On January 28, 2016, the European Commission (the Commission) presented the Anti Tax Avoidance Package (the Package), containing concrete measures to “prevent aggressive tax planning, boost tax transparency and create a level playing field for all businesses in the European Union”.
The Anti Tax Avoidance Package contains a number of legislative and non-legislative initiatives to help Member States protect their tax bases, create a fair and stable environment for businesses and preserve EU competitiveness vis-à-vis third countries. The package rests on three key pillars:
- Effective taxation whereby all companies pay taxes where they make their profits;
- Tax transparency so that Member States have the information needed to ensure fair taxation;
- Addressing the risk of double taxation so that companies which pay their fair share of taxes are not penalised for making use of the EU’s internal market
In order to achieve the above-listed goals, the Package consists of:
- An Anti Tax Avoidance Directive, which proposes a set of legally binding anti-avoidance measures, which all Member States should implement to shut off major areas of aggressive tax planning;
- A Recommendation on Tax Treaties, which advises Member States how to reinforce their tax treaties against abuse by aggressive tax planners, in an EU-law compliant way
- A revision of the Administrative Cooperation Directive, which will introduce country-by-country reporting between tax authorities on key tax-related information on multinationals
- A Communication on an External Strategy for Effective Taxation, which sets out a coordinated EU approach against external risks of tax avoidance and to promote international tax good governance
The Package also contains a Chapeau Communication and Staff Working Document, which explain the political and economic rationale behind the individual measures
The above-mentioned Anti Tax Avoidance Directive (the Directive) sets out six key anti-avoidance measures, which all Member States should apply, to counter-act some of the most common types of aggressive tax planning. These key anti-avoidance measures are:
a) Controlled Foreign Company (CFC) rule
The proposed CFC rule will allow the Member State where the parent company is located to tax any profits that the company parks in a no or low tax country. The CFC rule will be triggered if the effective tax rate in the third country is less than 40% of that of the Member State in question. The company will be given a tax credit for any taxes that it did pay abroad. This will ensure that profits are effectively taxed, at the tax rate of the Member State in which they were generated.
b) Switchover rule
In order to prevent double non-taxation of certain income, the Directive proposes a switchover rule, whereby companies would have to tell the EU tax authority that it had received a dividend and whether or not it had paid tax on it elsewhere. Tax authorities would then be able to deny the company tax exemptions if the income had been taxed at a very low or no rate in the third country. If the Member State determined that the dividend had indeed been properly taxed in the third country, it could give the company a credit for the tax it had paid.
c) Exit Taxation
In order to prevent companies from re-locating assets purely to avoid taxation, the Directive proposes that all Member States apply an exit tax on assets moved from their territory. The exit tax should be based on the value of the assets at that point in time. Since companies are obliged to send tax authorities their balance sheets containing information on their taxable assets, Member States can see when an asset such as intellectual property has “disappeared”. This will ensure that profits from high value assets cannot be shifted out of the EU untaxed.
d) Interest Limitation
In order to discourage companies from creating artificial debt arrangements designed to minimise taxes, the Directive proposes to limit the amount of net interest that a company can deduct from its taxable income, based on a fixed ratio of its earnings before interest, tax depreciation and amortisation (EBITDA). This should make it less attractive for companies to artificially shift debt in order to minimise their taxes.
In order to prevent companies from exploiting national mismatches to avoid taxation, the Directive proposes that in the event of such a mismatch, the legal characterisation given to a hybrid instrument or entity by the Member State where a payment originates shall be followed by the Member State of destination.
f) General Anti-Abuse Rule (GAAR)
In order to counter-act aggressive tax planning when other rules don’t apply, the Directive proposes a General Anti-Abuse Rule (GAAR), which would tackle artificial tax arrangements if there is no other anti-avoidance rule that specifically covers such an arrangement. The GAAR acts as a safety net in cases where other anti-abuse provisions cannot be applied. It would allow tax authorities to ignore wholly artificial tax arrangements and tax on the basis of the real economic substance.
The initiatives in the Anti Tax Avoidance Package reflect discussions in Council, recommendations from the European Parliament and the outcomes of the OECD’s Base Erosion and Profit Shifting (BEPS) project. As such, the groundwork has been done to allow Member States to quickly adopt and implement the proposed measures.
As the next steps, the two legislative proposals (Proposal on anti-tax avoidance measures & Proposal on mandatory automatic exchange of information amongst tax administrations) of the Package will be submitted to the European Parliament for consultation and to the Council for adoption. The Council and Parliament should also endorse the Tax Treaties Recommendation and Member States should follow it when revising their tax treaties. Member States should also formally agree on the new External Strategy and decide on how to take it forward as quickly as possible once it has been endorsed by the European Parliament.