On late January (28th) 2016, the European Commission presented its “Anti-Tax Avoidance Package”.
This represents a major step within the European Union in order to regulate the tax evation and mark the first step of a common EU practice and gouvernnace on taxe.
This draft represents largely the Luxembourg EU Council Presidency Working Paper of December 15, 2015.
The base erosion and profit shifting (BEPS) risks arising from several different areas are also picked up in response to the OECD – BEPS project including hybrid mismatches, interest deduction and
CFC (Controlled Foreign Corporation).
Many of these rules reflect the proposals arising from the OECD’s BEPS deliverable.
The draft ATA Directive also includes rules on additional areas, which were not included in the OECD BEPS; for instance the ATA Directive mentions minimum standardsto be enacted but it doesn’t prohibit other anti-avoidance
rules designed to give greater protection to the corporate tax base.
The “package” is made of 4 major parts:
1 DEDUCTIBILITY OF INTEREST:
A rule restricting net borrowing cost to the higher of EUR 1M or 30% of the paxpayer’s EBITDA. There is a temporary exclusion for financial undertakings.
RULES FOR EXIT TAXATION:
where a taxpayertransfers assets (between a head office and its Permanent Establishment (PE), or between PE’s)out of a Member State to another Member State or to a
third country, or transfers its tax residence at another Member State or to a third country, or tranfers its PE out of a Member State.
clause to ensure taxationof dividends and capital gains in respect of companies in a low tax third country. The clause also applies to low taxed Permanent Establishments (PE)
profits from third countries. The test for “low tax” has been set at 40% of the statutory tax rate in the Member State of the taxpayer (i.e. the company disposing of the shares/receiving the
distribution/holding the branch).
A GENERAL ANTI ABUSE RULE (GAAR):
allowing tax authorities to ignore arrangements where the essential purpose is to obtain a tax advantage that defeats the object or purpose of the tax provision
and where the arrangements are not regarded as genuine.
CFC (Controlled Foreign Corporation) RULES:
dealing with entities subject to a low level of taxation (40% of the parent’s effective rate) where more than 50% of the entity income falls
within specified categories (broadly passive income). Where the CFC is resident in the EU/EEA, the rules only apply if the entity’s establishment is wholly artificial or the entity engages
in non-genuine arrangements with essential purpose of obtaining a tax advantage.
RULES ADDRESSING MISMATCHES BETWEEN MEMBER STATES ARISING DUE TO HYBRID ENTITIES OR HYBRID INSTRUMENTS:
whereby the characterization of the entity or instrument in the Member State where the
payment has its source is followed by the other Member State which is involved in the mismatch.
2 ADOPTION AND IMPLEMENTATION OF THE DIRECTIVE:
To be adopted , the Directive requires unanimity in ECOFIN of all Member States.
Given the the political momentum around the BEPS and pressure on the ECon this dossier, the European Commission will aim to have the Directive adopted within the next 6 months so it might come
into effect either on January 1st or July 1st 2017…
The European Commission encourages Member States to amend their treaty about the definition of permanent establishment to reflect the proper implementation of the Directive and others
3 COMMUNICATION ON AN EU EXTERNAL STRATEGY FOR EFFECTIVE TAXATION:
This sets out the EC’s ideas for promoting tax good governance with non-EU countries e.g. through a special clause in trade agreements, and assistance to developping countries on tax matters.
Most importantly, the EC wants a common EU system for assessing, screening and listing third countries.
4 PUBLICATION OF A NEW STUDY ON “AGGRESIVE TAX PLANNING” (ATP):
This study written by independent advisors aims aims at identifying tax rules and practices that showing in Member States being vulnerable to ATP.
The study draws ou the following general observation:
– results imply that scope exists for Member States to tighten their anti-abuse rules in orderto counter base erosion by means of financing costs
– nearly half (13) of Member States did not apply any beneficial owner test when accepting a claim for a reduction or exemption of withholding tax
– half of the Member States do not have Controlled Foreign Corporation (CFC) rules
– very few Member States have rules to counter the mismatching tax qualification of a local partnership or company by another state (typically the state of the owners)
– most (26) Member States have general or specific anti-avoidance rules, the research notes that the rules in place can be only partially efficient to prevent ATAP structures.
In conclusion, both the EC and the OECD have to motivate Member States to implement the appropriate structures to break-down ATAP constructions. Some Member States will potentially not be in the same
level of “fair play” and will pass local bill to maintain their tax competitiveness.
This may happen for maintaining or attracting non EU companies…