European Commission proposes anti-tax-avoidance package Tax Insights

Tax Insights
from International Tax Services
European Commission proposes
anti-tax-avoidance package
February 2, 2016
In brief
The European Union (EU) Commission (EC) on January 28, 2016, presented an anti-tax-avoidance
package (ATAP) that consists of seven sections, including a proposed anti-tax-avoidance directive (draft
ATA directive). The draft directive outlines minimum standards based on proposals from the
Organisation for Economic Co-operation and Development’s (OECD’s) Base Erosion and Profit Shifting
(BEPS) deliverables. The draft directive differs from corresponding BEPS proposals in some regards and
covers additional subjects, such as exit taxation and a minimum level of taxation on third-country
income. The ATAP will be subjected to political and technical discussions, and its enactment is uncertain.
If it is enacted in some form, it is expected to significantly affect US companies investing in the EU.
In detail
The ATAP consists of the
following sections:
 the draft ATA directive
 an EC recommendation on
the implementation of
G20/OECD BEPS
suggestions regarding tax
treaty abuse and permanent
establishments (PEs)
 a proposed amendment to
Directive 2011/16/EU on
mandatory automatic
exchange of information
(AEOI) in the field of
taxation to enable
coordinated implementation
of G20/OECD BEPS countryby-country reporting (CBCR)
requirements
 a general policy
communication on the ATAP
and the proposed way
forward
 a general policy
communication on an EU
external strategy for effective
taxation
 an EC staff working
document, and
 a study on aggressive tax
planning.
Draft ATA directive
The draft ATA directive
addresses six international and
BEPS-related elements of the
Common Consolidated
Corporate Tax Base (CCCTB),
which the EC, Member States
and stakeholders have been
discussing since the EC issued
its 2011 CCCTB proposal. In
addition to the ATA directive,
the EC intends to issue a new
two-step CCCTB draft directive
in the fourth quarter of 2016.
The draft ATA directive largely
reflects the Luxembourg EU
council presidency working
paper from December 15, 2015.
The draft ATA directive notes
BEPS risks arising from several
different areas, including hybrid
mismatches, interest
deductions, and controlled
foreign corporations (CFCs).
The draft ATA directive
stipulates the enactment of
minimum standards; it does not
prohibit other anti-avoidance
rules designed to give greater
protection to the corporate tax
base. In general, the key
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provisions in the draft ATA directive
include:
 Interest deductibility: The draft
ATA directive includes a rule
restricting net borrowing costs to
the higher of EUR 1 million or 30%
of the taxpayer's earnings before
interest, taxes, depreciation, and
amortization (EBITDA). The
directive also includes suggested
language for a group ratio that
differs from the potential group
ratio rule suggested in OECD BEPS
Action 4. It also includes a
temporary exclusion for financial
undertakings.
 Rules for exit taxation: Exit
taxation rules would apply when a
taxpayer transfers: (i) its assets
between a head office and its PE
(or between PEs) out of a Member
State to another Member State or
third country; (ii) its tax residency
to another Member State or to a
third country; or (iii) its PE out of a
Member State.
 A ‘switch-over’ clause: The ‘switchover’ clause is designed to ensure
taxation of dividends and capital
gains from companies in a low-tax
third country. This clause also
would apply to low-taxed PE
profits from third countries. The
test for ‘low tax’ has been set at
40% of the statutory tax rate in the
Member State of the taxpayer (i.e.,
the company disposing of the
shares, receiving the distribution,
or holding the branch).
 General anti-abuse rule (GAAR):
The GAAR would allow tax
authorities to ignore arrangements
that have an essential purpose of
obtaining a tax advantage which
defeats the object or purpose of a
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provision and the arrangements
are not considered genuine.
 CFC rules for entities subject to a
low level of taxation: A low level of
taxation is considered 40% of the
parent's effective rate, and the CFC
rules apply if more than 50% of the
entity's income falls within
specified categories (generally,
passive income). If the CFC is
domiciled in the EU/European
Economic Area (EEA), the rules
would apply only if the entity's
establishment is wholly artificial or
the entity engages in non-genuine
arrangements with the essential
purpose of obtaining a tax
advantage.
 Rules addressing mismatches
between Member States due to
hybrid entities or hybrid
instruments: The mismatch rules
would apply when the
characterization of the entity or
instrument in the Member State
(where the payment has its source)
is followed by the other Member
State involved in the mismatch.
For enactment the directive requires
unanimous Economic and Financial
Affairs Council (ECOFIN) Member
State approval. Member States are not
sure whether the draft ATA directive
should be negotiated in council as an
integral package, or if it should be
enacted in separate parts similar to
the EU parent-subsidiary directive. If
enacted separately, some provisions
could take effect more quickly than
others.
Given the political momentum
regarding BEPS and pressure on the
EC on this issue, the EC will attempt
to adopt the directive in 2016 so that it
might take effect on January 1, 2017,
or July 1, 2017.
