charged on the entity or permanent establishment under the applicable
corporate tax system in the Member State of the taxpayer and the actual corporate tax
paid on its profits by the entity or permanent establishment

 Anti-hybrid mismatch provision (Art. 9):

o According to the Directive, a “hybrid mismatch” means a situation involving a taxpayer or,
with respect to article 9(3), an entity in the following situations.
o Possible different configurations (different forms of deductions without inclusion and
double deduction).

 Anti-hybrid mismatch provision (Art. 9):

o To the extent that a hybrid mismatch results in a double deduction, the deduction shall be
given only in the MS where such payment has its source;
o Deduction without inclusion there is a deduction of a payment in the MS in which the
payment has its source without a corresponding inclusion for tax purposes of the same
 payment in the other MS: in this case, the MS of residence of the payer shall deny the
deduction of such payment

The Unshell Proposal

UNSHELL

Overview of the Proposal:

- December 2021: Proposal for an “Unshell” directive (Proposal for a COUNCIL DIRECTIVE laying
down rules to prevent the misuse of shell entities for tax purposes and amending Directive
2011/16/EU) published by the Commission

- “Target”: passive undertakings resident in an EU MS lacking minimum substance (proxy for

conduct of economic activity)

- Subjective scope (see Art. 6):

- ‘Undertakings’ entities that, regardless of their legal form, are:

 engaged in an economic activity; and
 considered to be tax resident; and
 eligible to receive a tax residency certificate in an EU Member State

- Subjective scope – carve outs:

 Listed companies
 Financial institutions
 (Domestic) holdings and sub-holdings
 Undertakings with at least five own FTEs exclusively carrying out activities generating
relevant income * (removed following January 2023 approval by the EU Parliament)

- Subjective scope: three-tiered test (“gateways”):

 More than 75% 65%* of the undertaking’s revenue in the preceding two tax years deriving
from “relevant income”; and
 More than 60% 55%* of RI derived from cross-border transactions or RI passed on to other
companies situated abroad in the preceding two tax years, or more than 60% of the book
value of the undertaking’s assets was located outside the Member State of the
undertaking in the preceding two tax years; and
  In the preceding two years day-to-day operations and decision-making on significant
functions outsourced (to a third party)*
*Suggested amendments by EU Parliament in Jan. 2023

- If gateways are met  undertaking considered “at risk”

- Subjective scope: three-tiered test (“gateways”):

 Relevant income:  Passive income (e.g. interest, royalties, dividends, rental income,
income from financial leasing, income from certain property, other than cash, shares, or
securities, held for private purposes and with a book value exceeding €1 million, income
from insurance, banking, and other financial activities; and income from services
outsourced by the undertaking to other associated enterprises)

- Subjective scope: three-tiered test (“gateways”): Some Caveat

 Are the percentages in gateways 1 and 2 to some extent evidence-based or do they simply
rely on the domestic experience of some MS?
 Could the checking of the gateways be automatised?

- Implications of being an “at risk” undertaking (see Art. 7):

 Obligation to report information in tax return on:
o premises;
o bank accounts;
o residence of directors;
o residence of employees

- Substance test (See Art. 8):

 the undertaking has own premises or premises available for its exclusive use; and
 the undertaking has at least one own and active bank account in the EU; and
 either at least one qualified director of the undertaking that is authorized to take decisions
in relation to the activities generating the Relevant Income, is:
a. a tax resident in the Member State of the undertaking (or resides sufficiently close to
the Member State to perform the duties); and
b. is not employed by a non-associated enterprise and does not perform the function of
director in another non-associated enterprise.
 or, alternatively, the majority of the fulltime employees of the undertaking is qualified to
conduct RI generating activity and is a tax resident in the MS of the undertaking or reside
sufficiently close.

- Implications of substance test:

 If substance test failed, the undertaking is presumed not to have minimum substance for
the tax year.
 Presumption can be rebutted by providing additional supporting evidence on performed
activities

- Rebuttal of the presumption (See Art. 9):

 Evidence on the commercial rationale behind the establishment of the undertaking
 Evidence on the employee profiles
 Evidence that decision-making concerning the relevant income generating activity takes
place in the MS of the undertaking: the undertaking has performed and continuously had
 control over, and borne the risks of, the business activities/assets that generate the
Relevant Income.

*Request should be processed by tax authorities within nine months and will be considered
approved if the respective tax authority fails to decide within this period

- Possible “way outs” (See Art. 10):

 Demonstrate absence of tax benefits (for single undertaking and/or group)*
 Demonstrate that the existence of the undertaking does not reduce the tax liability of its
beneficial owners or of the group as a whole, then consequences arising from failure of the
gateway test may be waived*

*Request should be processed by tax authorities within nine months and will be considered
approved if the respective tax authority fails to decide within this period

- Implications of not meeting the substance test:

 No certificate of tax residency to be granted by local tax authorities (or granting of a
“tainted” tax residency certificate)

Intra-EU: No access to the EU PSD and IRD

Third countries:
- Payments to third countries made by interposing the shell subject to WHT at the level of the
entity that made the payment to the shell entity;
- Inbound payments will be taxed in the state of the shell’s shareholder

- Implications of not meeting the substance test:

 Where shell companies own real estate assets for the private use of individuals and that
have no income flows, the assets will be taxed by the state where the asset is located as if
it were owned by the individual directly (see Art. 11, Para. 3)

- Implications in case of non-compliance

 Article 14
Penalties Member States shall lay down the rules on penalties applicable to infringements
of national provisions adopted pursuant to this Directive, and shall take all measures
necessary to ensure that they are implemented. The penalties provided for shall be
effective, proportionate and dissuasive.
Member States shall ensure that those penalties include an administrative pecuniary
sanction of at least 5% 2%* (4% in case of false declarations) of the undertaking’s turnover
in the relevant tax year (or of its assets if turnover does not exceed a threshold t.b.d.), if
the undertaking that is required to report pursuant to Article 6 does not comply with such
requirement.
 30/03/2023

We are talking about rules that cover all the international cross-border transactions between any
economies, units, businesses or we are talking about rules that focus only in the intercompany
transactions?

When we talk a

bout international taxation, we talk about:

- international legislation
- international rules
- international standards

that mainly in all cases who relates the economical transactions cross-border running between business
units belonging to the same groups. What we practice define intercompany transactions/flows.

This is important because what happens between independent enterprises and independent businesses is
not affected/covered by this rules. This rule relates only the intercompany transactions running between
the same group.

This means that in principle is not a legislation that focus on what happen at domestic level within the
domestic territory.

If I am an Italian enterprise and I am acting in Italy and my clients, my suppliers are also located in Italy and
at the end all the transactions runs within the same territory that is the Italian one. Rules like that are not
relevant, but became relevant when our enterprise has suppliers, clients or other services providers abroad
performs cross-border transactions daily with affiliates, legal entities, units belonging to the same
enterprise.

We have 2 side of the coin:

- the relation between affiliates, units belonging to the same group that are covered by rules like
that.
- the economic transactions, even cross-border, running between independent enterprise. For those
transactions, such rules are not relevant.

Why are not relevant? The reasons are at least 2:

1. when we talk about a international group, we talk about an enterprise as a whole, not we standing
in the fact that can act in different countries, territories or jurisdiction using a number of several
legal entities, companies but from managerial point the enterprise is one single subject this means
that when the group plan the intercompany transactions and when it plan the remuneration of the
intercompany transactions I mean the prices that regulates such transactions, the group has the
power to define the attribution of profit/income between one entity to another.
The international group can move income/profit/value/money from one country to another base
on their own choice/plan and therefore what is the interest of country/citizens is to be sure that
the right portion of profit has been attributed to each country.
It is relevant because the right level of taxes due in the several countries is one of the principle
which bases the international taxation and domestic taxation laws is based.
A lot of rules are issued with the aim to regulate fair way with the fair approach the attribution of
profit that large multinational group can distribute based on their own business plan.
 2. On the other hand, the relation between independent parties does not require a lot of rules like
that because the principle is that the market, the competition between independent parties of
course provide the best solution/choice of the right price for each transaction. It’s an assumption,
but at the end of the day is truth. If you are independent, I wouldn’t give you some money without
any reason and on the other part you have the interest to optimize the cost of the gain of the
transaction that are dealing with me.
It's a sort of theoretical concept.
3. The other thing is that, for a large multinational group, nowadays any group independently from
the dimension when is acting on international level, the managerial attitude is considering all the
enterprise, as a whole, as a unique enterprise, independently by the numbers of legal entities or
offices or premises spread out in all the countries in which the business is operating.
To attribute profit, to regulate price of the intercompany transactions is a need for the company,
for business point.

Transfer price  technique for moving money between one country to another.

Before to be the basis for the tax planning for the group, the intercompany transfer pricing it’s a need for
managing concretely what happens from business point.

Before to be something that belongs to the so-called tax planning define internally, among the business
units of the group, what is the remuneration, what is the right allocation of assets and the attribution of
profit.

Taxation of subsidiary

Taxation of subsidiary means how is taxed a legal entity abroad control own by a parent company.

Ex. Parent company in Italy and control a legal entity in another country like France.

When a company, based in Italy, expand his business, promote new business abroad for instance in France,
the most frequent way to open business in another country is established there a new company, a legal
entity.

Is really the simplest way? Maybe the most simple way is acting like that  we are in a country A (Italy), we
have a head office of the enterprise and we open in country B (France) a branch (that could be an office, we
can rent premises, we can send there some employees or we can build up a factory).

In the tax glossary a branch is defined as a permanent establishment. An establishment that should be
not a temporary but permanent.
 Permanent Establishment Taxation

The simplest doesn’t require go to a public notary to establish a new company to inject capital in the new
company, to open position/legal position.

For tax purposes require a more deepen analysis, because there are many cases where the branch doesn’t
constitute a permanent establishment for tax purposes, on the other hand there are cases where
permanent establishment creates a liability for tax purposes in the other country and such an
interpretation like that apparently is very simple but not in all cases is so simple to understand if we have a
presence in the other country that have already created tax liability or not.

