European Commission publishes Anti-Tax Avoidance Package
On 28 January the European Commission (“Commission”) published the Anti-Tax Avoidance Package (see below), which includes legislative proposals for (i) a Directive laying down rules against tax avoidance practices that directly affect the functioning of the internal market (“Anti-BEPS directive”) (read here); and (ii) a Directive amending Directive 2011/16 as regards automatic exchange of information in the field of taxation (read here). Together with these legislative proposals, the Commission has also published a Communication on an external strategy for effective taxation (read here).
1. Proposal for a Directive laying down rules against tax avoidance practices that directly affect the functioning of the internal market (“Anti-BEPS directive”).
Through this directive, the European Commissions aims to facilitate the implementation of the OECD BEPS Final Reports at EU level.
The proposal sets principle-based rules, leaving the implementation to Member States.
The proposal would apply to all taxpayers that are subject to corporate tax in the EU, including permanent establishments in the EU of entities resident for tax purposes in a third country.
The proposal sets anti-tax avoidance rules in six specific fields:
- deductibility of interest – the Commission would allow entities to deduct net interest expenses up to 30% of the tax EBITDA or up to EUR 1 million, whichever is higher. This corresponds to the top of the scale recommended by the OECD. Higher interest deductions are possible pursuant to the group ratio rule if higher. Financial undertakings are temporarily excluded from the application of this article in the proposal. However, the Commission intends to provide specific rules for financial and insurance sectors once the international rules are agreed.
- exit taxation.
- switch-over clause – Pursuant to the switch-over clause, taxpayers obtain – upon profit distribution, realisation of gains on shares or as income from a permanent establishment – tax credits for tax paid abroad in low-tax jurisdictions (instead of a tax exemption). The threshold of ‘low taxation’ is set at 40% of the statutory tax rate that would have been charged under the applicable corporate tax system in the taxpayer’s Member State.
- general anti-abuse rule (“GAAR”) – the GAAR would allow abusive practices to be captured despite the absence of a specific anti-avoidance rule. The GAAR is designed to reflect the artificiality tests of the CJEU where this is applied within the EU
- controlled foreign company (“CFC”) rules – pursuant to the CFC rules, the tax base of the EU taxpayer has to include (passive) non-distributed income. The Commission hence aims to discourage shifting (passive) income out of (highly taxed) parent companies to low-taxed controlled foreign subsidiaries.
- hybrid mismatches – disparities in the treatment of entities (hybrid entities) and instruments (hybrid instruments) in cross-border situations.
2. Proposal for Directive amending Directive 2011/16 as regards automatic exchange of information in the field of taxation.
Aiming at implementing one of the BEPS requirements, the Commission proposes to introduce for the Multinational Enterprise (MNE) groups (consolidated group revenues equal or higher than €750 million) obligatory country-by-country reporting to tax authorities, providing information about:
- profit before tax
- tax paid and accrued
- number of employees
- stated capital
- retained earnings
- and tangible assets for each jurisdiction where MNE does business.
Member States should then be obliged to automatically exchange reported information with other Member States concerned
The Commission notes in the Communication on an external strategy for effective taxation that the requirement of public country-by-country reporting for companies in other sectors than banks and extractive industries (which already have such obligation) is under consideration. A legislative proposal in this regard is expected in April.
Communication on an external strategy for effective taxation.
- The Commission presents to the European Parliament and the Council the state of play of international taxation, and proposes further actions to be taken at EU level.
- The Commission presents to the European Parliament and the Council the state of play of international taxation, and proposes further actions to be taken at EU level
- Member States are encouraged to support BEPS by ‘pushing for its smooth and timely implementation’ in the EU and internationally.
- The Commission notes that it will promote international country-by-country reporting and the Extractive Industries Transparency Initiative (EITI) for greater transparency and accountability in the extractive industry.
- The Commission proposes a three-step process to reach a ‘pan EU list’: (i) the Commission should identify internally the third countries to be prioritised for screening by the EU by autumn 2016; (ii) Member States should decide on jurisdictions to be assessed; and (iii) Member States should decide whether to add the jurisdiction in question to a common EU list of problematic tax jurisdictions.
- Once a jurisdiction is added to the EU list, Member States should apply common counter-measures against it. In addition to measures set in the Anti-BEPS directive, a list of complementary top-up defensive measures (i.e. withholding taxes and non-deductibility of costs of transactions done through listed jurisdictions) should be agreed by Member States before the end of 2016.
Timeline for 2016
- 28 January 2016: Publication of the Anti-Tax Avoidance Package.
- Information on the Anti-Tax Avoidance package
- April: Legislative proposal for mandatory public country-by-country reporting (BEPS Action 13) expected to be published.
- Summer: Initiative on a coordinated approach to double taxation dispute resolution to be published.
- Q4: Legislative proposal for a revised (two-stage) CCCTB expected to be tabled.