Brussels, 21/01/2016 (Agence Europe) - On Wednesday 27 January, the European Commission is to present a package of measures, of which EUROPE has had sight, to prevent tax avoidance by multinationals. This package will consist of two legislative proposals, two communications, including one on an external strategy for effective taxation, and recommendations for the member states to change their bilateral tax agreements.
The proposed “Directive establishing rules against tax avoidance practices which directly affect the functioning of the single market” has taken up several points of the BEPS action plan of the OECD to fight aggressive tax optimisation, and a number of provisions of the text on the common consolidated corporate tax base (CCCTB).
The rules on controlled foreign companies (CFC) - Action 3 of BEPS - are dealt with in Article 8 of the proposal. They reallocate the revenue of a low-taxed controlled subsidiary to its parent company. In this scenario, the parent company must therefore pay tax on this income in the state in which it has its headquarters, generally high-taxation countries, the Commission explains. In the preamble to the legislative text, the Commission states that there is a need to address situations with third countries and within the EU. Given the limitations imposed by EU case-law (the Cadbury-Schweppes judgement of the Court of Justice of the EU of 2006), the Luxembourg Presidency took the view that it was better to stick to situations involving third countries and leave the member states the leeway to go further if they choose. “To comply with the fundamental freedoms, the impact of the rules within the Union should be limited to arrangements which result in the artificial shifting of profits out of the member state of the parent company towards the CFC”, the Commission writes. The wording it decided upon therefore looks like a kind of anti-abuse rule. By default, the rules on CFCs will not apply if a company has its tax residence in a member state or third country of the European Economic Area, “unless the establishment of the entity is wholly artificial or to the extent that the entity engages, in the course of its activity, in non-genuine arrangements which have been put in place for the essential purpose of obtaining a tax advantage”.
The definition of the notion of 'control', based on a direct and indirect participation of more than 50% of the voting rights or capital, is that of the OECD. The Commission's text also establishes that an effective tax rate is deemed low if it represents less than 40% of the effective rate of the member state in question.
Article 4 concerns the limitation of the deduction of loan interest (Action 4 of BEPS). Like the OECD, the Commission puts the upper limit for deductible interest in a range of between 10% and 30% of the results of the group before interest, tax, amortisation and reserves ('EBITDA'), or at €1 million. The Commission explains that financial and insurance institutions should also be subject to limitations on the deductibility of interest. However, given their specific nature, a case-by-case approach would be required for these sectors. “Given that discussions in this field are not yet sufficiently conclusive in the international and Union context, it has not yet been possible to provide for specific rules” in these sectors, it writes.
Article 5 of the Commission's proposal, on exit taxation, tightening up the rules on how assets are taxed when they are transferred to another state, is not a BEPS point, but comes from the EU's text on the CCCTB. This is also the case with Article 6, the switch-over clause, which has the same objective on controlled foreign companies, but different characteristics and a different scope. Article 7, the general anti-abuse rule, also comes from CCCTB.
The draft directive also tackles the issue of hybrid mismatches. The Commission feels that the scope of application of the rules on these hybrid mismatches should be limited to mismatches between EU countries. Mismatches between an EU country and third countries call for a subsequent assessment, the Commission states.
In a separate legislative proposal (amendments to the directive on administrative cooperation), the Commission applies Action 13 of BEPS, country-by-country reporting, to the letter. The multinationals concerned are therefore those with a total consolidated group turnover of at least €750 million. The ultimate parent company of a group in question will therefore have to notify the tax office of its country of residence of the “aggregate information regarding its turnover, profit (or losses) before tax, tax on profits paid, tax on profits due, equity capital, non-distributed profit, staff numbers and non-treasury and tangible fixed assets or treasury equivalent for each of the jurisdictions in which the group of multinational companies carries out its activities”. The declaration must also contain the identity of each entity of the group, clarifying the jurisdiction of tax residence. Amendments to the directive on administrative cooperation also provide for the automatic exchange of information between the member states to those which, on the basis of the information collected, are the country of residence of one or more entities of the group. The Commission will see, theoretically on 8 March, whether it will go further, proposing that some of this information is made public. The Parliament is pushing for it to do so in the framework of the revision of the directive on shareholders' rights. The proposed modifications to the directive on administrative cooperation will apply from 1 January 2017.
Tax agreements and third countries. As anticipated, the Commission is not dealing with the question of permanent establishment (Action 7 of the OECD) under the directive. This is the subject of a separate recommendation, which also deals with Action 6 of the OECD, on the limitation of the advantages of fiscal agreements. It encourages the member states, in the treaties they conclude between themselves or with third countries, to implement and make use of the provisions proposed in Article 5 of the OECD tax convention model, to deal with the artificial avoidance of the status of permanent establishment as laid down in Action 7 of BEPS. When states enter into tax agreements with each other or with third countries and include a 'principal purpose test' based on the OECD tax agreement model, they are encouraged to include a change to the OECD text (highlighted below). “A benefit under this Convention shall not be granted in respect of an item of income or capital if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that it reflects a genuine economic activity or that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of this Convention”.
The Commission is also to publish its “External strategy for effective taxation”. In an appendix based on this communication, it updates provisions which should be contained in a good fiscal governance clause to be brought into EU agreements with third countries. These provisions concern transparency, the exchange of information and fair tax competition, the global OECD standard on the exchange of information, international BEPS standards endorsed by the G20 and the international standards of the financial action group on the fight against money laundering and the financing of terrorism. In its communication, the Commission also states that it wishes to work to include provisions on State aid in negotiations for trade and association agreements with third countries.
After its initial consolidated list of tax havens, which came under heavy fire in June last year, the Commission is rethinking its strategy in this matter. It plans to start by internally identifying third countries which it feels should be monitored. In order to do so, it will develop a scoreboard of indicators to determine the potential impact of these jurisdictions on the tax bases of the member states (economic link to the EU, level of economic activity, legal and institutional factors, and the like). Inclusion on this table will not constitute a judgement on the standards of good tax governance of the countries, the Commission explains. It intends to present its preliminary conclusions to the Code of Conduct group in the autumn. The states will then decide which jurisdictions will be the subject of an assessment on this good governance criterion. This investigation stage will include dialogue with the third countries concerned. The final stage, a last-resort option, will be to make a list of these countries. “This should be reserved only for the jurisdictions which refuse to engage on these questions of good tax governance”, the Commission stresses. (Original version in French by Elodie Lamer)