Permanent Establishment (Art.5 OECD Model)

• The basic concept of the OECD Model (and most actual DTCs) is that an enterprise should not be
liable for tax on profits earned in a country that is not the country of residence of the enterprise,
unless the enterprise has a real and significant economic nexus with the country in which the
profits arise.

• An enterprise will only have such a significant nexus if it carries on business in the other country
through a permanent establishment (PE) in that country.

If our business has a sort of commercial presence in the other countries, simply for that reason we became
liable for taxes there. We are the Italian company, we sell product to French clients, therefore a lot of
French clients are purchasing our products and we of course recover money for our sales. This is the
reason, in a situation like that, in which we have a tax liability in Italy. In this condition we are simply
delivering our products to French clients, could arise in this situation a tax liability also in French other than
in Italy. So, there is no reason why I have to be subject to tax also in France.

Day 1  We are selling and delivering products from Italy to French clients

Day 2  We are selling and delivering products from Italy to German clients

So, we are expanding our business. Let’s assume that our top manager decided to improve much more the
development sales, try to find out new instruments/mechanisms, we have to be more close to the clients.
For doing that we have to be in touch with the client, for ensuring that after the sale the product is
maintained in a proper way.
Most likely, when we are in the final condition for example to build up a factory, we will transform our
branch in a legal entity.

The attribution of profit to a permanent establishment is a matter much more complicated than the
attribution of profit to a legal entity, because for the legal entity is mandatory to perform at the end of the
financial year. The attribution of profit to a legal entity, apparently, doesn’t create problem per sales.

When we stay in the case of a permanent establishment from juridical state point, the subject is still one
subject. Italian company having a permanent establishment in France, from juridical point of view, is only
one subject. If we have created a new legal entity, a new co there, we have 2 subjects from juridical point
of view: the parent company and the subsidiary.

The business unit, the PE, in France or in Germany nevertheless is liable to tax but to split/ to distribute/ to
attribute what is the portion of income belonging to the enterprise, as a whole, to the unit in France or in
Germany, very often is much more complicated because the driver for doing that are not so clear.

• Art. 7(1) OECD Model states that business profits are taxable only in the residence State unless the
taxpayer has a PE in the source State and the income is attributable to that PE. Where this provision
is met, the income of the PE is also taxable in the source State.

• Therefore, the application of art. 7(1) is dependent upon the existence of a PE in the source State.

Permanent Establishment

In fact, the double tax model:

- In the article 7 states the principle like that

- In the article 5 define when and what are the conditions/assumptions which basis a permanent
establishment is relevant for tax purposes
- In the article 7 states the allocation of income

If we have business activities without any kind of relevant economic presence nexus in practice without PE
in the other countries, the business result/income goes entirely to the home state.

The definition of PE is provided for in art. provision essentially comprises seven elements:

1. the basic-rule PE;

2. the examples of PEs (positive lists);
3. the construction projects;
 4. the exceptions to PEs (negative lists)
5. the dependent agents;
6. the independent agents;
7. the subsidiary companies.

Basic Rule

Art. 5(1) of the OECD Model states that:

For the purpose of this Convention, the term permanent establishment means a fixed place of business
through which the business of an enterprise is wholly or partly carried on.

Fixed place relates the so-called material permanent establishment. What is a fixed place?  it is a
concrete, a physical asset available in the other country for example an office, a factory, other premises.

If I go to France and I stay one month for assisting one important client for a specific task then come back to
Italy, of course we have not create a permanent establishment, we are simply performing the business
activity from the home state. Even though we have a sort of business trip in the other country.

For measuring that, there are a sort of assumption concerning the timing. In certain legislation, for
example, a presence of 3 months is efficient for creating a permanent establishment, in other ones 6
months is the right measure for determine if a permanent establishment is in place.

All the largest economy are connected by a network of double tax treating. Treaties that provide taxation
rules for avoiding double taxation and preventing tax evasion.

The double tax treating, the standard rules is 12 months.

This basic rule sets out three requirements:

1) Place of business: this criterion necessitates some physical presence, e.g. some premises or
equipment;

2) A fixed place: the place of business must be a distinct place, which has some degree of
permanence, i.e. not a place of a purely temporary nature. In some DTCs, a time limit of six months
is provided as a guideline.

3) Carry on business: it is necessary that the enterprise not only has a fixed place of business, but also
wholly or partly carries on its business through that fixed place.

Positive list  declare what are the positive examples

Art. 5(2) provides some examples (not exhausting) of PEs.

The term PE includes especially:

- a place of management;
- a branch;
- an office;
- a factory;
- a workshop;
- a mine, an oil or gas well, a quarry or any other place of extraction of natural resources.
In all cases the business of the enterprise must be carried on through the fixed place before it constitutes a
PE. Therefore, the requirements of art. 5(1) must be met before any of the listed places could be a PE.

Construction projects

Art. 5(3) tells us that a building site or construction or installation project constitutes a PE only if it lasts
more than 12 months, e.g. construction of buildings, bridges and canals.

This provision does not widen the PE concepts, but merely explains it: since the permanence of the PE is
uncertain in these cases, the Model clarifies when a sufficiently solid connection of a normally temporary
activity can be assumed in order to classify the arrangement as a PE.

If our presence there, for following the construction project, last more than certain time of month based on
tax treaties 12 months, this creates a permanent establishment.

Negative list useful for help the interpretation of the case, of the fact and circumstances

Art. 5(4) lists a number of activities that are deemed not to constitute a PE. These are:

- the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise
belonging to the enterprise;  for example a Warehouse

- the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the
purpose of storage, display or delivery;

- the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the
purpose of processing by another enterprise;

- the maintenance of a fixed place of business solely for the purpose of carrying on, for the
enterprise, any other activity of a preparatory or auxiliary character …

The positive list per se doesn’t define in absolute way the PE, it’s a sort of indication, a guideline for
understanding if PE is in place. On the other hand, the negative list, is the same juridical effect per se,
doesn’t define something that absolutely it’s out of scope of the PE rule. But define situations in which you
have to, most likely, the conditions no to create a tax liable PE, but you have to investigate case by case.

A common feature of the activities listed in art. 5(4) is that they are of a preparatory or auxiliary nature.

These exclusions intend to limit the wide scope of the definition of a PE outlined in art. 5(1) to ensure that
auxiliary activities alone will not be taxed in the source State.

The policy reason for these exclusions is based on the notion that a PE should only arise in a State where
the taxpayer has a sufficient connection with that State. It is generally accepted that the activities listed in
art. 5(4) involve insufficient economic activity within the source State.

Dependent agents Art. 5(5) states that:

“… where a person … is acting on behalf of an enterprise and has, and habitually exercises, in a Contracting
State an authority to conclude contracts in the name of the enterprise, that enterprise shall be deemed to
have a permanent establishment in that State in respect of any activities which that person undertakes for
the enterprise, unless the activities of such person are limited to those mentioned in paragraph 4”.

This provision focuses on a dependent agent (i.e. a person who is not independent), who acts on behalf of
the enterprise, has authority to conclude contracts in the name of the enterprise (i.e. legally bind the
represented enterprise), exercises his authority habitually and does not carry out any preparatory activity.

OECD Model treats these agents as PEs of their principal.

Where a person’s commercial activities are subject to detailed instruction or comprehensive control by the
enterprise, the person is regarded as dependent. The same happens when the person does not bear the
entrepreneurial risk of the business.

The basic principle followed here is that, even without a fixed place, a State should have the right to tax
where a person acts to a sufficient degree in that State for an enterprise.

Example: mister X apparently is independent agent, but he is working only for you, he has a full-time agent
in charge for selling and promoting your products, even though he is independent from the labor law point
of view, he is completely dedicated for your company. In such a case doesn’t matter if an employee or not,
in this case he constitutes a permanent establishment for your company, he is not material but a personal
one.

Different example: Mister X is a French agent working for a lot of company, international or not. In this
case, we have different approach. Looking at the situation of Mister X in France, we understand that he is
really independent from each of counterpart, he is not depending fully from one single company. He cannot
create a PE for the company with which is dealing with the agency’s relationship.

Independent agents

Under art. 5(6), the use of an independent agent in the source State does not constitute a PE.

An enterprise shall not be deemed to have a PE in a contracting State merely because it carries on business
in that State through a broker, general commission agent or any other agent of an independent status,
provided that such persons are acting in the ordinary course of their business.

So, the requirement to fall outside the agency PE category is that an enterprise’s representative in the
source State must be an agent of independent status acts in the ordinary course of his own business.

An agent of independent status means an agent that is legally and economically independent of his
principal.

Legal independence means that the principal has no control over, or power to interfere in, the day-to-day
business of the agent.

Economic independence means that the agent conducts his own exclusive business wherein he bears the
entrepreneurial risk of the business.

Subsidiary companies

Art. 5(7) provides that:

the fact that a company which is resident of a contracting State controls or is controlled by a company
which is a resident of the other contracting State … shall not of itself constitute either company a
permanent establishment of the other.

Therefore, the existence of a subsidiary company does not in itself constitute a PE of its parent. However, a
subsidiary company can be a PE of its parent if it:

1. makes its spaces or premises available to its parent company and the parent company carries on its
own business through that place; or

2. is not an independent agent of its parent and habitually exercises authority to conclude contracts in
the name of its parent company.

Tax Challenges of the Digital Economy

What we discussed till now is exactly the situation concerning the traditional economy: the industrial
traditional manufacturing activities. When we have a significant nexus, means physical presence,
determining a permanent establishment and of course determine a tax liability in the other countries, other
than the source taxation, the home state taxation.

What are the challenges of the Digital Economy?  the digital economy doesn’t require a physical
presence, so the difficulty faced during the last decade at least is that there is no drivers, rational for
identified a clear tax liability in the country where the sales are collected, where the clients are based.
There are not rules, not indication clear guidelines for attributing profit in those market.

New project  Global minimum tax = try to solve not only the problem of attribution of right to tax for the
digital economy, but also for the traditional one basically providing having 2 pillars, the most important is
the so-called pillar 2. Basically providing that one large multinational group overall at the end of the
financial year has to recognize taxes due for at least 15% as rate on the income. If the final result, in the
consolidated turnover the taxes accrued are less than 15%, this means that the parent/headquarter
company has to add taxes for achieving such a minimum level of 15% and these taxes should be
reattributed to the country where the business was relevant but not connected with the fair ratio of taxes
collected.

