Austria - Beyond Mozart & Chocolate
By Imke Gerdes
Posted: 19th September 2013 08:18On a global scale, the last years were characterised by the economic crisis, which prompted discussions on the level of the OECD, the European Union and the UN on rightful taxation and ensuring that countries get their fair share in revenue. The most significant developments, the fight for transparency and against unfair tax competition, resulted in the OECD Report on Base Erosion and Profit Shifting ("BEPS"). The BEPS Report focuses amongst other things on the tax aspects of mismatches in entity and instrument characterisation, transfer pricing and the availability of harmful tax regimes. Like any other country, Austria was and is affected by these developments.
1. Tax Transparency
For many years, Austria has been a proponent of tax transparency. The Austrian tax authorities were very much in favor of conducting simultaneous audits and exchanging information with other European tax administrations. Because of domestic legal restrictions, the exchange of information happened in a more general way, sharing their experience of which "schemes" companies would employ to lower their effective tax rate. In many instances the structures discussed by the tax authorities and considered "schemes", usually were proper planning applying the OECD Transfer Pricing Guidelines. However, many of these discussions lead to the authorities aligning their approach when auditing a tax payer.
The general shift to tax transparency and exchange of information not only impacted Austrian corporate tax payers but also resulted in a series of tax agreements affecting individuals that have deposited their funds in a Swiss or Liechtenstein bank account. Austria has concluded agreements with Switzerland and Liechtenstein forcing Austrian individuals that have a bank account in one of the countries to declare these accounts and the respective income. The goal of the agreements is to tax undeclared funds that had been transferred to a Swiss bank account in the past and to ensure future proper taxation of funds located in Switzerland. Under the agreement, the tax payer had two choices: (i) apply the Rubikon agreement and agree to a lump sum taxation on an anonymous basis, or (ii) file a voluntary self disclosure and allow the bank to notify the tax authorities thereof. To date, Austrian tax payers with a total amount of undeclared funds of supposedly EUR 4.4 billion have notified their banks to inform the Austrian tax authorities under the Austrian-Swiss Rubikon agreement of these funds. The deadline for choosing to either filing a voluntary self disclosure, or applying the Rubikon Agreement was 31 May 2013. In total, it is estimated that undeclared funds in the amount of EUR 20 billion are deposited in Switzerland and the Austrian revenue expects additional income tax of roughly EUR 1 billion. Whereas the agreement with Switzerland already entered into force in 2013, the agreement with Liechtenstein is expected to take effect as of 2014.
2. The BEPS Report and the Austrian Answer
The general developments surrounding profit shifting and the public outrage that was first voiced in the UK, did not leave Austria unaffected. However, it has to be noted that many of the developments summarised in the BEPS report have already been tackled by the Austrian legislator and the tax authorities in prior years. For example, already as of 1 January 2011 the participation exemption is no longer applicable to payments made to an Austrian company if those payments are deductible as business expense in the country of the payor. This provision is designed to catch hybrid instruments that are considered a (tax exempt) dividend on the level of the payee but a (tax deductible) interest payment on the level of the payor. One issue the OECD has mentioned in the BEPS Report as pressure point and that is dealt with by other countries only now (Germany has implemented a similar law like Germany with effect as of 2014).
Further, already in past years the Austrian tax authorities have viewed business reorganisations, whereby an Austrian distributor is converted into a commissionaire or a limited risk distributor, very critically. Despite various court decisions from the French (Zimmer case, Conseil d'Etat, No 304715, 308525) and Norwegian (Dell case, HR-2011-02245-A) courts, the Austrian tax authorities always took the view that the converted commissionaire or limited risk distributor most likely is a dependent agent and therefore constitutes a permanent establishment for the foreign principal. Meanwhile the OECD also attended to this issue and revised Article 32.1 of the Commentary to the OECD Model Tax Convention 2010 in its Revised Proposal Concerning the Interpretation and Application of Article 5 (October 2010-January 2013), and included an example on dependent agents. It concluded that the same could be given, if a person only factually binds the principal versus legally binding the latter. Consequently, structures using commissionaires or limited risk distributers are at high risk of creating a permanent establishment and the Austrians now find support of their view in the OECD.
3. General Comments and Audit Environment
In general, there has not been much legislative change in the past and this is not expected to change in the near future. 2013 is election year in Austria and as usual, provisions like the cross border group relief were discussed by the parties and their candidates during the election campaign, but remained untouched. Practitioners do not expect this to change after the election. However, one noticeable change is the audit environment tax payers find themselves in. Austria was known for conducting audits in a rather agreeable atmosphere that was characterised by the mutual interest in finding a reasonable solution. In the past years, this audit environment has changed dramatically and one notices a much more aggressive approach. As any European country, also Austria has taken a hit in tax revenues because of the global crisis and one cannot avoid getting the impression that the goal when opening an audit is to end it with collecting additional tax payments. This development is particularly visible in transfer pricing audits, which are usually conducted by a special audit team focusing solely on transfer pricing. Whenever a tax audit turns into a transfer pricing audit, tax payers may expect a lengthy procedure that encompasses comprehensive information requests and benchmark studies prepared by the authorities that sometimes leave the feeling of being result driven.
However, many of these developments can be seen in many countries and do not single out Austria. Overall, Austria is a country with a stable tax legislation that allows for tax planning. It is not expected that this will change any time soon.