Complaints against Norway relating to reporting obligations when contracts are given to non-resident contractors

1.  Introduction
We refer to previous correspondence, inter alia our letter 19 February 2016 in which the Ministry of Finance informed that it has initiated a legal review of the reporting legislation in the Norwegian Tax Assessment Act (TAA) § 5-6 and Regulation on Third Party Reporting Obligation ("Third Party Regulation") § 5-6-1- to § 5-6-6. 

The Ministry wishes to update the Authority on the progress of the legal review.

 2.  Discussion paper 11 October 2016
As explained in our letter 19 February 2016, the Ministry of Finance requested the Norwegian Directorate of Taxes to put forward amendmentsto the reporting regulations. The Norwegian Directorate of Taxes submitted its report to the Ministry 13 July 2016. Based on an assessment of the report, the Ministry 11 October 2016 published a discussion paper proposing several amendments to the reporting obligation.

The discussion paper and other relevant documents may be downloaded from the webpage:
https://www.regjeringen.no/no/dokumenter/horing---forslag-om-endring-av-reglene-om-rapportering-av-utenlandske-oppdragstakere-og-arbeidstakere-til-sentralskattekontoret-for-utenlandssaker/id2515389/

Please observe that the case contains of the following documents:

• Letter from the Ministry of Finance 11 October 2016
• Discussion paper from the Ministry of Finance 11 October 2016
• Report from the Norwegian Directorate of Taxes 13 July 2016
• List of bodies invited to submit their observations on the discussion paper

The following paragraphs hold a summary of the discussion paper and enhancement of certain parts of the proposal.

Sections 1 and 2 contain a summary of the proposed amendments and an overview of the current legislation.

Sections 3 and 4.1 contain an assessment of the objectives that has to be taken into account when framing the future reporting system. The Ministry notes that the objectives of fiscal supervision etc. have to be balanced with the objective of reducing compliance cost for the relevant parties. Further, The Ministry observes that the reporting system must comply with EEA-law.

Sections 4.2 to 4.6 contain a more detailed presentation of the proposed amendments.

The Ministry proposes to continue the basic principles of the existing legislation, which inter alia implies that a principal – at an outset – has to report information on any non-resident contractors and subcontractors in the contract-chain. The reporting obligation shall apply to all business sectors. However, the Ministry proposes several amendments which aim at repealing the reporting obligations in situations where it may be difficult for the obligated parties to provide the requested information or situations where the need for information, i.e. the need for fiscal supervision etc., is not as extensive as it normally is.

Firstly, the Ministry proposes to repeal the existing exception form reporting obligation when contracts are performed on site that is under the client's control. Indeed, it is true that this proposal – if one looks at it isolated – extends the scope of the reporting obligation. However, this existing exception shall be replaced by a rule that implies that the reporting obligation only comprises information on two contractors in the contract-chain, cf. section 4.2. For instance, in a contract-chain consisting of principal A, contractor B and the sub-contractors C, D, E and F, A is only obligated to give information on B and C (not D, E and F), B is only obligated to give information on A, C and D (not E and), while C is only obligated to give information on B, D and E (not A and F).

It must be assumed that the proposed limitation will ease the burden of fulfilling the reporting obligation. From the principal's point of view, it is more difficult to keep control of, and collect information from, sub-contractors several steps below in the contract-chain than it is to collect the same information from its own contracting parties and one sub-contractor.

We stress that the limitation shall apply on a general basis, i.e. that it applies to all contracts regardless of the sort of business sector and where the business is performed. By contrast, the existing exemption for contracts which is not performed on a site that is under the principals control, does not apply to contracts performed in the continental shelf or contracts or on a site of building or assembly work.

Secondly, the Ministry proposes to raise the threshold exempting contracts with low contracts amounts from reporting obligation from 10 000 NOK to 50 000 NOK, cf. section 4.3.

Thirdly, the Ministry proposes that the principal's obligation to report information on the workers shall apply only if it is established that information is not given by the contractor, cf. section 4.4. According to current law, the principal's reporting obligation to report information on the contractor's employees is equal to the reporting obligation of the contractor. The proposed amendment implies that the reporting obligation in TAA § 5-6 – on this particular point – is brought in accordance with the Belgian regulations assessed by EUCJ in the case C-315/13. In that case, the EUCJ expressed that at national legislation which requires a recipient of services to report information on the contractor's workers as a supplement to a declaration requirement already imposed on the contractor, is capable of being proportionate to the objectives stated by the Member State.   