The unique company having Head office in country A and a PE in country B, we assume that is liable for
taxes either in country A or in country B. So, we talk about hot to attribute the income to the branch. For
doing that, because we have not a clear distinction between different legal entities, the OECD model
provides the main rule. The main rule is to adopt an approach define as a functional separate entity
approach  the domestic legislation of all the countries should manage the attribution of profit to a PE for
tax purposes assuming that the PE is in the condition like a separate legal entity.
 Business profit (Art. 7 OECD Model)

• The concept of PE is important for the allocation of taxing rights.

• According to art. 7(1) the profits of an enterprise of a contracting State shall be taxable only in that
State (i.e. the residence State). The only exception arises when the enterprise carries on business
in the other contracting State (i.e. the source State) through a PE situated therein.

• If the company carries on business in the other contracting State through a PE, art. 7(1) provides
that the PE state also has the right to tax the profits that are attributable to the PE

• Art. 7(2) contains rules regarding the attribution of profits to a PE: the profits that are attributable
to a PE are those that it might be expected to make if it were a separate and independent entity
engaged in the same or similar activities under the same or similar conditions: functionally
separate entity approach.

Example:

Company R, a resident of Country R, manufactures motorbikes in Country R. It transfers the motorbikes to

its PE in country S, which sells them to customers in Country S.

What is the correct value at which the motorbike should be transferred from Company R to the PE in
Country S?

Assuming that the PE is operating as a distributor, art. 7, par. 2, requires that the distributor’s profit is
calculated by deducting from its sales to consumers in Country S the wholesale price for the motorbikes.

This approach relates what is the income tax base that should be declare in the tax return where the PE is
located. All these rules relate what is the income declare in France and in principle should be the same
income equal to the income that should be declare if we have views a legal entity instead of a PE.
What is the main difference of these 2 situations?  if we have a branch, the same income that we have
declare in France will be subject to tax in France and in Italy (home State), because the legal entity is only
one. Therefore in the home State the company has to declare all the income, included all the income
recognize in France. Differently in France should be declare only the income perform in France. This means
that part of the income, the French one is taxed twice (in France and also in Italy) this depends only by the
fact that we have a unique legal entity from juridical point. This means that the branch (PE) in France it’s a
part of the unique legal entity, so also in Italy have to declare the same income.

The OECD model provides the tools/rules for eliminating/mitigating the double taxation effects.

The most common mechanism for doing that is to provide, in the home state (A), tax credit corresponding
to the taxes paid abroad. This means that we have to declare and pay taxes first of all in France for the PE,
at the end of the same financial year in Italy included the French income but when the company calculates
the taxes due in the home state (Country A) take into account as a credit the taxes already paid in France.

Foreign tax credit  I have to calculate the taxes due in the home country overall, but when I go to pay I
can credit/match such a total sum with the tax already pay in France and of course decreasing the final bill
to be paid.

The foreign tax credit is a U.S. tax credit used to offset income tax paid abroad. U.S. citizens and resident
aliens who pay income taxes imposed by a foreign country or U.S. possession can claim the credit. The
credit can reduce your U.S. tax liability and help ensure you aren't taxed twice on the same income.

If we are using legal entities, in principle, we don’t create double taxation.

What happens when the net profit is distributed to the parent company/shareholders?  this is the
standard case.  we have in the group several subsidiaries, they are in a profit position, they account at
the end of the financial year net profit, we can keep this net profit as reserves or we can distribute to the
shareholders, to the parent company.

What is the tax treatment in this case? When the subsidiary distribute money, the dividend to the
shareholders, what we are distributing? The income after having paid taxes, so the net income. But such a
net income/dividend has already paid taxes. Therefore, when the money achieves the shareholders, in
principle should be exempted by taxes because this is result after having already paid relevant taxes in the
source country.

Respecting the conditions required by the directive, for all the dividend flows among the E.U member
states are free of taxes and therefore no double taxation arise anyway. It is a mechanism that anticipate
such a balance for avoiding double taxation in the final calculation of the tax due in the tax return of the
company.

Associated enterprises (Art.9 OECD Model)

• Multinational enterprises (MNEs) with affiliates in different tax jurisdictions face the challenge of
determining a price for transactions effectuated within their groups of companies.

• In determining these prices, MNEs have the opportunity to manipulate the level of profits of each
affiliate in order to minimize the enterprise’s global tax liability.

• Transfer pricing (TP) is the technique used to allocate the profits made by a group of companies to
each group member.
 • Therefore, for MNEs as well as for tax authorities, the issue of transfer pricing is of utmost
importance, especially in the light of the global tax planning: by over/under-pricing intragroup
transactions, the profits within the group can be shifted to low-tax jurisdictions and the overall tax
burden of the MNE can thereby be minimized.

Transfer pricing is a technique used by multinational corporations to shift profits out of the countries where
they operate and into tax havens that involves a multinational selling itself goods and services an artificially
high price.

“Let’s say it costs a multinational corporation $100 to produce a crate of bananas in Ecuador. It then sells
that crate to an affiliate located in a tax haven for $100, leaving no profits in Ecuador. The tax haven
affiliate immediately sells that crate on to an affiliate in Poland for $300, leaving $200 profit in the tax
haven. That Polish affiliate sells the crate at the genuine market price of $300 to a supermarket, leaving no
profits in Poland.
As a result, the multinational pays no tax in Ecuador and no tax in Poland, and the $200 in profits shifted to
the tax haven do not get taxed.
In this way, multinational corporations avoid their responsibility to pay tax and fail to contribute to the
societies in which they operate”.

Source: Tax Justice Network - What is transfer pricing?

Art. 9 OECD MC: Arm’s length principle (ALP)

Where … conditions are made or imposed between the two enterprises in their commercial or financial
relations which differ from those which would be made between independent enterprises, then any profits
which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those
conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.

Example:

A Romanian company delivers single component of cars to its parent company, which is resident in Spain,
and receives a price of 100 for each component (controlled transaction).

If the subsidiary had sold these goods to an independent party (uncontrolled transaction), a price of 200 for
each component could have been realized (arm’s length price): the profits are artificially reduced in
Romania.

Therefore, the Romanian tax authorities adjust the profit of the subsidiary and adds 100 per component to
the profits under art. 9 DTA Romania - Spain.

Example:

An Austrian company sells computer software packages to third-party customers (uncontrolled transaction)
for EUR 100 each (arm’s length price), but sells the same software to its Polish subsidiary for EUR 70 per
unit (controlled transaction).

Therefore, the Austrian tax authorities adjust the profit of the Austrian company and add EUR 30 per
component to its profits under art. 9 DTA Austria - Poland.

• The OECD has published Transfer Pricing Guidelines. This report is extremely important in practice
since it provides the internationally agreed principle for the application of the ALP.

• Comparability between controlled and uncontrolled transaction is the core of the application of
the ALP: internal comparability vs. external comparability.

Comparability because we have to compare the price with a comparable that could be internal:

The aim of the rules?  to keep in a neutral position what we are doing among the group.

So, we can define the intercompany price for the transaction.

The internal comparability is a sort of theoretical way because of course the company be care to not make
evidence of differences. What in reality happens is that the real comparability for understanding if the
company has adopted a correct transfer pricing in policy, it’s a comparison between transaction made
within the group by our company and different transaction made by third parties.

The important key  I have to compare a similar transaction of goods, industries, quality of products and
market position

No Chinese quality compares with luxury.

Comparable transactions must occur between independent parties: in many cases, a competitor cannot
represent a comparable

Comparability exists only if there are no differences which affect the economic conditions of the
transactions

The OECD Guidelines identify five main comparability factors:

1. characteristics of the property/services
2. functional analysis
3. contractual terms
4. economic circumstances
5. business strategies

The difference in the characteristics of property and services often leads to differences in their value (e.g.
crocodile leather vs. normal leather).

The comparison of the function of the parties is important because in dealings between independent
companies the price reflects the functions taken on by each enterprise (e.g. inventory risk vs. no inventory
risk).

The contractual terms of transactions generally define how the responsibilities, risks and benefits are to be
divided between independent enterprises (e.g. exclusive vs. non-exclusive license).

The price varies across different markets and it is therefore important to identify the economic
circumstances of transactions (e.g. geographic location, size of the markets, availability of substitute
goods) in determining comparability.

Finally, business strategies are important to determine the comparability for transfer pricing purpose (e.g
market penetration scheme).

We have to examine now the way in which transfer price is set.

 • Traditional transaction methods (standard methods): comparable uncontrolled price (CUP), resale
price method (RP), cost plus method (CP)

• Transactional profit methods: transactional net margin method (TNMM), profit split method

There is no “best method rule”: each company should use the most appropriate method to the
circumstances of the case.

Associated enterprises (Art.9 OECD Model – Comparable Uncontrolled Price)

- The CUP compares the price charged in the controlled (i.e. intragroup) transactions with “real-life”
uncontrolled transactions to calculate the arm’s length price.

- Internal CUP vs. External CUP.

Associated enterprises (Art.9 OECD Model – Resale Price Method)

The RP takes into account the price of the product when it is resold on next supply chain level to third party
and deducts a gross margin in order to calculate the arm’s length price.

Associated enterprises (Art.9 OECD Model – Cost Price Method)

The CP is very similar to the RP method, but it proceeds the other way around, i.e. the arm’s length price is
determined by adding a mark-up to the company’s costs
 31-03-2023

Introduction to Environmental Taxation

Regulatory developments

If one wished to set an ideal starting point for the concept of international environmental law, one would
necessarily have to go back to the work of the United Nations Conference on the Human Environment,
held in Stockholm in 1972, during which, for the first time, common principles were enshrined for the
protection of the environment and a legal as well as doctrinal debate was launched that was to last for
decades. Among the principles enunciated at the conference, the most significant was the one that stated:

"The Earth's natural resources, including air, water, flora, fauna and especially the natural ecological
system, must be safeguarded for the benefit of present and future generations through careful planning or
appropriate administration."

