PURPOSE: to establish rules against tax avoidance
practices that directly affect the functioning of the internal
market.
PROPOSED ACT: Council Directive.
ROLE OF THE EUROPEAN PARLIAMENT: the Council adopts
the act after consulting the European Parliament but without being
obliged to follow its opinion.
BACKGROUND: the European Council Conclusions of 18
December 2014 cite "an urgent need to advance efforts in the fight
against tax avoidance and aggressive tax planning, both at the
global and European Union levels".
The proposed Directive is one of the constituent
parts of the Commission's Anti- Tax Avoidance Package. It
builds on the Action Plan for Fair and Efficient Corporate
Taxation, presented by the Commission
on 17 June 2015 and it responds to the finalisation of the project
against Base Erosion and Profit Shifting (BEPS) by the G20 and the
Organisation for Economic Cooperation and Development
(OECD). It also responds to demands from the European Parliament,
several Member States, businesses and civil society, and certain
international partners for a stronger and more coherent EU approach
against corporate tax abuse.
The current political priorities in international
taxation highlight the need for ensuring that tax is paid where
profits and value are generated. The schemes targeted by this
proposed Directive involve situations where taxpayers act
against the actual purpose of the law, taking advantage of
disparities between national tax systems, to reduce their tax
bill.
Taxpayers may benefit from low tax rates or double
deductions or ensure that their income remains untaxed by making it
deductible in one jurisdiction whilst this is not included in the
tax base across the border either. The outcome of such
situations distorts business decisions in the internal market
and unless it is effectively tackled, could create an environment
of unfair tax competition.
IMPACT ASSESSMENT: no impact assessment was carried
out for this proposal given that the proposed Directive is
complementary to other initiatives aimed to implement the output of
the OECD BEPS reports in the EU and contribute towards a common
minimum level of protection against tax avoidance.
To provide up-to-date analysis and evidence, a
separate Staff Working Document accompanying the draft
Directive gives an extensive overview of existing academic work and
economic evidence in the field of base erosion and profit
shifting.
CONTENT: the draft Directive is broadly
inclusive and aims to capture all taxpayers which are subject
to corporate tax in a Member State. Its scope also embraces
permanent establishments, situated in the Union, of corporate
taxpayers which are not themselves subject to the
Directive.
Having the aim of combating tax avoidance practices
which directly affect the functioning of the internal market, the
proposal lays down anti- tax avoidance rules in six specific
fields:
- The deductibility of interest: multinational groups often finance group entities in
high-tax jurisdictions through debt and arrange that these
companies pay back 'inflated' interest to subsidiaries resident in
low-tax jurisdictions. The aim of the proposed rule is to
discourage the above practice by limiting the amount of interest
that the taxpayer is entitled to deduct in a tax year. Given that
this Directive fixes a minimum level of protection for the internal
market, it is envisaged setting the rate for deductibility at the
top of the scale (10 to 30%) recommended by the OECD. Member States
may then introduce stricter rules.
- Exit taxation: taxpayers
may try to reduce their tax bill by moving their tax residence
and/or assets to a low-tax jurisdiction. Exit taxation serves the
purpose of preventing tax base erosion in the State of origin when
assets which incorporate unrealised underlying gains are
transferred, without a change of ownership, out of the taxing
jurisdiction of that State. The proposal also addresses the
EU law angle of exit taxation by giving taxpayers the option for
deferring the payment of the amount of tax over a certain number of
years and settling through staggered payments.
- A switch-over clause:
given the inherent difficulties in giving credit relief for taxes
paid abroad, States tend to increasingly exempt foreign income from
taxation. Switch-over clauses are commonly used against such
practices. Namely, the taxpayer is subjected to taxation (instead
of being exempt) and given a credit for tax paid abroad. In this
way, companies are discouraged from shifting profits out of
high-tax jurisdictions towards low-tax territories, unless there is
sufficient business justification for these transfers.
- A general anti-abuse rule: such a rule is designed to cover gaps that may exist
in a country's specific anti-abuse rules against tax avoidance. It
would allow authorities the power to deny taxpayers the benefit of
abusive tax arrangements. Within the Union, the application of
anti-abuse rules should be limited to arrangements that are
‘wholly artificial’ (non-genuine); otherwise, the
taxpayer should have the right to choose the most tax efficient
structure for its commercial affairs.
- Controlled foreign company (CFC) rules: taxpayers with controlled subsidiaries in low-tax
jurisdictions may engage in tax planning practices whereby they
shift large amounts of profits out of the (highly-taxed) parent
company towards subsidiaries which are subject to low taxation. The
effect is to reduce the overall tax liability of the group. CFC
rules re-attribute the income of a low-taxed controlled foreign
subsidiary to its parent company. As a result of this, the parent
company is charged to tax on this income in its State of residence
– usually, this is a high-tax State.
- A framework to tackle hybrid
mismatches: these mismatches are the
consequence of differences in the legal characterisation of
payments (financial instruments) or entities when two legal systems
interact. Such mismatches may often lead to double deductions (i.e.
deduction on both sides of the border) or a deduction of the income
on one side of the border without its inclusion on the other side.
In order to ensure that Member States introduce rules to
effectively combat against these mismatches, this Directive
prescribes that the legal characterisation given to a hybrid
instrument or entity by the Member State where a payment, expense
or loss, as the case may be, originates shall be followed by the
other Member State which is involved in the mismatch.