On June 21, 2016, the Member States of the European Union agreed on their general approach for far-reaching new rules to eliminate the most common corporate tax avoidance practices, also known as the Anti Tax Avoidance Package.
First proposed by the European Commission in January 2016, the measures in the Directive target the main forms of tax avoidance practiced by large multinationals and build on global standards developed by the OECD last year on Base Erosion and Profit Shifting (BEPS).
During the negotiations, some amendments were made to the original proposal: such as the scope of the provision on interest limitations and its transposition.
The 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. As such, 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 introduces country-by-country reporting between tax authorities on key tax-related information on multinationals; and
- 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 main document, Anti Tax Avoidance Directive, sets out five key anti-avoidance measures, which all Member States should apply, to counter-act some of the most common types of aggressive tax planning:
a) Controlled Foreign Company (CFC) rule: To deter profit shifting to no or low tax countries
The CFC rule will allow the Member State where the parent company is located to tax certain profits that the company parks in a no or low tax country. The CFC rule will be triggered if the tax paid in the third country is less than half of that which would have been paid in 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) Exit Taxation: 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.
c) Interest Limitation: 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 (i.e. EBITDA).
The interest limitation rule includes a grandfathering rule, which means debt in place prior to June 17 2016 will be excluded from the scope of the rule, as will interest used to fund long-term public infrastructure projects. Member States which have equivalent rules will be allowed to continue with those rules until the OECD recommends a minimum standard of interest limitation rules, or at the latest by January 1 2024.
d) Hybrids: To prevent companies from exploiting national mismatches to avoid taxation
The Directive lays down that in the event of a double deduction, the deduction will only be given in the source country. In situations where a deduction is given, but the corresponding income is not taxed, the deduction shall be denied.
e) General Anti-Abuse Rule (GAAR): To counter-act aggressive tax planning when other rules don’t apply
The Directive sets out a General Anti-Abuse Rule, which would tackle abusive 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 abusive tax arrangements and tax on the basis of the real economic substance.
Since the European Parliament has already issued its opinion, the new rules are expected to be soon formally adopted by the European Council.
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