Twenty years after the Stockholm Conference, the United Nations gave impetus to a new international
forum on the environment by organizing the Conference on Environment and Development from 3 to 14
June 1992 in Rio De Janeiro, where 183 states participated.

At the Earth Summit, for the first time, 108 Heads of State or Government met to discuss and approve
important acts, including the United Nations Framework Convention on Climate Change, which can be
considered the logical as well as legal antecedent to the subsequent Kyoto Protocol.

In 1997, five years after the Rio Conference, more than 180 government delegations came together to
negotiate what would become the Kyoto Protocol on climate change, thus assigning the Conference of the
Parties - COP - of the United Nations Framework Convention on Climate Change (UNFCCC) a decisive role in
the complex and jagged path towards the recognition of a conscious and resolute environmental
consciousness.

In this context, therefore, the international community introduced a different and more organic level of
cooperation between States, identifying, as an indispensable element for the achievement of more
important objectives, that of the predisposition of appropriate harmonized and common legal
instruments that could surpass the much more limited local and therefore national level.

The 2030 Agenda of the United Nations Organization and the Decision 1386/2013/EU represent a real
awareness on the part of the international community regarding the inescapable correlation between
waste production and environmental impoverishment, to be through economic and fiscal policies aimed
at promoting and enhancing production processes marked by circularity and at discouraging unsustainable
behaviour from the point of view of environmental impact.

The European Union has made considerable efforts from both political and legislative standpoint-think of
the approval of the European Green Deal, programming a multi-year plan directed at the elimination, by
2050, of greenhouse gas emissions through the promotion:

 of a more efficient use of resources-typical of a clean and circular economy

 and the preservation of biodiversity.

The preparatory work carried out to achieve this ambitious goal was characterized by numerous prodromal
acts, including: the approval of the package of directives on the Circular Economy, aimed at increasing
municipal waste recycling to at least 55 percent by 2025, 60 percent by 2030, and 65 percent by 2035.The
set of regulations then fostered a new approach to waste management and circularity, mandating the
decrease of waste going to landfills to a maximum share of 10 percent by 2035.

Doctrinal and regulatory developments have affected the international community, including the majority
of European Union countries, which, on several occasions, have introduced facilitative measures capable
of incentivizing more "circular" and, therefore, less polluting production processes.

In addition, tax breaks related to the production and use of renewable energy have been expanded and
disincentive taxes functional to the adoption of the well-known "Green New Deal" have been introduced.
In the same direction should be read the European Commission's adoption of a new action plan for the
circular economy, through which additional measures were introduced to increase the circular approach of
the continent's economy instead of the linear one.

The goal of the plan is to ensure Europe would have a "new growth strategy that transforms the Union
into a modern, resource-efficient and competitive economy in which, in 2050, no more net greenhouse gas
emissions are generated, economic growth is decoupled from resource use, and neither a single person nor
a place are neglected."

Over the past decades, the topic of environmental taxation and the more general approach to
environmental protection has undergone profound transformations and evolutions from doctrinal,
regulatory and economic perspectives.

More specifically, in the field of taxation, the Pigouvian theory aimed at taxing negative externalities and,
thus, at placing in direct correlation the marginal damage caused to the environment with the payment
of a tax, has been juxtaposed over the years with more modern theories marked by the provision of
benefits and concessions capable of supporting productive policies aimed at safeguarding the environment.

The purpose of this approach is to orient production and thus consumption by abandoning the idea of
fiscal neutrality in the economic sphere, and instead accessing more interventionist policies directed at
making certain production processes, that are polluting or disregard reuse principles, more onerous.

In this sense must be read the speech of the European Commission Vice President F. Timmermans at the
European Business Summit held in November 2020, where he said that "we need to correct the current
system, where taxes reflect the cost of transporting a product, but do not take into account its impact on
the environment (...) we need to make sure that carbon use is fully reflected in our taxes."

So, taxation must act on production and on consumption!

In order not to nullify this momentous opportunity for renewal, however, it is necessary to envisage an
even more comprehensive approach to tax issues that could translate into a highly harmonized legal and
regulatory language capable of explaining its effects not only in the European economy but also in the
broader international context.

In this regard, the experience of the project called "Base Erosion and Profit Shifting" (hereafter BEPS) -
conceived by the OECD and the G20 - could suggest the identification of a common platform capable of
planning regulatory interventions, coordinated and homogeneous, using already existing measurement
dashboards -think of the Italian experience of the State eco-budget- capable of measuring the actual impact
of the aforementioned interventions on the economies of individual states.

Insight: the circular economy

From linear to circular economy

As pointed out so far, therefore, the concept of the environment cannot be declined in its most modern
and careful meaning unless equal attention is paid to the study and research of new production
processes that are more sustainable and aligned with the principle of environmental protection, which are
indispensable for moving from a linear to a circular economy.

Before (and, to some extent, still today)

In fact, the production processes that characterized the evolution of the economy throughout the 20th
century, and that marked the methodologies adopted by industrialized countries from the Second
Industrial Revolution onward, were based on an industrial economy essentially founded on the incessant
extraction of raw materials, mass consumption and the formation of a growing production of waste
generated by manufactured products whose life cycle, already very short due to the scarcity of
technologies and production know-how, ended after use.

Insight: from linear to circular economy

Therefore, this economic model, defined as linear, had as its basic assumptions those of the exploitation of
natural resources (mainly fossil fuels) and that of the inevitable transience of individual products, destined
for the end of life and therefore no longer usable.

In such a perspective of continuous use of resources, the prevailing pattern is one that starts with
extraction, continues with production and consumption and ends in disposal, without any consideration of
the problem related to the "end of life" of products.

Insight: from linear models …

Insight: to circular economy models …

Insight: the circular economy

Industrial development, then, while it has certainly produced positive effects in terms of wealth and
prosperity, has also ended up causing negative repercussions both in terms of the environment and,
speculatively, in the more relevant aspect of public health.

It is therefore evident that we cannot imagine severing the biunivocal and connected relationship between
environmental quality and health protection.

Indeed, it cannot be doubted that the combination of two phenomena of the present and the past century,
namely those of globalization and industrialization, has inevitably placed the interest of individual states in
rapid and exponential development on irreconcilable and often opposing planes with the more general
interest of environmental protection.

In contrast, a more circular approach to the economic subject requires to:

 Preserve available natural resources over time;

 Give preference to so-called "renewable" energy sources;

 Minimize the use of raw materials;

 Increase the reuse of products as much as possible;

 Extend the life cycle and make waste a new source of energy.

This approach assumes as a diriment element the one linked to the protection and enhancement of the
environment.
So, is clear that the circular economy is organized through processes that transform waste into a resource
so that it regenerates itself, preserving its value, which instead of running out at its end life will continue to
generate value in different forms, transforming and changing its characteristics due to the "next user."

This perspective makes it possible to organize the production system according to a scheme in which all
activities, from extraction to final production, respond to the need to transform someone's waste into
resources for someone else.

The circular economy today represents a tool for development and growth, especially for the European
Union, partly because of the substantial resources made available to member countries by the Commission
through the Recovery Plan.

This type of economy, then, has the additional virtue of:

 enabling businesses and consumers to create and obtain new forms of value;

 contributing to the creation of elastic markets and production-trading chains that can offer new
room for intervention in such profiles as design, production, consumption and waste management,
enabling the latter to generate new utility and, therefore, wealth.

Circular economy and taxation

Taxation is a key factor in accelerating the transition from a focused linear industrial economy to a
sustainable circular industrial economy measured by the ability to maintain stock quality and quantity.

More specifically, it would be necessary to provide a homogeneous tax framework that, considering the
business and social environment in which the proposed instruments must operate, does not induce
companies to relocate production to countries with less stringent environmental regulations.

In this sense, in the context of economic circularity, the tax lever must become a highly attractive tool
through which to achieve at least two objectives:

 Implement and promote sustainable production;

 Protect the environment.

Historically, the focus has always been on labor productivity and how to try to maximize time and
production methods so as to maximize final output as well.

Resource productivity, on the other hand, has always played a marginal role, especially in policymaking.

Following this trend, taxation has focused on labor rather than in penalizing resource consumption and
thus, more generally, environmental protection.

In the relationship between taxation and circular economy, one of the first points of attention concerns
the shift of the tax burden in a circular economy context …

More specifically:

 the transition process to the circular economy must be promoted on both the "consumption" and
"production" sides. This requires a change in incentives for different economic agents.

As for the "demand" side:

  it is necessary to shift the tax burden from income to consumption. However, merely doing so is
not enough because it does not discriminate between types of consumption and may generate
social equity problems.

The process of shifting the tax burden requires a further step:

 the implementation of tax differentiation between "sustainable" and "non-sustainable"

consumption, based on the characteristics of the product and the production process;

 in addition, it would be advisable to encourage greater implementation of "pay as you throw"

schemes. Where this scheme has been applied, it has yielded excellent results by increasing
recycling rates (even in Italy there are experiences of this kind. Think of the Municipality of Treviso
where, applying the model, 90% recycling results were achieved).

From this perspective, fiscal measures to implement the use of the circular economy must be rethought
from a "reward" perspective and thus with the aim of:

 Discouraging behavior that is incompatible with the condition of scarcity in which we live;

 Incentivizing, on the contrary, virtuous policies such as material recycling;

 Incentivizing the use of renewable and non-polluting resources.

In this way, taxation could become a tool to achieve two goals:

 Recognize-through rewarding tax mechanisms-the achievements of businesses;

 Push toward sustainable market demand.

The Environmental Taxation in Italy

In Italy, the first environmental levies were structured to cover the costs of environment-related services,
without any regard to incentive effectiveness.

In fact, we should recall that, in the aftermath of Italian unification, the country was in a state of serious
public debt.

Therefore, the post-unification period was characterized by the introduction of numerous taxes, including:

 the tax on beer and carbonated waters (1864);

 the tax on powders and other explosive materials (1869);

 the tax on spirits (1870);

 the tax on chicory prepared for coffee (1874), sugar (1877), seed oil (1881) and matches (1896).
Also, we have to consider the waste treatment, which was regulated by Article 268 of Royal Decree No.
1117 of Sept. 14, 1931, later repealed by Legislative Decree No. 507 of Nov. 15, 1993.