Finally, the Ministry proposes to repeal TAA § 10-6 regarding joint and several liability, cf. section 4.5. The proposal implies that breach of the reporting obligation may only be sanctioned by an enforcement fee or a penalty, cf. TAA §§ 10-7 and 10-8. We refer to the explanations given in our letters 20 August 2015 and 19 February 2016 on the interpretation and application of these regulations.

In addition to the proposed amendments, the Ministry of Finance specifically invites the hearing bodies to submit observations on possible amendments which were rejected by the Norwegian Directorate of Taxes in its report 13 July 2016, cf. section 4.6. For instance, the hearing bodies are invited to consider whether contracts given to non-resident contractors with some sort of presence in Norway, i.e. have established a branch in Norway, should be exempted from the reporting obligation. Observations on these possible amendments will be taken into consideration by the Ministry in the final assessment of the legal review.

The question whether the reporting legislation is in compliance with EEA-law is addressed in the discussion paper section 4.7. The Ministry of Finance maintains the view that Norway may uphold the current reporting obligation. Further, it is the view of the Ministry that amendments proposed in the discussion paper, if adopted by the Parliament, strengthens a conclusion that Norway comply with EEA-law.  

In the discussion paper page 14 the Ministry recognises that the reporting obligation represent at restriction on the freedom to provide services which – at the outset – is prohibited according to the EEA-agreement. However, in page 15 to 18 the Ministry argues that the reporting obligation may be justified as it meets overriding requirements relating to the need of ensuring fiscal supervision, preventing tax evasion (fight against tax fraud) and ensuring effective tax collection, that it is appropriate for securing the attainment of these objectives and that it does not go beyond what is necessary in order to attain them.

The Ministry refers to the fact that the reporting obligation was introduced in order to meet the specific challenges related to the handling of non-resident taxpayers. The Ministry emphasizes that the regulation enables the tax authorities to receive information on the taxpayers at an early point in time. Receiving such information is essential as these taxpayers to a large extent fail to comply with their ordinary obligations to report information to the tax authorities. We refer to the observations in our letter 19 February 2016 regarding the function of the reporting obligation. We also refer to the observations by the Norwegian Tax Directorate cf. section 5.1 and 5.3.

The Ministry stresses that the reporting obligation is not based on an assumption of tax fraud among non-resident taxpayers.

The Ministry discusses – in light of C-53/13 and C-80/13 – whether the fact that the reporting obligation applies regardless of whether the contractor has established a branch in Norway (provides services in Norway more than on an occasional basis), implies that the regulations do not comply with EEA-law. The Ministry refers to the report from the Norwegian Directorate of Taxes 13 July 2016, in which it is argued that a branch established by the non-resident contractor will not be capable of providing all the information required by the tax authorities. Thus, it cannot be claimed that the current reporting legislation breaches EEA-law on this particular point.

As far as the question of proportionality concerns, the Ministry argues that it is necessary to maintain a reporting obligation even if the contract – alone – does not trigger tax liability for the contractor and its workers. The reason for this is inter alia that a number of contracts performed by a contractor – combined – may result in tax liability. We refer to the observations in letter 19 February 2016 on this matter.

The Ministry argues that the proportionality of the reporting obligation that lies upon non-resident contractors must be assessed in light of the requirements that apply to resident employers. The Ministry refers to the fact that resident employers are obligated to report information on their workers to the NAV State Register of Employers and Employees.

The Ministry draws the attention to case C-433/04 in which the EUCJ observed that a reporting obligation is a less restrictive means than a withholding requirement.

Finally, The Ministry considers that the sanction imposed to safeguard compliance with the reporting obligation do not – as such – constitute a breach of EEA-law. In this respect, The Ministry specifically refers to the proposed repeal of TAA § 10-6 regarding joint and several liability.

 3. Conclusion
In accordance with ordinary legal procedure in Norway, the bodies entitled to comment the discussion document, are invited to give their observations within three months. Based on an assessment of the observations from the public hearing, the Ministry of Finance intends to propose legal amendments for the Parliament during the first Parliamentary session 2017. Assuming that the amendments are adopted by the Parliament during that session, the new legislation may enter into force in 2017.

The Ministry of Finance will submit further information on the legal review as it progresses.

Yours sincerely,

Helle Harbou-Hals
Deputy Director General

                                                                                 Håvard Lyngmo
                                                                                 Legal Adviser

 Copy:         The Norwegian Directorate of Taxes

                   COFTA (Central Office for Foreign Tax Affairs)