Ministers of the Economic and Financial Affairs Council (ECOFIN) have finally reached agreement on the text of the draft Anti-Tax Avoidance Directive (ATAD), which forms a key part of the European Commission’s corporate tax anti-avoidance package launched in January. The agreed text has reduced from six to five the number of specific provisions contained in the directive. See http://bit.ly/28O4Wlw.
ECOFIN discussed the directive on 25 May, including recommendations by the EU Parliament’s Economic and Monetary Affairs Committee for a number of significant amendments to the original text, but postponed agreement until the next ECOFIN meeting on 17 June. The EU presidency then tabled a compromise package, which included a proposal to drop the ‘switch-over’ rule if final agreement could be reached on the other five main provisions.
ECOFIN reached agreement in principle on 17 June, subject to a ‘silence’ procedure until midnight on 20 June, allowing the governments of Belgium and the Czech Republic more time to consider their positions on certain elements of the package. This deadline passed without objections being raised, meaning the directive will now be submitted to a forthcoming ECOFIN meeting for formal adoption. The proposed directive requires unanimous agreement by the Council before it can be adopted.
The draft directive covers all taxpayers that are subject to corporate tax in member states, including subsidiaries of companies based in third countries. It lays down anti-tax-avoidance rules in five specific fields:
· Interest limitation rules: Multinational groups may finance group entities in high-tax jurisdictions through debt, and arrange that they pay back inflated interest to subsidiaries resident in low-tax jurisdictions. The outcome is a reduced tax liability for the group as a whole. The draft directive sets out to discourage this practice by limiting the amount of interest that the taxpayer is entitled to deduct in a tax year. The agreed text sets this limit at the higher of 30% of the company’s earnings, or €3m, as originally proposed. A grandfathering rule will exclude debt in place prior to 17 June 2016. Member states with 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 until 1 January 2024.
· Exit taxation rules: Corporate taxpayers may try to reduce their tax bill by moving their tax residence and/or assets to a low-tax jurisdiction. Exit taxation prevents tax base erosion in the state of origin when assets that incorporate unrealised underlying gains are transferred, without a change of ownership, out of the taxing jurisdiction of that state.
· General anti-abuse rule: This rule is intended to cover gaps that may exist in a country’s specific anti-abuse rules. Corporate tax planning schemes can be very elaborate and tax legislation doesn’t usually evolve fast enough to include all the necessary defences. A general anti-abuse rule therefore enables tax authorities to deny taxpayers the benefit of abusive tax arrangements.
· Controlled foreign company (CFC) rules: In order to reduce their overall tax liability, corporate groups can shift large amounts of profits towards controlled subsidiaries in low-tax jurisdictions. A common scheme consists of first transferring ownership of intangible assets, such as intellectual property, to the CFC and then shifting royalty payments. CFC rules reattribute the income of a low-taxed controlled foreign subsidiary to its – usually more highly taxed – parent company. The agreed text omits reference to a specific effective tax rate threshold below which the CFC rule would be triggered, although the rule is likely to apply where the rate in the third country is less than half that in the member state concerned.
· Rules on hybrid mismatches: Corporate taxpayers may take advantage of disparities between national tax systems in order to reduce their overall tax liability. Such mismatches often lead to double deductions (i.e. tax deductions in both countries) or a deduction of the income in one country without its inclusion in the other. The directive specifies that, where there is a double deduction, the deduction will only be given in the source country. Where a deduction is given, but the corresponding income is not taxed, the deduction shall be denied.
The ‘switch-over’ rule, which would have denied exemption for dividends paid by companies established in low-tax jurisdictions, has been dropped.
Three of the five areas covered by the directive implement OECD recommendations; namely, the interest limitation rules, the CFC rules and the rules on hybrid mismatches. The two others (the general anti-abuse rule and exit taxation rules) deal with BEPS-related aspects of the Commission’s latest proposals for a common consolidated corporate tax base (CCCTB).
Most of the provisions of the directive are intended to apply from 1 January 2019.
Both Oxfam International and the European Parliament’s Greens/European Free Alliance have criticised the ‘watered down’ measures. Oxfam International EU tax policy adviser, Aurore Chardonnet, said: ‘Finance ministers destroyed the European Commission’s proposal, turning ATAD into wastepaper.’
However, tax experts Zoe Wyatt and Tom Wesel, partners at Milestone International Tax, said that that ATAD went too far and 'usurped member state sovereignty'.
‘The EC claims the ATAD seeks to ensure a consistent and uniform implementation of the OECD’s BEPS recommendations across the EU. In fact, it goes considerably further than this,' they said. '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.’