It established a fee for the pickup and transportation of household waste.

This kind of tax is already valid in Italy and is denominated “TARI” (s.c. “Tax on waste disposal and
collection”).

Italian environmental law, even from a fiscal standpoint, has a predominantly supranational derivation.

In fact, the regulations affecting environmental law within our legal system derive from international and
EU sources. So that domestic legislation has over time adapted successively to the action of other
extranational authorities.

The environment began to assume prominence as a legal asset deserving of independent protection only
as a result of international and EU treaties in the face of the visible effects of environmental damage.

Specifically, in our legal system, the environment became a protectable legal good only in 2001, with
Constitutional Law No. 3 introducing environmental protection into our Constitutional Charter.

In the same years (between 1998 and 2000) was approved the Document of Economic and Financial
Planning (DPEF), in which the Government committed itself "to introduce qualified forms of environmental
taxation, which will have to realize a levy replacing the ordinary one while leaving the overall tax pressure
unchanged and favoring the development of productive activities of ecologically compatible goods and
services."

In addition to this, DPEF 99/2001 stated that the government should implement the commitments made at
the Kyoto Convention to curb climate change, "through the reduction of greenhouse gases, the promotion
of energy efficiency, and the development of renewable sources, the encouragement of energy-efficient
and low-CO2 products and industrial cycles, and the reduction of emissions in the transport sector, including
through ecological taxation measures, substituting for other forms of levy."

The general governing principles of the environmental taxation

The principles underlying Italian environmental policies.

The principles applied in our legal system have European and International derivation, which in turn has
transposed them from international agreements or treaties. In this sense, it is recalled that the normative
foundation of EU policies is Article 191 paragraph 2 of the TFEU.

Article 191 paragraph 2 of the TFEU states that the Union's policy on the environment aims at a high level
of protection, taking into account the diversity of situations in the various regions of the Union, and that it
is based on the:

 Principles of precaution: The precautionary principle is mentioned in Article 191 of the Treaty on
the Functioning of the European Union (EU). Its purpose is to ensure a high level of environmental
protection by taking preventive action in the event of a risk. However, in practice, the scope of the
principle is much broader and also extends to consumer policy, European food law, human, animal
and plant health.

According to the European Commission, the precautionary principle may be invoked when a
phenomenon, product or process may have potentially dangerous effects, identified through scientific and
objective evaluation, if this evaluation does not allow the risk to be determined with sufficient certainty.
Recourse to the principle is therefore part of the general framework of risk analysis and more particularly
within the framework of risk management, which corresponds to the decision-making phase.

The Commission emphasises that the precautionary principle can only be invoked in the event of a
potential risk, and that it can under no circumstances justify arbitrary decision-making.

Recourse to the precautionary principle is therefore justified only when it meets three conditions, namely:

 the identification of potentially negative effects;

 the evaluation of the available scientific data;

 the extent of scientific uncertainty.

 preventive action: This principle allows action to be taken to protect the environment at an early
stage. It is now not only a question of repairing damages after they have occurred, but to prevent
those damages occurring at all. This principle is not as far-reaching as the precautionary principle. It
means in short terms: it is better to prevent than repair.

 "polluter pays" principle: The Organisation for Economic Co-operation and Development (OECD)
first introduced the Polluter Pays Principle (PPP) in 1976. It stated that the polluter should bear the
expenses of carrying out the pollution prevention and control measures introduced by public
authorities, to ensure that the environment is in an acceptable state.

Policymakers can use this principle to curb pollution and restore the environment. By applying it, polluters
are incentivized to avoid environmental damage and are held responsible for the pollution that they
cause.

It is also the polluter, and not the taxpayer, who covers the costs created by pollution. In economic terms,
this constitutes the “internalization” of “negative environmental externalities”.

When the costs of pollution are charged to the polluter, the price of goods and services increases to include
these costs. Consumer preference for lower prices will thus be an incentive for producers to market less
polluting products.

Since 1972, the scope of the PPP has gradually increased (Figure 1)8. The principle initially focused solely on
pollution prevention and control costs but was later extended to include the costs of the measures
authorities took to deal with pollutant emissions.

A further extension of the principle covered environmental liability:

 polluters should pay for the environmental damage they caused, irrespective of whether the
pollution giving rise to the damage was below legal limits (termed “allowable residual pollution”)
or accidental.

The PPP underlies the EU’s environmental policy.

Article 191(2) of the 2007 Treaty on the Functioning of the European Union (TFEU)11 states that: “Union
policy on the environment (…) shall be based on the precautionary principle and on the principles that
preventive action should be taken, that environmental damage should as a priority be rectified at source
and that the polluter should pay”.

EU legislators are not bound by the principle when enacting EU policy in areas other than that of the
environment, even when they might have a significant environmental impact, e.g. transport, fisheries, or
agriculture policy

Two sides of the same medal…

The European Commission is responsible for drafting proposals for environmental legislation that shall be
based on the PPP.

The Member States are responsible for transposing, applying and enforcing EU environmental directives
and regulations

The general governing principles of the environmental taxation

The principles underlying Italian environmental policies:

  The principle of prevention which provides for the introduction of regulations that prevent the
realization of damage known in advance and with scientific certainty at the source;

 the principle of integration which requires balancing the interests of environmental protection
with the often-conflicting interests of other sectors;

 the recently introduced principle of sustainable development which presupposes development

that allows present generations to meet their needs through the use of environmental resources,
without precluding future generations from doing the same. Principle explicitly provided for in
Article 3 of the EU Treaty.

Compared with the principles mentioned so far, Legislative Decree No. 4/2008 on environmental
regulations, which amended Legislative Decree No. 152/06, enunciates the following additional
environmental principles:

 the principle on the production of environmental law;

 the principle of environmental action;

 the principle of sustainable development;

 the principle of subsidiarity and loyal cooperation.

The debate on environmental taxes

The legal debate on environmental taxation has so far - at the level of both domestic and EU law - raised
many problems, which have remained largely unsolved.

The most relevant are the following:

• which is the correct concept of an environmental tax for national and EU law;

• what justification this type of tax should have in terms of “contributory capacity” (art. 53 Cost.);

• how it should be framed in the fiscal federalism system, with particular reference to regional and
local taxes defined as 'purpose'.

The definition of an environmental tax

As for the definition of environmental tax, since the middle of the last century, jurists have considered
environmental taxes in the proper sense only those taxes constructed by the legislator according to the
Community 'polluter pays' principle, found in Articles 174 and 175 of the EC Treaty.

In other words, these are those taxes that include in their premise the same polluting factor, i.e. the same
event that produces the environmental damage.

This is the case of taxes that, for example, directly affect:

• the emission of noise or polluting gases (such as NoX, So2 and Co2);

• as well as the extraction or production of substances that deplete and cause damage to the
environment.

There is a tendency to differentiate these taxes from those defined as environmental in a purely functional
sense, i.e. from those taxes that instead have a traditional presupposition (e.g. consumption, assets,
income, etc.), but to which at the same time the legislator has imprinted the main purpose of incentivizing
or disincentivizing the performance of activities or the use and production of goods that concern the
environment.

In this perspective a tax, to be environmental in the proper sense, must be characterized by the existence
of a necessary causal link, by a direct (almost osmotic) relationship between the presupposition and the
material fact - the physical unit - that causes a scientifically ascertained and sustainable deterioration of
the environment.

A deterioration - mind you - that, to justify the imposition, must not be absolute but relative, therefore
bearable, possibly reversible, possibly repairable.

Compatibility of environmental taxes with "ability to pay” principle

‘Ability to pay’ principle and environmental taxes

The second issue that has characterized - and to some extent still characterizes - the debate on
environmental taxes is the one concerning their compatibility with the principle of fiscal capacity, enshrined
in Article 53, par. 1, of the Constitution (“Everyone is obliged to contribute to public expenditure
according to their ability to pay”).

In order to better understand the application of the principle in question, to environmental taxes, then, it is
necessary to frame them in relation to their main nature - levies or taxes - so as to decline them in the most
appropriate sense. Moreover, the strictly 'material' nature of our tax system must be considered.

It is considered that environmental tributes should necessarily be ascribed to the group of levies (s.c.
“imposte”), since they possess their typical characteristics, namely:

• The coercivity of the patrimonial performance demanded by the public body lack of the
synallagmatic relationship;

• The allocation of the tribute to indivisible services (services provided by the municipality and used
in general by all citizens for which it is not possible to identify a specific user);

• The impoverishment of the taxable person;

• The absence of a counter-performance by the State directed against the same taxable persons.

And in fact, in environmental taxes there is an activity on the part of the State - of protection, control,
safeguarding - but directed not at the taxpayers but at the community, to protect it from the negative
effects on the environment caused by polluting agents.

Environmental Taxes and Fiscal Federalism

Turning then to the further problem of the framing of environmental taxation in fiscal federalism - despite
the fact that environmental protection is literally counted among the subjects of exclusive state
competence (art. 117, c. 2, lett. s, Const.) - the field of regional and local finance may also lend itself, under
certain conditions, to the construction of environmental taxes in the proper sense, depending on the
allocation of polluting sources.

This, however, under 'certain conditions' because:

 • we should observe the general principle that interventions (including taxation) affecting the matter
of environmental protection, carried out by the regions in the exercise of their own 'legislative'
powers, in order to be legitimate, must always take place in compliance with the uniform levels of
protection of the environmental 'value' set by the State throughout the national territory;

• secondly, the use of regional and local taxation levers should in any case be ruled out when it is
intended to support environmental policies relating to global ills, such as global warming.

Some examples of environmental taxes:

Plastic Tax

The Single Use Plastic (SUP) Directive

In June 2019, the EU formally adopted a pioneering legislation to curb single-use plastics (SUP) - Directive
(EU) 2019/904 on the reduction of the impact of certain plastic products on the environment.

Rarely has a European directive been the subject of that much media coverage and attention at European
level.

It was the first EU Directive requiring Member States to ban a series of plastics - certain single use plastic
items and oxo degradable plastics, for which alternatives were considered to be easily available and
affordable.

