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EC Explains Anti-Tax Avoidance Directive

by Ulrika Lomas,, Brussels

03 February 2016

The European Commission has set out the six key measures included in its new Anti-Tax Avoidance Directive, which it said would counteract some of the most common types of aggressive tax planning.

The Commission's anti-avoidance package aims for a coordinated European Union (EU) wide response to corporate tax avoidance. Tax Commissioner Pierre Moscovici said: "We will not stop cross-border tax avoidance with 28 national responses. A patchwork approach does not match the multiple challenges of our 21st century tax systems. So a coordinated approach in the EU is essential to succeed. In our single market, to leave the national level implementing measures without coordination can create burdens for businesses, uncertainty for investors, and even more loopholes for tax avoiders to exploit."

The Commission said that its proposed controlled foreign company (CFC) rule should discourage multinationals from shifting profits from their parent company in a high-tax country to controlled subsidiaries in low- or no-tax countries. The rule will allow the EU member state where the parent company is located to tax any profits that the company "parks" in a low or no tax country. It will be triggered if the effective tax rate in the third country is less than 40 percent of that of the member state in question. The company will be given a tax credit for any taxes it paid abroad. The aim is to ensure that profits are effectively taxed, and at the tax rate of the member state in which they were generated.

The second measure outlined in the Directive is a switchover rule, whereby a company would have to inform the relevant EU tax authority when it received a dividend from a non-EU country and explain whether it had paid tax on the dividend elsewhere. The tax authority would then be able to deny the company tax exemptions if the dividend income had been taxed at a very low or zero rate in a third country. If the member state determined that the dividend had been properly taxed in the third country, it could give the company a credit for the tax it had paid.

Third, the Directive proposes that all EU member states apply an exit tax on assets moved from their territory. It would be based on the value of the assets at that point in time. The Commission said that as companies are obliged to send tax authorities their balance sheets (containing information on their taxable assets), member states would be able to determine when an asset such as intellectual property had "disappeared."

The Commission has also recommended that member states limit the amount of net interest that a company can deduct from its taxable income, based on a fixed ratio of its earnings. Interest payments are generally tax deductible in the EU. The Commission said that a group can currently seek to reduce its overall tax burden by arranging inter-company loans that ensure their debt is based in a company in a high-tax country where interest payments can be deducted. Meanwhile, the interest on the debt is paid to the group's "lender" company, based in a low-tax country. The Commission said its proposal should make it less attractive to companies to artificially shift debt in order to minimize their taxes.

The fifth proposal seeks to prevent companies from exploiting mismatches in national rules to avoid taxation. The Commission said that some companies take advantage of the fact that EU member states treat the same income or entities differently for tax purposes, to deduct their income in both countries or obtain a tax deduction in one country on income that is exempt from tax in the country of destination. It recommended that, in the event of such a mismatch, the legal characterization given to a hybrid instrument or entity by the member state where a payment originates should be followed by the member state of destination.

Finally, the Directive contained plans for a General Anti-Abuse Rule (GAAR), which would tackle an artificial tax arrangement if there is no other anti-avoidance rule that specifically covers such an arrangement. The Commission said the GAAR would act as a safety net in cases where other anti-abuse provisions cannot be applied and allow tax authorities to ignore wholly artificial tax arrangements and tax on the basis of the real economic substance.

TAGS: tax | business | European Commission | tax avoidance | interest | intellectual property | corporation tax | tax authority | multinationals | tax planning | transfer pricing | tax rates | tax reform | exit tax | European Union (EU) | Europe | BEPS

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