Ministers of the Economic and Financial Affairs Council (ECOFIN) have finally reached agreement on the text of the draft Anti-Tax Avoidance Directive (ATAD), which forms a key part of the European Commission’s corporate tax anti-avoidance package launched in January. The agreed text has reduced from six to five the number of specific provisions contained in the directive. See http://bit.ly/28O4Wlw.
ECOFIN discussed the directive on 25 May, including recommendations by the EU Parliament’s Economic and Monetary Affairs Committee for a number of significant amendments to the original text, but postponed agreement until the next ECOFIN meeting on 17 June. The EU presidency then tabled a compromise package, which included a proposal to drop the ‘switch-over’ rule if final agreement could be reached on the other five main provisions.
ECOFIN reached agreement in principle on 17 June, subject to a ‘silence’ procedure until midnight on 20 June, allowing the governments of Belgium and the Czech Republic more time to consider their positions on certain elements of the package. This deadline passed without objections being raised, meaning the directive will now be submitted to a forthcoming ECOFIN meeting for formal adoption. The proposed directive requires unanimous agreement by the Council before it can be adopted.
The draft directive covers all taxpayers that are subject to corporate tax in member states, including subsidiaries of companies based in third countries. It lays down anti-tax-avoidance rules in five specific fields:
· Interest limitation rules: Multinational groups may finance group entities in high-tax jurisdictions through debt, and arrange that they pay back inflated interest to subsidiaries resident in low-tax jurisdictions. The outcome is a reduced tax liability for the group as a whole. The draft directive sets out to discourage this practice by limiting the amount of interest that the taxpayer is entitled to deduct in a tax year. The agreed text sets this limit at the higher of 30% of the company’s earnings, or €3m, as originally proposed. A grandfathering rule will exclude debt in place prior to 17 June 2016. Member states with 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 until 1 January 2024.
· Exit taxation rules: Corporate taxpayers may try to reduce their tax bill by moving their tax residence and/or assets to a low-tax jurisdiction. Exit taxation prevents tax base erosion in the state of origin when assets that incorporate unrealised underlying gains are transferred, without a change of ownership, out of the taxing jurisdiction of that state.
· General anti-abuse rule: This rule is intended to cover gaps that may exist in a country’s specific anti-abuse rules. Corporate tax planning schemes can be very elaborate and tax legislation doesn’t usually evolve fast enough to include all the necessary defences. A general anti-abuse rule therefore enables tax authorities to deny taxpayers the benefit of abusive tax arrangements.
· Controlled foreign company (CFC) rules: In order to reduce their overall tax liability, corporate groups can shift large amounts of profits towards controlled subsidiaries in low-tax jurisdictions. A common scheme consists of first transferring ownership of intangible assets, such as intellectual property, to the CFC and then shifting royalty payments. CFC rules reattribute the income of a low-taxed controlled foreign subsidiary to its – usually more highly taxed – parent company. The agreed text omits reference to a specific effective tax rate threshold below which the CFC rule would be triggered, although the rule is likely to apply where the rate in the third country is less than half that in the member state concerned.
· Rules on hybrid mismatches: Corporate taxpayers may take advantage of disparities between national tax systems in order to reduce their overall tax liability. Such mismatches often lead to double deductions (i.e. tax deductions in both countries) or a deduction of the income in one country without its inclusion in the other. The directive specifies that, where there is a double deduction, the deduction will only be given in the source country. Where a deduction is given, but the corresponding income is not taxed, the deduction shall be denied.
The ‘switch-over’ rule, which would have denied exemption for dividends paid by companies established in low-tax jurisdictions, has been dropped.
Three of the five areas covered by the directive implement OECD recommendations; namely, the interest limitation rules, the CFC rules and the rules on hybrid mismatches. The two others (the general anti-abuse rule and exit taxation rules) deal with BEPS-related aspects of the Commission’s latest proposals for a common consolidated corporate tax base (CCCTB).
Most of the provisions of the directive are intended to apply from 1 January 2019.
Both Oxfam International and the European Parliament’s Greens/European Free Alliance have criticised the ‘watered down’ measures. Oxfam International EU tax policy adviser, Aurore Chardonnet, said: ‘Finance ministers destroyed the European Commission’s proposal, turning ATAD into wastepaper.’
However, tax experts Zoe Wyatt and Tom Wesel, partners at Milestone International Tax, said that that ATAD went too far and 'usurped member state sovereignty'.
‘The EC claims the ATAD seeks to ensure a consistent and uniform implementation of the OECD’s BEPS recommendations across the EU. In fact, it goes considerably further than this,' they said. '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.’
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