For non-banned products, the focus is on waste prevention measures, such as consumption reduction,
marking requirements and product design requirements and on improved waste management.

Producers will help cover the costs of waste collection and treatment, along with litter clean-up and
awareness raising, for the following single-use plastic items:

 food and drink containers,

 bottles,

 cups,

 crisp packets and sweet wrappers,

 light plastic shopping bags,

 tobacco products with filters.

For wet wipes and balloons, producers will cover the costs of awareness raising, cleaning up litter and
gathering and reporting data.

Italian plastic tax

The so-called Italian “plastic tax” is a tax on the consumption of single-use plastic manufactured goods
(manufatti con singolo impiego, hereinafter “MACSI”).

It was introduced in art. 1, paragraphs 634 – 658, of Law 160/2019, in order to disincentivize the
production of single-use plastic products, in implementation of Directive no. 2019/904/EU, also called
“SUP Directive”: Single Use Plastic Directive.

The application of the plastic tax has been deferred since its introduction, from 2020 to 2024.
On which products does the plastic tax apply?

The tax applies to products intended for the “containment, protection, handling or delivery of goods or
foodstuffs” made using “plastics consisting of organic polymers of synthetic origin” and basically not
designed to be used repeatedly (single-use products).

The draft decree contains a non-exhaustive list of manufactured goods that are included among the MACSI
subject to tax. These include:

- plates, - packaging,

- preforms, - films,

- bottles, - bags,

- caps, - foils,

- containers, - and all other polymeric products, however shaped or mouldable

- lids, suitable to constitute a wrapping or part of wrapping for goods or

food products

Among others, the following are considered MACSI subject to the plastic tax:

 MACSI made with the use, even partial, of plastic materials,

 semi-finished products (including preforms) made with the use, even partial, of plastic materials,
used in the production of MACSI;
 devices, made with the use, even partial, of plastic materials, which allow the closure, marketing,
or presentation of MACSI, or of manufactured goods made entirely of materials other than plastic
materials.

Exclusions

The following are excluded from the application of the plastic tax:

- MACSI that are compostable;

- medical devices;

- MACSI used to contain and protect medicinal preparations.

The tax is also not due on the plastic material contained in the MACSI that comes from recycling processes.

Subjects liable to the tax

Plastic tax is payable by:

- for MACSI produced in Italy:

• the manufacturer; or

• the seller, i.e., any entity, resident or not resident in Italy, that intends to sell MACSI,
produced on its behalf, to other Italian entities.

- for MACSI coming from other EU Member States:

 • the purchaser, i.e., the subject who purchases the MACSI in the exercise of its economic
activity; or

• the transferor, if the MACSI are purchased by a private consumer;

- for MACSI coming from non-EU countries, the importer.

Some examples of environmental taxes:

Carbon Tax

Carbon Tax

What is it?

A tool to reduce greenhouse gas emissions.

How does it work?

 By putting a price on carbon dioxide and other greenhouse gases that are emitted by businesses.

 It works by charging a fee for each ton of carbon dioxide or equivalent GHG that is released into
the atmosphere.

 This fee is designed to reflect the cost of the damage caused by the emissions, such as climate
change and air pollution.

In Italy a carbon tax was introduced with the art. 8 of the Law n. 448, on 23 December 1998, which
established increasing rates to be applied from the 1° January 2005, but in never entered into force.

The OCSE report on the environmental fiscal reform called «An Action Plan for Environmental Fiscal Reform
in Italy” (2021), envisages the introduction of a carbon tax of € 40 per ton of CO2 emitted in the first year of
the reform. The tax should increase of 10 €/ton every year. If it had been introduced in 2022, the rate
should have reached 60 €/ton in 2024 and 120 €/ton in 2030.

The Fiscal Monitor of the International Monetary Fund (2019): how much should the carbon tax be, in
order to reach the necessary level to limit global warming to 2° Celsius?  75 dollars per ton of CO2 within
the 2030.
 20-04-2023

PILLAR 1 & PILLAR 2

The epoch-making reform for the taxation of digital economy

1. Framework

Historically multinational enterprises (MNEs) benefited from a tax base shift from high-tax countries to
others with low or no tax burdens (“profit shifting”) thanks to the exploitation of “loopholes”in
international tax systems.

Based on this assumption, the BEPS (Base erosion and profit shifting) project established unique and
transparent rules, internationally shared with the aim of counteracting “harmful tax competition” which
has encouraged profit shifting without moving the “substance” of the economic activity.

The BEPS project, in order to ensure profits of multinational enterprises (MNEs) to be taxed in the country
where value is created, while considering cross-state tax competition as a still efficient tool for the correct
allocation of resources, is aimed to eliminate “double non-taxation” through a better coordination of the
different national tax systems that would remove tax “loopholes” within the traditional legal arrangements
of international tax law (permanent establishment and arm's length principle - ALP) based on the model of
the 'industrialist' multinational (brick and mortar model).

The development of the web economy, from one side, and the pandemic, from the other, have led to an
even more radical fight against cross-state tax competition tout court.

The solution proposed by the Inclusive Framework OECD/G20 BEPS (IF) comes from this new approach. In a
global and digitalised economy, the generation of profits is mainly driven by the possession of intangible
assets rather than by physically established and taxable industrial assets (properties, plants and
equipment’s).

The digital economy paradigm has challenged the traditional legal arrangement on which international tax
law was based (permanent establishment and arm's length principle - ALP) still based on the model of the
'industrialist' multinational.

On the one hand, Pillar One is aimed to reform the international tax rules in order to overcome the current
paradigm based on physical presence. At this purpose it recognise a tax right to countries where consumers
of goods and services over digital network are located introducing a new nexus and new profit allocation
rules based on the «Unified approach».

On the other hand, Pillar Two introduces 15% global minimum tax on MNEs to compensate taxation in the
parent company’s country of residence for income coming from countries with a tax rate lower than the
minimum.

From an economic policy perspective, global minimum tax is cornerstone of fair tax competition aimed to
stop the “race to the bottom” which has led countries to tax the less mobile factors, such as consumption
or labour, undermining their fiscal sovereignty. In this way, it will allow a more efficient allocation of
resources for investment in research and development (R & D) and for identifying countries in which
intellectual property is held, regardless of tax reasons.
Pillar 1: Introduction

Digital technologies and the globalisation of markets led to the splitting of value chains. In this context,
traditional international tax law institutions have lost their skill to intercept the new wealth produced
world-wide and to tax It properly. In this scenario, global firms need to implement global taxation.

Conscious of this new reality, the OECD adopted Pillar 1 introducing a new architecture of international
taxation (unified approach) changing the international tax paradigm:

• Global extra-profits are lump-sum and allocated to consumer jurisdictions;

• For routine and unallocated extra profits, the tax rules remain unchanged, including transfer pricing
according to the arm's length principle.

Therefore, transfer pricing rules does not appear to be definitively over. They lost their functions as a
benchmark in the context of the taxation of non-routine income and it took the function of contrary
evidence to resist the lump-sum determination of certain cost components.

The purpose of the OECD's Pillar 1 Blueprint is to ensure that a country can tax non-resident companies
that not having a physical presence in that country (plants, offices, facilities, etc.) but earns revenues
through online transactions with customers tax resident in that country.

The mechanism underlying Pillar 1 consists of several key elements grouped into three components:

i. Amount A, setting new taxing right for market jurisdictions where digital businesses maintain an
"active and sustained" participation;

ii. Amount B, setting fixed return for marketing and distribution activities;

The establishment of Tax Certainty instruments based on dispute avoidance and resolution mechanisms.

Pillar 1: AMOUNT A – Scope of application

Amount A aims to identify the share of "non-routine" profits to be allocated to the consumer jurisdiction,
using a formula-based approach relying on the consolidated accounts. The amount exceeding these profits
will correspond to non-routine revenues, to be taxed in the country where the firm is tax resident.

Before Amount A can be finalised and implemented, it will be necessary further political and technical
negotiations among the members of the IF to define the following particular issues:

a) The Scope: to minimise compliance costs and keep the new rules manageable for tax
administrations, Blueprint defines two thresholds that should be met for the MNE group's activities
to fall within the scope of Pillar 1:

 The first refers to global revenues of the MNE group. At this purpose, there may be an
advantage in using a threshold below the current limit of EUR 750 million adopted for the
Country-by-Country reporting (CbCR)

 The second threshold, by analogy with the provisions of the proposed EU digital tax
directive and the individual national taxes on digital services, refers to revenues generated
in the single country. (The former Italian Digital tax sets 50 million revenues at the EU level
and 5,5 million at the Italian level)
 b. The determination of the residual profit portion (The Quantum) to be allocated to the market/user
jurisdictions as Amount A and the criteria by which this amount should be calculated. This process
includes issues concerning:

• how to regulate loss carry-forwards;

• how to eliminate double taxation.

c. The transposition of Pillar 1 into national law. This objective could be achieved through a
multilateral convention process that would replace all bilateral treaties on this point.

In qualitative terms, the Blueprint identifies two categories of activities:

o Automated Digital Services (ADS);

o Consumer-Facing Businesses (CFB).

The scope of those services covers almost the entire spectrum of activities except for a few specifically
identified exclusions.

Pillar 1: AMOUNT A – Automated Digital Services (ADS)

Automated Digital Services (ADS) are made available to users through digital channels with automated
access, minimising human involvement by equipment and systems in place for this purpose.

The general definition of ADSs consists of a positive list of nine activities that qualify as ADSs and a negative
list of five activities to which this qualification cannot be attributed. The positive list of ADS activities
includes:

• Online advertising services on social media platforms;

• Monetising user data generated on a digital interface;
• Advertising on (i) Online search engines; (ii) Social media platforms; (iii) Online platforms for the
intermediation of goods and services;
• Automated supply of digital content (e.g. music items, films, books, etc.) except of the purchase of
(i) products on a physical medium; (ii) highly personalised software;
• Online gaming platform;
• Online teaching services;
• Cloud computing.

