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EC Anti-Tax Avoidance Directive usurps EU member state sovereignty

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The EC claims the Anti-Tax Avoidance Directive (ATAD) seeks to ensure a consistent and uniform implementation of the OECD recommendations across the EU. In fact, it goes considerably further than this: under the guise of ‘restoring trust in the fairness of tax systems and allowing governments to effectively exercise their tax sovereignty’, the EC is exploiting this opportunity to push its own agenda of unified EU tax corporate tax policy. One can already sense the CCCTB (which proposes a pan-European corporate tax base) waiting in the wings. After all, if there are to be unified anti-avoidance rules, which are very much more a matter of national tax policy, why not a common measure of accounting profit, at which point a minimum corporate tax rate cannot be far away.

Rather than empowering member states, ATAD does the exact opposite by removing member states' ability to implement BEPS in line with their national tax and economic policies. For example, BEPS Action 3 on CFC recognised that a state that exempts foreign profits for companies may wish to have limited CFC rules that focus on profit artificially diverted abroad.

The UK has spent the last nine years positioning itself as the go-to territory for multinational groups to locate their European headquarters. Starting with the reform on the taxation of foreign profits and ending with a recast CFC regime, the UK has taken on Luxembourg and Netherlands and won. ATAD would largely remove its ability to continue to do this. It simply usurps member state tax sovereignty. Subsidiarity seems to have been forgotten about. It’s true that ATAD ensures the BEPS recommendations are implemented by member states, but this is at the cost of a ‘one size fits all’ policy that looks suspiciously like it has been dictated by Germany, jealous at the effect of UK tax competition. First a challenge to the patent box, now one to the UK’s CFC rules.

The EU would like a pan-European tax system, but with 28 member states with vastly differing economic performance, this cannot work and is doomed to failure (much like the single currency). A uniform implementation of the BEPS recommendations must be balanced with a member states’ ability to stimulate their economies through tax policy and incentives. The ATAD takes a huge step backwards in removing this. For example, the UK has a comprehensive and effective CFC regime that includes an exemption for foreign group finance companies (where certain conditions are met). It is difficult to see how this will survive post ATAD. Ireland, which does not currently have a CFC regime, will have a CFC regime forced upon it (as will Malta and Cyprus). Countries will respond because they need to remain competitive: Ireland may well move from a credit method for dividends to an exemption method.

Thankfully the pernicious ‘switch over’ clause has been dropped. However, the ATAD is subject to review in four years’ time and we’re betting that it eventually finds its way back in.

One wonders why member states haven’t objected to or rejected the ATAD. Do they really understand the extent to which their ability to chart their own course has been taken away from them? The ATAD overshoots the target with the inclusion of yet another a GAAR and exit tax provisions (with the latter arguably contrary to EU law). This is supranational law forced upon the UK (and every other member state) without any coherent, analytical or reasoned opposition (unlike the BEPS project).

Should the UK leave the EU it will have a huge competitive advantage simply by having the ability to set its own tax policy.