Brussels, 14/03/2016 (Agence Europe) - The European Commission should withdraw its proposed anti-tax evasion directive, as it goes beyond the BEPS action plan of the OECD (to fight base erosion and profit shifting), argues BusinessEurope in a position paper published on Monday, 7 March 2016, which was sent directly to the Commissioner for Taxation, Pierre Moscovici.
“The declaration to Ecofin stating that all member states will review the national fiscal systems to ensure that they are coherent with OECD standards would be preferable and sufficient at this stage”, with possibly a monitoring role for the Commission, BusinessEurope adds.
None of the six specific provisions as laid down in the proposed directive finds favour with the employers' association. The BEPS measures “are aimed at ensuring that taxes levied in the country where the value and profit is created. This is hardly the case with, for example, the switch-over clause ('moving from exoneration to tax credit'), which results in taxation at the shareholder level and has nothing to do with base erosion within the national market”, the BusinessEurope document explains. This provision stipulates that a member state may not exempt certain foreign revenue (distribution of profits, proceeds from divestments of shares) from third countries with, in return, the award of tax credit, if the legal corporate taxation rate in the third country is 40% less than the legal rate in force in the member state.
The industry also notes that the provisions taken from the proposed common consolidated corporate tax base ('CCCTB') are, in that framework, part of a broader and consolidated regime with “clear ambitions to enhance growth, employment and investment” whereas in the new directive, these measures are directed “against other member state as well as third countries”.
BusinessEurope also expresses concern at the fact that the Commission's proposal states that the “EU should encourage its international partners to also adopt these higher standards”, although the directive would be in place irrespective of actions taken by other countries. “The US in particular has expressed considerable reluctance to implement several of the action points in the OECD-BEPS proposal”, BusinessEurope notes.
As regards the cap on the tax deduction of loan interest (set at 30% of group profit before interest, tax, depreciation and amortisation, or 'EBITDA'), the European employers take the view that the Commission's proposal goes further than BEPS, for instance by applying this cap to the payment of interest at national level, rather than just a cross-border payments. “Within a multinational enterprise, the borrowing for the entire group is often made through the parent company”, BusinessEurope explains. If the headquarters of the parent company is located in a large country with a big home market, the EBITDA is likely to be higher, meaning that bigger countries will have an advantage over smaller countries in attracting company headquarters.
BusinessEurope then goes on to criticise the provision regarding exit taxation, which aims to prevent the tax base from being eroded in the state of origin if the assets comprising latent added value are transferred without change of ownership outside the fiscal jurisdiction of that state. This point does not come under BEPS and “nor does it belong in the internal market”, explains BusinessEurope, which goes on to question whether the proposal would comply with the case-law of the Court of Justice of the EU, as it is likely to result in an “unjustified restriction on the fundamental freedoms, such as the freedom of establishment and the freedom of movement of capital”. If other countries decide against bringing in a provision of this kind, “the national tax sovereignty of the member states should be respected”, the position paper states. During discussions at the Council, Malta is reported to have made the same point.
BusinessEurope also points out that the OECD concluded that the rules on controlled foreign companies should be dealt with at national level, whereas the Commission, it argues, is proposing a rigid 'one size fits all' framework. These rules reallocate the revenue of a controlled foreign subsidiary under a low rate of taxation to its parent company, with the effect that the parent company becomes liable for tax on this income in its state of residence.
Council process in train.
For their part, the member states are making good progress in their technical examination. The option of dividing the proposal into two so as to leave the provisions not included in BEPS until a later date seems to have been permanently shelved. The Presidency is furthermore hoping to conclude two of these provisions at a technical meeting this Thursday 17 March: exit taxation and the general anti-abuse rule. The Presidency is also expected to do its utmost to keep the switch-over clause in place, but this could also end up being removed. In any case, a number of states are reported to be asking for this to apply only in cases where there is no bilateral agreement in place. Germany and Denmark also want the safety net principle (applicable when nothing else applies) to be valid for the rules on hybrid mismatches. Other states are calling for the text to be further aligned on that of the OECD as regards these hybrid mismatches.
The states have also made good progress from a technical point of view on interest capping. Ireland and the United Kingdom are calling to be able to exempt projects of public interest from this provision, as the OECD provides for in BEPS. Speaking via Insurance Europe, the insurance sector make the same request last week. Although the Commission has provided that the “EBITDA of a tax year not fully absorbed by borrowing costs borne by the taxpayer during that financial year or previous financial years” may be carried forward to subsequent financial years, a number of states are also calling for the possibility of being able to do a 'carryback', as the OECD provides for.
The Presidency is to submit a new proposed compromise for this Thursday's technical meeting. It is hoping for a solid text in May. (Original version in French by Elodie Lamer)