On the other hand, the negative list of ADS activities includes:

• Customised professional services;

• Customised online teaching services;
• Online sale of services other than ADS:
• Online sale of «Internet of things» (tangible goods connected to the web);
• Internet service providers
Pillar 1: AMOUNT A – Consumer Facing Businesses (CFB)

The consumer-facing services (CFB) includes non-digital enterprises selling their goods or services through
the web. This category covers services:

• primarily designed for sale to consumers

• made available for personal consumption;

• to be provided to consumers through market research using consumer/user data or providing

consumer feedback or support services.

The following activities qualify as CFBs:

• Over-the-counter drugs (OTC) freely consumed/used by individuals, excluding those subjects to

medical prescriptions;

• Companies selling consumer products indirectly through third-party resellers or intermediaries

(franchising and licensing);

• Dual-use goods and services to be sold both to consumers and businesses. For example, cars,
personal computers and some medical equipment (such as blood pressure monitors).

• Intermediate products and components incorporated into a finished product sold to final
consumers.

The following activities do not qualify as CFBs :

• Natural resources such as oil and minerals, renewable energy products (biofuels, biogas, green
hydrogen) and agricultural, fish and forestry products;

• Financial Services subject to regulatory supervision;

• Infrastructure and construction activities;

• International aviation and shipping companies

Pillar 1: AMOUNT A – Profit Allocation

Amount A would be based on a three-step approach:

• Step 1 would define a profitability threshold above which the actual profits of the MNE will be
considered as residual profit;

• Step 2 would define the reallocation percentage of the "residual profit" allocable to single market
jurisdictions;

• Step 3, practical allocation of tax base to eligible market jurisdictions taking into account scope,
nexus and sourcing rules of the revenue.

Following the allocation, it will be necessary to ensure that individual entities are not taxed twice on the
same profits reflected in Amount A. To prevent double taxation the OECD proposes to allow each
jurisdiction to choose between the use of the credit method or the exemption method.
Pillar 1: AMOUNT B – Scope

Pillar 1 defines Amount B as a ''fixed remuneration for certain basic distribution and marketing activities
that physically take place in a market jurisdiction''; it is proposed as a solution to the long-standing
discussions on transfer pricing of distribution and marketing services. In this respect, the OECD proposal
would provide a "fixed return" for such activities.

The purpose of Amount B is twofold:

i. First, it aims to approximate the results the arm’s length principle (ALP) application through the net
transactional margin method (TNMM), calculated on a net return on sales (OECD Transfer Pricing
Guidelines of 2017);

ii. Second, Amount B intends to improve tax certainty and reduce disputes between tax
administrations and taxpayers by simplifying the administration of transfer pricing rules and
thereby reducing compliance costs for both.

The Blueprint proposes that Amount B operates under a "rebuttable presumption". Therefore, distribution
entity will have to apply Amount B unless the taxpayer can provide contrary evidence that another transfer
pricing method is more appropriate.

From a subjective point of view, legal entities and permanent establishments carrying out "basic marketing
and distribution activities" fall within Amount B's scope.

Therefore, if distributing entity purchases goods from a related foreign party for resale but does not carry
out sufficient "core marketing and distribution activities", the transaction does not fall within Amount B's
scope, and the ALP should apply.

Pillar 1: AMOUNT B – Nexus rules

Technology enables digital companies to generate revenues outside their country of residence through
remote sales. In this the jurisdiction of the consumer should adopt new nexus rules (the "significant digital
presence”) to exercise the taxing power.

According to the Blueprint, the nexus rules may differ depending on whether the MNE's activities include
services that qualify as ADS or CFB. In particular:

• For ADS services, a market revenue above a certain threshold would be sufficient to establish the
link between the MNE and the single jurisdiction, creating a taxing right for that Country.

• For CFB services, revenues above a certain threshold (potentially different from the market
threshold for ADS), possibly supplemented by one (or more) "additional factors", may be necessary
to establish a jurisdiction's entitlement to taxing rights participation. The Blueprint suggests several
alternative "additional factors” which invoke a test of the "physical presence" of the MNE (i.e.,
whether an MNE has a branch or permanent establishment in a specific jurisdiction).
Pillar 1: REVENUE SOURCING RULES

Revenue sourcing rules are aimed at identifying which revenues qualify to be considered as deriving from a
particular market or jurisdiction. They are set out differently for ADS and CFB services and are presented in
a hierarchical order.

SOURCE OF ADS REVENUES

To identify the source of ADS revenues, a MNE’S should rely on objective factors independent from user
input (e.g. geolocation and IP address). Those information could often prove difficult, especially in countries
where VPN use is widespread. That’s why, a hierarchy of sourcing rules has been introduced, allowing
recognition to be based on some more manual inputs, such user profile information, billing address,
domicile and profile information. The Blueprint provides some relevant indicators by type of revenue:

• Online advertising services on social media platforms à IP address jurisdiction or, if the foregoing
are not available, by other information such as billing address, mobile phone country code or
information entered by the viewer into the system;

• Monetising user data generated on a digital interface à residence location. However, if the real-
time location is the critical data point that advertisers are interested in, geolocation might be a
more appropriate measure;

• Advertising on (i) Online search engines; (ii) Social media platforms; (iii) Online platforms for the
intermediation of goods and services à geolocation of the device, IP address jurisdiction or, if the
foregoing are not available, by other information such as billing address, mobile phone country
code or information entered by the viewer into the system;

• Automated supply of digital content (e.g. music items, films, books, etc.) except of the purchase of
(i) physical products; (ii) highly personalised software à geolocation of the device, IP address
jurisdiction or, if the foregoing are not available, by other information such as billing address,
mobile phone country code or information entered by the viewer into the system.

SOURCE OF CFB REVENUES:

• Revenues from goods sold directly to customers  the place of final delivery to the customer;

• Revenues from goods sold through an independent distributor  the place of final delivery of the
good to the consumer;

• Revenue from consumer services  the place of use of the service (For example, in the case of
tourism, the revenue sourcing rule would identify the location visited). If the service is rendered
online, the revenue sourcing rule is the ordinary residence of the consumer.

• Revenue from franchising and licensing  the sourcing rule is the place of delivery of the good.
Thus, for (i) franchising activities related to services, or for (ii) intellectual property licensing
agreements the sourcing rule is the place of delivery of the service.

DOCUMENTATION:

Provided that usually MNE has a robust internal control framework on which the tax authorities can rely,
there is no specific requirement to keep particular records of individual users' geolocation information, IP
addresses, and other information. The system should extract the aggregate location information - at the
jurisdictional level - included in the different sources of information.
Pillar 1: TAX BASE

The Blueprint rules aim to minimise additional compliance costs and administrative burdens for both
taxpayers and tax authorities. Therefore, the starting point for Amount A's calculation will be the Profit
Before Taxes (PBT) resulting from the IFRS compliant consolidated financial statements of the multinational
groups concerned. Other GAAP will be allowed, provided it does not lead to material distortions in Amount
A's calculation. The Blueprint notes that the GAAPs already considered permissible cover around 90% of
MNE groups with consolidated revenues above EUR 750 million and profitability above 10% for 2016.

For the calculation of the tax base of Amount A, it will be necessary to exclude from the PBT:

• income tax expenses;

• dividends;
• share-related gains or losses;
• expenses not deductible for corporate income tax purposes.

Pillar 1: TAX BASE – Segmentation

For some groups, it may be necessary to calculate the Amount A tax base on a segmented geographical or
industry basis. The segmentation framework is based on a three-step process by which MNEs:

1. Will split the income between ADS, CFB and out of scope activities.

2. with global revenues below an amount not yet defined will benefit from a "segmentation
exemption".

3. that do not qualify for the exemption will segment their tax base through "segmentation criteria”
still to be defined.

Taxpayers may split revenues between ADSs, CFBs and out-of-scope, but it may not be possible to calculate
the net profits attributable to these individual activities. At this purpose, the Blueprint recognises the
possibility of using the consolidated profit margin as an estimate of the in-scope profit margin and applying
it to the in-scope revenues.

Pillar 1: TAX BASE - LOSS CARRY FORWARD

Losses generated in a given fiscal year under Amount A will not be allocated to market jurisdictions but will
be set aside in a single account for each relevant segment and carried forward to the following years.
Therefore, no profit under Amount A will arise for that segment (and be reallocated to the markets) until
the historical losses carried forward in that account have been fully absorbed. This regime will be separate
from any existing national loss carry forward rules and include specific rules to deal with corporate
reorganisations and anti-avoidance situations.

Some specific aspects of the loss carry forward rules need to be refined:

• the inclusion of a transitional regime for losses incurred before the introduction of the Amount A
regime (i.e. pre-regime losses);
 • whether the Amount A regime should apply only to economic losses or whether it should also
consider situations where the profit of a group/segment is below the relevant profitability
threshold (i.e. profit losses).

Pillar 1: PROFIT ALLOCATION

The success of Pillar 1 will depend on the ability of the IF countries to reach a consensus on a standardised
and easy-to- administer approach to both defining and implementing the Amount A formula. This approach
should provide tax certainty, limiting (i) both unnecessary burdens on taxpayers and (ii) double taxation
instances.

To allocate Amount A’s share to jurisdiction in which the market interest is located will be necessary to
amend Articles 5 (Permanent establishment), 7 (Business profits) and 9 (Associated enterprises) of the OECD
Model, presumably by exploiting the high potential of the BEPS Multilateral Convention (MLI).

The combination between Amount A and current profits taxed under the local jurisdiction could lead to
double taxation of the same profits. In this respect, the Blueprint proposes "safe harbour" mechanisms to
identify an upper limit to the amount of profits to be taxed. Here again, the matter is still subject to
negotiation.

Pillar 1: TAX CERTAINTY

Tax certainty is the cornerstone of Pillar 1 and is at the heart of the Blueprint, which includes innovative
dispute avoidance and resolution mechanisms.

The new right to tax will be determined based on the application of a formula to a newly defined tax base,
corresponding to a portion of the residual profit of the in-scope activities of large multinationals.

The Blueprint incorporates a mechanism to ensure that applying the new taxing right to a particular
multinational group is agreed between all interested jurisdictions. In this respect, a panel between the tax
administrations and the MNEs is to be set up to agree on:

1. the determination of the tax base, in cases of segmentation of business lines;

2. the criteria for applying the formula;

3. any other features of the new tax law, including paying entities and the elimination of double
taxation.

