The Commission’s Proposal on Anti-Tax Avoidance Measures was published on 28 January 2016. The proposed measures will implement several of the OECD’s initiatives and will take the first steps towards the Common Consolidated Corporate Tax Base (CCCTB). In the meantime, the proposed Anti-Avoidance Directive includes six key anti-tax avoidance measures which Member States should apply.
The commission is still promising to come up with a follow-up instrument to introduce first a Common Corporate Tax Base, without consolidation, this summer. This may be followed by instruments proposing for consolidation by the end of this year. The CCCTB will act as a more comprehensive solution to profit shifting and aggressive tax avoidance.
In the meantime, the proposed Anti-Avoidance Directive includes six key anti-tax avoidance measures which member states should apply. Three of these measures are based on the OECD’s principles and the commission has argued that the other three are necessary for the proper operation of the internal market.
The OECD based rules include the Controlled Foreign Company (CFC) rule, switchover rule and exit taxation rules. These aim to deter multinationals from artificially shifting profits abroad and/ or relocating assets to avoid tax.
1. The CFC rule allows the Member State where a parent company is located to tax any profits that the company parks in a no or low tax country. Under the proposal, the CFC rule will be triggered if the effective tax rate in the third country where the company has created a subsidiary is less than 40 per cent of the Member State in question.
2. The Switchover rule aims to prevent double non-taxation of certain income. The companies will be required to tell the Member State tax authorities that they have received a dividend and whether they had paid tax on it elsewhere. This way the tax authorities can deny a company tax benefits where income has been taxed at a low rate in another country and tax any profits that have not been taxed elsewhere.
3. The proposal also introduces new rules on exit taxation, which aim to prevent non-taxation of assets such as intellectual property or patents. In this scenario, companies develop the intellectual property or patentable rights in one Member State but then transfer the assets out of reach of that Member State’s tax jurisdiction when the product starts to make profits. Therefore the proposal will mean that the Member State can apply exit taxation on the value of the product before it is moved out of the jurisdiction.
The other measures that are included in the proposal are: interest limitation, hybrid mismatches and a general anti-abuse rule
4. The interest limitation rule aims to tackle inter-company loans between different parts of companies located in different countries. Some companies arrange these inter-company loans so that their debt is based in one of the group’s companies in a high tax country where interest payment can be deducted, and interest on the debt is to be paid to the group’s lender company which is based in a low tax country where interest is taxed at a low rate or not at all. The proposal sets to limit the amount of net interest that a company can deduct from its taxable income, based on a fixed ratio of its earnings.
5. The hybrid mismatch rule aims to prevent companies from exploiting national mismatches to avoid taxation where member states treat the same income or entities differently for tax purposes. Currently companies are able to take advantage of these mismatches to deduct their income in both countries or to get a tax deduction in one country on income that is exempt in the country of destination. The proposal would mean that any mismatch is eliminated and the tax deduction will only be allowed in one Member State.
6. Finally, the general anti-abuse rule provides a catch-all provision which will apply to aggressive tax planning where the other rules do not apply. It provides a safety net in cases where other anti-abuse provisions cannot be applied and allows national authorities to create rules to expose and tackle wholly artificial tax arrangements on the basis of the real economic substance.
The commission and the Dutch Presidency are expecting that there will be a deal on the Anti-tax avoidance proposals by the next Economic and Financial Affairs Council Configuration (ECOFIN) meeting which will take place on 25 May 2016. There have been reports that some member states in the council have made calls to split the proposal into two: one containing the OECD aspects and another containing the EU internal market rules. However, according to the most recent reports this has not taken place yet and the member states are negotiating on the whole package.