Brussels, 28/01/2016 (Agence Europe) - On Thursday 28 January, the European Commission took the measure of how hard it is going to be to keep all of the stakeholders happy in such a sensitive dossier as corporate taxation. Presenting its anti-corporate tax avoidance package (see EUROPE 11473), it succeeded in sweeping away a series of criticism.
The whole of the problem lies in fighting tax abuse whilst ensuring that the European Union remains an attractive place for businesses. “This is important for jobs, growth and investment, which are a priority of this Commission”, stressed Pierre Moscovici, the European commissioner for taxation, at a press conference. The issue for the private sector and several member states will, after all, be to see whether the rest of the world follows suit in the implementation of BEPS, the OECD's action plan to fight aggressive tax planning. “The EU cannot be alone in its corporate taxation reform, our member states are already delivering on their promises. Now we must ensure that others do the same in order to prevent an external threat”, Moscovici continued. He went on to explain that this was precisely the aim of the strategy which the European Commission intends to set in place with regard to the countries considered to be non-cooperative in taxation matters.
Upstream of the publication of the legislative package, BusinessEurope, the European employers' association, urged the EU not to shoot itself in the foot. “The EU must not act as lone front-runner in implementing the OECD BEPS agreement, and must not undermine the competitiveness of EU industry or damage the EU's attractiveness”, warned Markus J. Beyrer, its director general.
The ECR group at the European Parliament spoke along the same lines. “Internationally, the battle for job creation is raging (…). Everyone who ignores the reality that the markets have become global puts himself in a weaker competitive position”, said Sander Loones of Belgium. “This is why we need to question the Commission's ideas to impose additional obligations, which go beyond what has been agreed internationally at OECD level”, added the Belgian MEP, who is the deputy president of the economic and monetary affairs committee of the EP.
The accountancy experts, represented by ACCA, also feel that creating a separate list of European rules which are separate from the OECD rules should be avoided. According to Chas Roy-Chowdhury, the approach decided upon, which limits the levels of tax-deductible loan interest, is a good example of “where a constructive approach towards creating a genuinely coherent global system has been taken”.
Civil society and a proportion of the members of the European Parliament take the opposite view. The network Eurodad, for instance, considers that the Commission's proposal will allow businesses to deduct high levels of interest payments from their tax bills. On behalf of the Greens/EFA group at the EP, Eva Joly of France said that the Commission's proposal was a “minimum implementation version of BEPS. This is particularly true of the proposals on limiting the tax deductibility of interest charges”.
What is behind these arguments? The OECD recommended setting the upper limit of deductible interest at between 10% and 30% of the group's results before interest charges, tax, amortisation and reserves ('EBITDA'). According to these arguments, the Commission would have chosen the lighter version of this recommendation. The institution defends itself, pointing out that what it hopes to do is to establish minimum common standards throughout the EU.
Controlled foreign companies. The organisation Oxfam International has questioned the rules on controlled foreign companies (CFC), which reallocate the income of a low-taxed controlled subsidiary to its parent company. In this scenario, the parent company would have to pay tax on this income in the state in which it has its headquarters, usually a country of high taxation. These CFC rules will apply if the effective taxation rate of the third country represents less than 40% of the effective rate of the member state, under the Commission's proposal.
Wednesday's edition of the French daily newspaper Les Echos detailed the concerns of French companies regarding this provision, as the French reference rate is high. Oxfam feels that this proposal is a problem in that some countries have a very low tax rate (10% in Bulgaria). “Given the low rates of corporate income tax in some countries, the current proposal implies that a corporate tax rate of 4% is good enough for the Commission”, explains Aurore Chardonnet of Oxfam International. The European Trade Union Confederation also feels that the threshold of 40% decided upon is too low. Oxfam, like Eurodad and ActionAid, also fears that this rule will tighten up to competition between the states and lead to a race to the bottom.
Pierre Moscovici has no such concerns. Public policies and services need resources, he pointed out, adding that a race to the bottom would simply leave no resources to pay for public policies.
The co-chair of the Greens/EFA of the European Parliament, Belgium's Philippe Lamberts, welcomed the proposal to include a “clause on permanent establishments, to limit cases similar to that of AMAZON”. “However, it's a pity that this proposal will not be binding upon the member states”, he added. The European Commission has issued a recommendation on this point for the member states to change their bilateral tax treaties in line with EU law. Within its services, however, it is acknowledged that if the states choose not to apply the recommendation, there is nothing the Commission can do.
What is expected of the Council?
On behalf of the S&D group, Portugal's Elisa Ferreira called upon the Council “not to water down these proposals, which are a minimum”.
When asked about the future attitude of the member states, Moscovici said he expected that the “discussions at the Council will naturally be very lively”. “We are not breaking any new ground”, he explained, stressing that the legislative package aims to translate into Community law the result of the work carried out within the OECD. As regards the EU states which are not members of the OECD, he said that whether or not a country belongs to the OECD has no bearing on whether it shares the principles the organisation lays down.
On several sides, it is anticipated that the discussions will be particularly difficult on the CFC companies and the 'switch-over' clause, which has the same objective, despite different characteristics and a different scope. At the Council, it is believed that the states will probably reject this switch-over clause, which is not part of the BEPS action plan, but which comes from the text on the common consolidated corporate tax base ('CCCTB').
The Commission has incidentally distanced itself from the Council's approach to hybrid mismatches. At the Council, it is predicted that the states will favour their own approach. At the Commission, a source explained that the proposal decided upon stems from an analysis of compatibility with Community law and the case-law of the Court of Justice of the EU. According to the rules put forward by the Commission, it will be the responsibility of the source state to define the tax treatment of the taxable instrument or entity. For the time being, these rules are limited to intra-EU situations, but the Commission is looking into the question of situations involving third countries.
Google. When asked about the agreement reached between the company Google and the United Kingdom, Moscovici sang from the same hymn sheet as his counterpart for Competition, Margrethe Vestager. He added that in the proposed directive aiming to fight tax avoidance, the proposals on exit taxation could make it possible to tackle the type of issue raised by the case of Google. The aim is to “prevent companies from relocating assets purely to avoid taxation”, he said. This proposal does not come from the OECD, but from the initial text on the CCCTB.
After six years of negotiations with HMRC, Google has agreed to pay £130 million in corporate tax arrears for the period 2005-2015. Commissioner Vestager appeared that morning on the BBC to say that if she received a complaint, she would be prepared to look more closely at the agreement.
Later in the day, the Commission confirmed that it had received a letter from the deputy leader of the Scottish National Party. “The Commission will look at it and issues raised, as with all letters received from stakeholders”, the Commission said. This does not prejudge the opening of any investigation. (Original version in French by Elodie Lamer)