Recommendation for
implementing measures to tackle
tax treaty abuse
The EC recommendation urges
Member States to implement the
OECD BEPS proposals to address tax
treaty abuse. When Member States
include a GAAR in tax treaties that is
based on a principal purpose test
(PPT), as suggested in the OECD's
final report on BEPS Action 6 Prevention of Treaty Abuse, the EC
recommends that the rule should be
modified to comply with EU case law
such that genuine economic activity is
not affected. Member States also are
encouraged to amend treaty
definitions of PE to reflect the OECD's
proposed amendments to Article 5 of
the OECD Model Tax Convention as
set out in the OECD's final report on
BEPS Action 7 (preventing the
artificial avoidance of PE status).
Member States must inform the EC on
the measures taken to comply with the
recommendation, and the EC will
publish a report on the
recommendation’s application within
three years of its adoption.
Coordinated implementation
within the EU of OECD BEPS
Action 13 CBCR requirements
The EC proposes coordinated
implementation within the EU of the
OECD BEPS Action 13 country-bycountry reporting (CBCR)
requirements by extending the scope
of the recently amended EU directive
on mandatory AEOI / tax rulings and
advance pricing agreements (APAs) to
EU tax administrations. Since most
EU Member States are also OECD
members, and already have
committed to implementing BEPS
Action 13, this amendment could be
adopted in Council within weeks if
Member States do not raise new
technical issues. The directive then
would take effect on January 1, 2017.
The EC is expected to issue a proposal
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and impact assessment for CBCR with
public disclosure in spring 2016.
General policy communication
The EC explains the rationale behind
the ATAP in the general policy
communication. The EC notes that the
majority of businesses do not engage
in aggressive tax planning and suffer a
competitive disadvantage to those that
do. The EC also notes that Member
States suffer significant revenue loss
as a result.
While the EC generally commends the
BEPS project, it states that the EU can
and should go further to ensure that
Member States develop a ‘common
standard’ and level playing field by
implementing the ATAP in a
coordinated manner. The CCCTB
clearly is the preferred solution to
profit shifting, transparency, and
effective corporate taxation in the EU.
The EC claims to be on track to adopt
the new CCCTB legislative proposal in
fall 2016.
To address business concerns, the EC
states that the measures included in
the ATAP have been designed to
minimize the risk of double taxation
and disputes ‘as much as possible.’
The EC notes that its work on an
impact assessment for dispute
resolution is progressing, with a path
to presenting a new proposal in
summer 2016.
Communication on an EU
external strategy for effective
taxation
The communication on an EU
external strategy for effective taxation
outlines the EC’s ideas for promoting
tax governance with non-EU
countries, such as through a special
clause in trade agreements, and
assistance to developing countries on
tax matters. Most importantly, the EC
wants a common EU system for
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assessing, screening and listing third
countries. The communication does
not address the counteraction against
listed countries. An update of the EC’s
controversial June 2015 list of non-EU
country, non-cooperative tax
jurisdictions is available online in an
interactive map.
Study on aggressive tax planning
The EC recently published a study on
aggressive tax planning (ATP) that
was commissioned to identify
indicators that facilitate ATP. The
study compared the corporate income
tax systems of Member States with the
ATP indicators to identify tax regimes
that result in Member States being
vulnerable to ATP. The study does not
reflect the official opinion of the EC,
as it was written by independent
advisors and national tax experts. The
study included the following general
observations:
Staff working document
An EC staff working document
supplements the ATAP, and supports
the EC’s economic and academic
analysis on the most common
mechanisms leading to aggressive tax
planning.
The takeaway
The legislative proposals of the ATAP
will be submitted to the European
Parliament for consultation and to the
Council for adoption. Before
endorsing and implementing the
various documents, all Member States
must consent on a unanimous basis
and decide on the way forward.
Although it is uncertain when and in
what form the ATAP will be enacted, it
is important to monitor updates and
further developments. If the ATAP is
enacted in some form, it may
significantly impact multinational
enterprises investing in the EU.
 Member States have room to
tighten their anti-abuse rules in
order to counter base erosion
through financing costs.
 Nearly half (13) of the Member
States do not apply any beneficial
owner test when accepting a claim
for a reduction or exemption of
withholding tax.
 Half of Member States do not have
CFC rules.
 Very few Member States have rules
to counter the mismatching tax
qualification of a local partnership
or company by another State
(typically the States of the owners).
 Although most (26) Member States
have general or specific antiavoidance rules, the study notes
that it appears the rules in place
can be partially efficient at best in
preventing ATP structures.
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Let’s talk
For a deeper discussion of how this might affect your business, please contact:
International Tax Services, United States
Calum Dewar
+1 (646) 471 5254
[email protected]
Maarten Maaskant
+1 646 471 0570
[email protected]
Mohammed Allaoui
+1 646 471 7190
[email protected]
International Tax Services, Netherlands
Sjoerd Douma
+31 88 792 4253
[email protected]
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