Pierre Moscovici – Photo EC
(BRUSSELS) – EU Member States agreed far-reaching new rules Tuesday to clamp down on the most common tax avoidance practices used by multinational companies.
The draft directive agreed is part of a January 2016 package of proposals from the European Commission to strengthen rules against corporate tax avoidance. The package builds on 2015 OECD recommendations to address tax base erosion and profit shifting.
The rules will be legally-binding and are a swift response to the recent Panama Papers revelations and to global efforts to clamp down on aggressive tax planning.
The directive addresses situations where corporate groups take advantage of disparities between national tax systems in order to reduce their overall tax liability. Corporate taxpayers may benefit from low tax rates or double tax deductions. Or they can ensure that categories of income remain untaxed by making it deductible in one jurisdiction whilst in the other it is not included in the tax base. The outcome distorts business decisions and risks creating situations of unfair tax competition.
Economic Affairs Commissioner Pierre Moscovici welcomed the Council agreement, saying it struck a serious blow against those engaged in corporate tax avoidance: “For too long, some companies have been able to take advantage of the mismatches between different Member States tax systems to avoid billions of euros in tax,” he said. ” I congratulate our Member States who are now fighting back and working together to make the changes needed to ensure that these companies pay their fair share of tax.”
The new rules are expected to be formally adopted soon by the Council, as the European Parliament has already issued its opinion .
Once implemented, this legislation should put an end to the most common loopholes and aggressive tax planning schemes currently used by some large companies to avoid paying their fair share of tax.
The draft directive covers all taxpayers that are subject to corporate tax in a 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.
- 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 re-attribute the income of a low-taxed controlled foreign subsidiary to its – usually more highly taxed – parent company.
- 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 ensures that the OECD anti-BEPS measures are implemented in a coordinated manner in the EU, including by 7 Member States that are not OECD members. Pending a revised proposal from the Commission for a common consolidated corporate tax base (CCCTB), it also takes account of discussions since 2011 on an existing CCCTB proposal within the Council.
Three of the five areas covered by the directive implement OECD best practice, namely the interest limitation rules, the CFC rules and the rules on hybrid mismatches. The two others, i.e. the general anti-abuse rule and the exit taxation rules, deal with BEPS-related aspects of the CCCTB proposal.
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