Pillar 1: CONCLUSION

Pillar 1 regulates the multinational group as a unitary enterprise and a portion of its worldwide profits
are allocated to market jurisdictions.

This approach is physiological concerning globalisation, which has generated internationally articulated
value chains requiring a global tax approach. In this context, the ALP is not completely waived but is
secondary to the Pillar 1 formula. Evaluations resulting from applying Pillar 1’s formula will not deviate from
"reality": neither the formula nor the ALP represent the exact definition of value. They represent different
approximation tools. On the other hand, the underlying Pillar 1 the practice of rulings in favour of MNEs
should disappear.
Pillar 2: INTRODUCTION

In order to ensure minimum taxation at the international level, Pillar 2 provides for a new system of rules
assigning to one state the tax rights that another State does not exercise to ensure minimum level (15 %) of
global taxation for multinational enterprise groups (MNE groups). To this purpose, Pillar 2 provides for the
introduction of:

a) the global minimum tax system (GloBE rules) consisting of two rules to be adopted by every single
jurisdiction: the Income Inclusion Rule (IIR) and the Undertaxed Payment Rule (UTPR)

b) new provisions to update the double-tax treaties (DTT) in order to introduce the Subject to Tax
Rule (STTR) which gives the source jurisdictions the right to levy limited taxation on certain
payments made to related parties subject to taxation below the minimum rate.

Pillar 2: THE GLOBE RULES: THE INCOME INCLUSION RULE (IRR)

The IRR gives to the ultimate parent company jurisdiction (UPE) of a multinational group the right to tax
income from other jurisdictions which in exercising their tax sovereignty, have chosen to reduce or cancel
their tax claims.

Once a jurisdiction has been identified as a sub-taxed (i.e. when its effective tax rate (ETR) is lower than the
minimum tax (15 %), the difference between the latter rate and the former rate, expressed as a percentage,
is applied to the share of income of the parent entity appropriately identified. For example, if a fully
controlled company “X” has an ETR of 10 %, the 5 % supplementary tax should be levied from the parent
company’s level on the under taxed income of the subsidiary “X”.

Pillar 2: THE GLOBE RULES - UNDERTAXED PAYMENT RULE (UTPR)

The UTPR shares with the IIR the aim of protecting jurisdictions from erosion of the tax base through
intragroup payments to entities resident in low-tax countries. To this purpose the UTPR acts in a
complementary way by providing the IRR with the appropriate backstop.

In fact, while (i) the IIR provides for the application of a complementary tax in the country of the UPE,
calculated on the income coming from controlled entities incorporated in low-tax countries (ii) the UTPR
limits the deductibility of outgoing payments to controlled entities resident in foreign countries that do not
fall within the scope of the IIR, until the minimum tax rate is reached. The non-deductibility of costs makes
the UTPR more restrictive than the IIR, as it does not give any tax credit.

Pillar 2: THE GLOBE RULES - SUBJECT-TO-TAX RULE (STTR)

The STTR aims to protect the tax base of countries with limited administrative capacities against cross-
border mechanisms that rely on intra-group payments and that, by exploiting certain treaty provisions, shift
profits from source countries to jurisdictions where such profits are subject to no or low nominal tax rates.

The STTR applies only to particular payments made between related parties that are characterised by a
high risk of base erosion and shifting (e.g., payments relating to interest, royalties, other payments for
mobile factors such as capital, assets or risks, franchise fees or other payments for the use or right to use
intangibles in combination with services - payments for the use of software where the supplier also
provides ancillary support - insurance or reinsurance premiums, guarantee, brokerage or financing fees,
rent or any other payment for the use of movable assets, payments for services such as marketing,
procurement, agency or other intermediary services where their value derives primarily from the use of an
intangible asset (e.g., a customer list).

Pillar 2: THE SUBJECT TO TAX RULE

The premise behind the Subject to Tax Rule is simple; namely, where a jurisdiction does not exercise its
taxing rights over the receipt of certain payments to an adequate extent, the jurisdiction of the payer has
the right to claw back those taxing rights, negating in part the relief it allows for the deduction of the
payment for local tax purposes.

The Subject to Tax Rule only applies to particular covered payments made between connected persons.
Covered payments are those that are perceived to carry heightened base erosion and profit shifting risk:

• Interest;
• Royalties;
• Other payments for mobile factors such as capital, assets, or risks:
o Franchise fees or other payments for right to use intangibles in combination with services
(e.g. payments for the use of software where the provider also provides ancillary support);
o Insurance or reinsurance premiums;
o Guarantee, brokerage or financing fees;
o Rent or any other payment for the use of right to use moveable property;
o Payments for services such as marketing, procurement, agency or other intermediary
services where their value primarily derives from the use of an intangible asset (e.g. a
customer list).

SUBJECT TO TAX RULE: NOMINAL RATE TRIGGER, TOP UP APPROACH.

The Subject to Tax Rule would apply where the recipient of a payment is subject to tax at an amount less
than the nominal trigger rate. Where the rule applies, the payer jurisdiction would impose a 'top-up'
withholding tax (For example a tax system that applies a 20% CIT rate but exempts 80% of all royalty
receipts. Here the Blueprint considers that the rate applied to royalties is 4%. As this is below the 7.5%
nominal trigger rate used for illustrative purposes, tax equal to 3.5% of the payment can be collected by the
payer's jurisdiction).

IMPLEMENTATION

The Blueprint acknowledges that both the Subject to Tax Rule and the Switch-Over Rule would require
changes to existing bilateral tax treaties. These could be implemented through bilateral negotiations and
amendments to individual treaties or more efficiently through a multilateral instrument. Mutual agreement
procedures could then apply to any disputes arising. However, the Income Inclusion Rule and the
Undertaxed Payment Rule could be implemented just through changes to domestic law.

The Inclusive Framework will also explore the development of a multilateral convention which could
contain provisions for dispute prevention and resolution concerning the application of the GloBE rules as
well as provisions for exchange of information between tax administrations.
Pillar 2: THE GLOBE RULES - COORDINATION OF GLOBE AND STTR RULES

To summarise how the rules are coordinated, it is envisaged that the top-up tax is to be levied primarily
through the IIR in the UPE jurisdiction. If this jurisdiction does not implement the GloBE rules, a top-down
approach in the participation chain will be pursued, with some exceptions introduced for anti-avoidance
purposes.

Where top-up taxes cannot be levied in the UPE low tax country, the UTPR would be applied in the state(s)
of origin.

The UTPR thus seeks to tackle the relocation of corporate headquarters to countries without an IIR, as well
as to ensure that profits in the UPE jurisdiction would be subject to the GloBE Rules.

Pillar 2: THE GLOBE RULES - SCOPE OF APPLICATION

The GloBE Rules target multinational groups that have achieved in at least two of the four fiscal years
immediately preceding a total consolidated turnover of more than € 750 million. This threshold has been
chosen, as it is closely linked to the “Country by Country” (CbCR) reporting obligations; it therefore ensures
the exclusion of small and medium-sized enterprises (SMEs), which would otherwise face significant
administrative problems.

Jurisdictions does not meet the following de minimis thresholds are excluded when determining the
group’s minimum taxation:

a) the average GloBE income of this jurisdiction is less than EUR 10 million; e

b) GloBE’s middle income or loss of that jurisdiction is a loss or is less than EUR 1 million.

Pillar 2: THE GLOBE RULES - LOSS CARRY FORWARD IN THE CALCULATION OF THE ETR

Under the GloBE Rules losses:

i. can be carried forward in perpetuity and can be carried back if the jurisdiction in which they arise
allows it for local tax purposes;

ii. are not subject to the restrictions on tax loss carry-forwards in domestic law.

In this respect, losses carried forward are only taken into account in a jurisdiction's GloBE base if its ETR is
below the minimum rate. Thus, if losses are used for local tax purposes, but the ETR remains above the
minimum rate, such losses would apparently remain available for use in future periods for GloBE purposes.

Pillar 2: THE GLOBE RULES – ENTRY INTO FORCE

The entry into force of:

- the income inclusion rule (IIR) would apply in tax years beginning on or after 31 December 2023;

- the UTPR in tax years beginning on or after 31 December 2024.

 21-04-2023

Barilla Tax Strategy

Tax certainty

► The existence of a TCF is one of the requirements to enter into the Cooperative Compliance regime,
Barilla has been admitted to on July 5th, 2018.

► Through the preventive comparison with Tax Authority, Barilla can obtain certainty about the
proper interpretation on tax issues before/during the business course and avoid following tax
disputes.

Minimize Tax Risk

► Allow the company to monitor and manage tax risk on an ongoing basis.

► Identify risks in a preventive manner and then address specific control points.

► Guarantee the effectiveness of company policies and procedures and insure periodic updates

Tax Efficiency

► Cost saving in the management of tax audit both in economic terms (consultants) and resources
(FTE).

► Opportunity to gain the maximum benefit thanks to the previous sharing of the best scenario for
the company with Tax Authority.

► In case of discrepancy with Tax Authority, possibility of benefiting from reduced tax penalties.

Good reputation

► The implementation of the TCF and the admission into the Cooperative Compliance regime has
increased the image of Barilla as a virtuous company from also the tax perspective.

► Improved relations with Tax Authority  involvement in other projects such as ICAP, APA, which
are based on prior agreements with Tax Authorities.
Key words for Tax Team 4.0

 TAX CERTAINTY

o TCF and Fiscal Transparency

o Benefit in using the advance relations and preventive agreements (Cooperative Compliance, ruling,
APA, BAPA, ICAP)

 STABILITY

o Initial tax savings

o Proactively avoid risk - disputes / litigation

o Effective tax rate under control

 NO DOUBLE TAXATION

o It must not represent an entrepreneurial risk

 TAX OPPORTUNITIES

o Optimization of the tax burden in this new scenario

Tax approach

Key points

 Business partners;
 Development of tax awareness in the Group;
 Domestic and international support;
 Consulting network for each foreign jurisdiction and for specific topics (TP, duties and customs, VAT);
 Division of activities in the team:
• Project activity 60%
• Day-by-day activities 40%