On 28 January 2016, the European Commission issued a set of proposals as a response to corporate tax avoidance and aggressive tax planning.
According to the Commission, this new anti-avoidance package "offers immediate and effective solutions to tackle tax avoidance, boost tax transparency and ensure a fairer and more stable business environment".
It is a first step towards a greater harmonization of corporate tax bases at the level of the European Union through the re-launch of the Common Corporate Consolidated Tax Base (CCCTB).
The package is built around three key actions: “Ensuring effective taxation in the EU”, “Increasing tax transparency” and “Securing a level-playing field” designed to promote tax good governance both within the Single Market and globally.
The proposals to implement these actions are
(i) a proposed EU Anti-Tax Avoidance Directive (ATA Directive) which introduces legally-binding measures to counter-act the most common methods used by companies to avoid taxation;
(ii) a proposed Directive amending Directive 2011/16/UE as regards mandatory automatic exchange of information in the field of taxation which implements country-by-country reporting of information on companies operating in the EU;
(iii) a communication proposing a framework for a new EU external strategy for effective taxation which particularly focuses on a new EU process of listing third countries who refuse to play fair and
(iv) a recommendation to Member States on how to prevent tax treaty abuse.
The ATA package falls within the current global approach to corporate taxation. It has been developed in response to the final recommendations of the OECD base erosion and profit shifting (BEPS) project and to the demands from the European Parliament and both businesses and the civil society.
(i) The ATA draft Directive
The scope of the draft ATA Directive is much broader than the scope of the draft CCTB Directive as the new rules would apply to all taxpayers – including permanent establishments (PE) of entities resident for tax purposes in third countries and located in one or more Member States - subject to corporate tax in the EU and not only to corporate groups (ATA Directive – Article 1)
The ATA Directive sets out six anti-avoidance measures regarded as a minimum level of protection for domestic corporate tax bases. They shall not preclude the application of stricter domestic rules by Member States to ensure a higher level of protection (ATA D. article 3).
An interest deduction rule (ATA D. article 4): to discourage companies from creating artificial debt arrangements designed to minimize taxes
Companies, excluding financial undertakings, shall be entitled to deduct their net interest charge only up to 30 percent of the taxpayer’s earnings before interest, tax, depreciation and amortization (EBITDA) or up to an amount of € 1 million, whichever is higher.
A waiver is specified: shall be entitled to a full deduction taxpayers who can demonstrate that the ratio of their equity over their total assets is equal to, or higher than, the same group ratio.
An exit taxation clause (ATA D. article 5): To prevent companies from re-locating assets solely to avoid taxation
In specific circumstances (company migration, transfer of assets from a head office to a PE or from a PE to its head office or to another PE in a third country), Member States shall be entitled to tax the unrealized capital gain relating to the assets transferred.
If the assets are transferred to another Member State or to a State that is party to the EEA, the payment could be made in installments over at least five years.
A switch-over clause (ATA D. article 6): to prevent double non-taxation of certain income
As opposed to the current exemption based system which applies in several EU countries, Member States shall not exempt from tax income a company has received as a profit distribution from an entity in a third country or as proceeds from the disposal of shares held in an entity in a third country or as income from a PE situated in a third country where the entity or PE is subject, in its country of residence, to a tax on profits at a statutory corporate tax rate lower than 40% of the statutory corporate tax rate that would have been charged under the legislation of the Member State of the taxpayer.
Should it be so, the taxpayer shall be subject to tax on foreign income and entitled to a deduction of the tax paid in the third country. The deduction shall not exceed the amount of tax, as computed before the deduction, which is attributable to the income that may be taxed.
The switch-over clause shall not apply to losses incurred by the PE of a resident taxpayer situated in a third country or to losses from the disposal of shares in an entity which is tax resident in a third country.
A General anti-abuse rule – GAAR (ATA D. article 7): to counter-act aggressive tax planning when other specific rules do not apply
Non-genuine arrangements or series thereof (regarded as wholly artificial, i.e. not set up for valid commercial reasons which reflect economic reality) which have been carried out for the essential purpose of obtaining a tax advantage that defeats the object or purpose of the otherwise applicable tax provisions shall be ignored and tax liability shall be determined by reference to economic substance in accordance with national law.
This GAAR is in many respects comparable to the Parent-Subsidiary Directive GAAR, which Member States were required to have transposed into domestic law by 31 December 2015. It however seems to be worded in a narrower way, as obtaining a tax advantage must be the “essential purpose” while the Parent-Subsidiary Directive GAAR applies where “the main purpose or one of the main purposes” of a transaction is to benefit from the Directive.
