Austria’s Hans Jörg Schelling Eyes EU Digital Tax Rules

Austrian Federal Minister of Finance Hans Jörg Schelling has not held back on his views of how to tax multinational corporations so they pay their fair share. He talks to Anjana Haines about what he has planned over the coming year.

2 October 2017

Schelling has declared that Austria holds the answer for taxing multinational digital companies across the EU, suggesting the virtual permanent establishment (PE) rules could be key. He has also not held back when he believes sufficient progress is not being made. His latest attack has been directed at Ireland, saying he is keen to exhaust all bilateral opportunities for achieving rapid results on how to tax digital companies.

"Since Ireland currently hosts the most important digital companies operating in Europe, power to negotiate the double taxation agreement with Ireland forms a key component of the plan to close tax evasion routes," he said in a recent press statement. "The objective of these negotiations is to incorporate the concept of a digital office in the double taxation agreement with Ireland in order to enable corresponding taxation of 'digital' profit in Austria."

"This marks a further important stage in our plan to close tax loopholes," Schelling concluded.

Sharing his views on how to tax borderless businesses, the finance minister tells International Tax Review what he plans to do if his political party wins the next general election in October, and how he plans to change the EU tax landscape when Austria takes on the EU Council presidency in July 2018.

Anjana Haines: You said in a recent press statement that Austria has been a "pioneer" in implementing national measures against multinational profit shifting. What have you achieved so far and how?

Hans Jörg Schelling: The battle against multinational base erosion and profit shifting (BEPS), international tax avoidance and tax fraud has top priority for the Austrian Ministry of Finance. Thus, in the last few years Austria has taken a number of steps in this area in order to avoid such practices. Among others, there are a few I want to point out:

1) In order to limit BEPS by interest and royalty payments, in 2014 Austria implemented rules which limit the deductibility of interest or royalties paid to associated companies if the interest/royalties are not adequately taxed at the level of the recipient.

2) In 2015, profound changes were made to the Austrian exit tax rules in order to avoid profit shifting especially by IP transfers to low-tax countries. Thus, the possibility to defer exit taxation in case of an exit and relocation to another EU/EEA member state until the actual sale of the transferred assets was replaced by an instalment payment concept.

3) In 2016, a special unit was established for transfer pricing. It is aimed at preventing profit shifting to low-tax countries by means of value chain shifting, economic goods shifting, intercompany credits, service shifting, loans, research transfer pricing, etc. and implementing uniform standards for inter-company settlement in Austria.

4) In addition, a separate audit team of experts specialising in international matters was formed, known as the Task Force Offshore.

AH: Do you think the OECD's BEPS Action Plan goes far enough to tackle MNE tax practices?

HJS: I think the OECD is on a good track to tackle many of the challenges. What is happening now is that the OECD develops clear principles on the taxation of the digital economy. Austria supports the idea that companies operating within the digital economy should be taxed in the states where they create value. From an Austrian perspective the taxation of the digital economy should go further than the former brick-and-mortar-PE concept.

AH: How do you propose implementing EU rules on virtual permanent establishments?

HJS: The current definition of a permanent establishment which is used as a key point of reference for the allocation of taxing rights among countries is not suitable for the digital economy. A virtual permanent establishment should therefore be established if a significant virtual presence exists.

I would prefer an internationally agreed solution on the taxation of digital enterprises – among the member states of the EU and beyond within the OECD. Nevertheless, a common European position should already be aligned and represented within the OECD.

Needless to say, I'm open to ideas and alternative approaches when it comes to meeting the challenges of the digital economy.

AH: I understand that you are pushing the EU authorities to expedite the pace of development on a common European tax strategy. What measures would you like to see happen very soon and why?

HJS: As a small economy Austria has a particular interest in a proper functioning of the internal market. This, of course, requires a common EU tax strategy.

The main outstanding issues are: facing the challenges of digital economy and the adoption of the common corporate tax base (CCTB) directive.

In addition, tackling tax avoidance and evasion has to be an important task of the European Union. The fundamental freedoms and the internal market require a common instead of a unilateral approach.

AH: Where do you stand on plans to introduce a common consolidated tax base (CCCTB) and what would you say to those countries that do not want to see it implemented?

HJS: Austria supports this project since it should bring about a significant reduction of compliance costs for businesses operating in more than one country and create an internal market in terms of taxation. An attractive common corporate tax base will enhance competitiveness of the EU as a whole and will attract third country companies to invest and do business in the EU. After having implemented the CCTB as a first step, the consolidation should be tackled in a second step in order to reach the CCCTB.

AH: If all major tax issues are tackled by the EU soon, what will you be focusing on when you take over the six-month EU presidency from July 2018?

HJS: As a guideline for Austria's EU presidency I have developed a plan consisting of the following key topics:

Since Austria would like to be an international pioneer in the area of digital economy, it will put the focus on developing detailed rules for the creation of virtual permanent establishments.

Moreover, Austria will actively support the further development of a common corporate tax base, since harmonising tax bases within the EU would create a transparent system which allows fair and transparent tax competition.

Since Austria has decided to play a leading role in the prevention of BEPS and international tax fraud, I will continue to promote these plans during Austria's EU presidency. For example, the establishment of a common European model for double taxation conventions with low-tax jurisdictions is on my tax agenda. By changing the method for elimination of double taxation from the exemption method to the credit method, higher tax revenues will be generated.

Regarding value-added tax, I propose a cross-border exchange of VAT data and VAT on all mail-order sales, meaning that VAT should be paid on all (online) orders from countries outside the EU. The previous exemption for low-value goods should be removed, in order to ensure competition on an equal footing for domestic companies.

AH: On a separate note, with the UK's exit from the EU looming, does Austria stand to benefit at all from this change? And how?

HJS: Of course nobody is happy about Brexit. The actual consequences will depend on the outcome of the negotiations. The European Union will make sure that the United Kingdom will fulfil all of its obligations and that there is no cherry picking.

However, as to possible benefits it is important to keep in mind that there is tax competition within the European Union and with third countries.

I'm convinced that Austria could benefit from its membership of the EU and its attractive tax system. Tax advantages like our group taxation scheme, no wealth and inheritance tax or research promotion incentives are just some of the benefits. In addition, Austria is a highly attractive business location that offers stability and security in all aspects, highest quality of life, excellent infrastructure, a central location, high productivity and top qualified employees.

AH: Looking ahead, Austria is gearing up for a general election in October. If your Austrian People's Party wins, what is on your tax agenda for multinational and cross-border businesses during your next term in office?

HJS: Beyond the election date we will be dedicated to work on all the issues of the plan already mentioned to eliminate opportunities for tax avoidance and evasion. Finding national and international solutions in this area are therefore the focus on my agenda as well as the national implementation of the EU Anti-BEPS Directive, since essential parts of this directive have to be implemented by 2019.

It also will remain an important goal to strengthen Austria as a business location. This includes the implementation of rules that increase the attractiveness of the country, create more legal certainty and reduce the administrative costs for entrepreneurs and tax administration.

The above article was published on on October 2 2017 and has been republished with the approval of the Publisher.