Controlled foreign company (CFC) legislation (ATA D. article 8): to deter profit shifting to no or low tax countries
Taxpayers shall add to their tax base non-distributed profits of CFCs that are subject to an effective taxation at a rate lower than 40% of the effective tax rate that would have been charged under the corporate tax system of the Member State of the controlling entity.
This extra charge shall not be applied within the Member States or the EEA unless the establishment of the entity is wholly artificial or the entity has engaged in non-genuine arrangements or series thereof set up for the essential purpose of obtaining a tax-advantage.
Arrangements or series thereof shall be regarded as non-genuine to the extent that the entity would not own the assets or would not have undertaken the risks which generate its income if it were not controlled by a company where the significant people’s functions are carried out.
Article 9 provides for a detailed CFC income computation set of rules.
Hybrid mismatches provisions (ATA D. article 10): to prevent companies from exploiting national mismatches to avoid taxation
Member States give a different legal characterization to the same taxpayer (hybrid entity) or to the same payment (hybrid instrument) and this leads to a situation where there is a deduction of a payment in a Member State without a corresponding inclusion of the same payment in the other.
The legal characterization given to the hybrid entity or instrument by the Member State in which the payment has its source shall be followed by the other Member State in order to ensure that a tax deduction is allowed in only one Member State.
(ii) The CbcR Directive
Directive 2011/16/UE as regards mandatory automatic exchange of information has been recently amended to expand the scope to financial account information and information on cross-border tax rulings and advance pricing arrangements.
The proposed CbCR Directive mostly implements the OECD’s CbCR recommendations (Action 13). The Commission emphasizes that most Member States, as OECD members as well, have already committed to implementing CbCR in their domestic law. Yet, there is a risk that the CbCR may be implemented in different ways or not at all.
The proposed CbCR Directive has then been designed to enshrine in EU law specific requirements regarding exchange of information in order to prevent loopholes in the EU’s tax transparency network and provide businesses with a uniform compliance burden.
CbCR will be available solely to tax authorities but Commissioner Moscovici, during the press conference, reiterated that CbCR was considered to be made available to the public.
Amended Article 8aa of the CbCR Directive states that each Member States shall take the necessary measures to require the Ultimate Parent Entity of an MNE Group that is a resident for tax purposes in its territory (or a subsidiary appointed by the Group) to file a CbC report with respect to its reporting fiscal year within 12 months after the last day of the MNE group’s reporting fiscal year.
The CbC report shall contain aggregate information as regards to the amount of revenue, profit (loss) before income ax, income tax paid, income tax accrued, stated capital, accumulated earnings, number of employees, and tangible assets other than cash or cash equivalent in each jurisdiction where the Group operates. Each Group entity shall be identified as well as their location and main business activity.
It is expected that the CbCR Directive will provide that the reporting obligation applies to MNE Groups with annual consolidated group revenue exceeding 750 million Euros.
The reporting obligation should apply to both EU MNE Groups and non-EU MNE Groups for which one or several of their entities are located in the EU.
Member States shall have transposed the CbCR Directive by 31 December 2016 with effect on 1 January 2017.
(iii) Commission recommendation on the implementation of measures against tax treaty abuse
Member States are advised on how to prevent treaty abuse. The recommendations take on Actions 6 (treaty abuse) and 7 (PE definition) of the OECD BEPS final report.
First, the Commission advises Member States to implement in their upcoming tax treaties the proposed definition of a PE provided by Article 5 of the OECD Model Tax Convention as it is drawn up in the final report of Action 7.
Secondly, the Commission proposes to introduce a general anti-avoidance rule based on a principal purpose test: (change in bold) “(…) a benefit under a tax treaty shall not be granted if obtaining that benefit was one of the principal purposes of any arrangement that resulted directly or indirectly in that benefit, unless it is established that it reflects a genuine economic activity (…)”.
(iv) External strategy for effective taxation
The Commission states that the EU should act as a “united block” in dealing with problematic third countries that keep on ignoring tax good governance standards.
Are proposed a miscellany of additional measures which the Commission believes could strengthen the fight against corporate tax avoidance: updates tax good governance criteria, implementation of tax clauses in international agreements, assistance to developing countries, tax good governance conditions for EU funds.
The most prominent of those measures is certainly a new EU listing process of jurisdictions that do not play fair.