Brussels, 25/05/2016 (Agence Europe) - The European Union's rhetoric on the fight against aggressive tax optimisation collided with reality, on Wednesday 25 May, when the finance ministers of the Twenty-Eight failed to agree on the proposed directive on this matter, partially due to the different levels of ambition expressed around the table. The aim is now for an agreement in June.
On behalf of the Dutch Presidency of the Council of the EU, the Dutch Minister, Jeroen Dijsselboem, said that the states would possibly end up having to sacrifice the fiscal instruments that they currently cherish. In response to the Luxembourg minister, who made a recommendation, when the agreement comes in June, that the points on which the EU is going further than the OECD be emphasised, Dijsselbloem said that there must first of all be a “good agreement before we get a good line of communication”.
The meeting of the Permanent Representatives of the member states to the EU the day before had convinced the Dutch Presidency of the Council of the EU of the need for a discussion on this dossier behind closed doors, to prepare the ground for the public negotiations.
At this discussion behind closed doors, the European Commissioner for Taxation, Pierre Moscovici, said that action was needed on the same day. “We are very late” he warned. The Irish Minister immediately afterwards said that he felt “steamrollered”, according to a source close to the dossier. Many delegations, indeed, felt that things were moving too quickly. Recently, fiscal texts have tended to be approved with more or less unprecedented speed, but so far it has been mainly a matter of administrative cooperation, whilst in this case, it is a matter of changing the tax law of the member states, an ultra-sensitive point.
The Presidency's last-minute changes to address concerns raised by the states during an initial round of public debates were really just whistling in the wind, as the Irish Minister had no mandate to give his blessing to a modified text, according to a number of sources.
Even so, the Presidency looked at possible solutions. For instance, many delegations said (either publicly or behind closed doors) that they wanted to limit the application of the rules to control foreign companies (CFC) to purely artificial entities (Bulgaria, Ireland, Hungary, Luxembourg, Malta, Latvia and Belgium). Readers may recall that these rules reallocate the income of a low-taxed controlled company to its parent company. In this scenario, the parent company must pay tax on this income in the state in which it has its headquarters - generally a high-taxation country. In the most recent the compromise put together the same day, the Presidency provided for the CFC rules not to apply if the CFC had been set up for valid commercial reasons and pursued economic activity with the support of a team, assets, and so on. The change made is that the burden of proof for the economic substance is no longer on the taxpayer, but on the tax administrations, which was welcomed by Luxembourg, subject to a final definition of the notion of 'economic substance'. In a separate declaration, according to the Presidency's proposal, the Council would call upon the Code of Conduct group to develop guidelines shedding more light on these valid commercial reasons and economic activity.
As Ireland is no friend to the idea that the CFC rules would be triggered if the effective rate in the third country is below 50% of the reference rate of the member state, it reiterated the states' prerogative to set rates. It was supported on this point by Belgium. The Commission has therefore put together a declaration to be included in the minutes of the Council, essentially stating that this directive would not oppose a minimum effective taxation rate. Ireland questioned the legal value of this declaration, but Commissioner Moscovici was unable to offer any more, stressing the fact that it was difficult to legislate on something the Commission did not intend to do. The Irish Minister pointed out that at one time, the United Kingdom applied CFC rules without a reference rate to trigger them. The British representative then took the floor to state that London had eventually concluded that a reference rate was necessary to trigger these rules in order for them to be effective. Dijsselbloem, who is highly expert on the dossier at technical level, said that he had discussed the issue with the OECD and did not see how it would even work without a reference rate.
The proposed declaration on hybrid mismatches failed to secure support from Malta. The proposed declaration states that the Commission will make proposals in October to cover more situations in this field, for instance situations with third countries. This was also important to the United Kingdom, Ireland and Italy.
On limiting the tax deductibility of loan interest, Commissioner Moscovici explained that he would have preferred all existing loans to be covered by the directive, whereas a 'grandfather clause' has been added. To date, the Presidency's text stipulates that loans taken out before 22 May 2016 will be excluded from the scope of the directive. Spain would like this date to be replaced by the date on which the directive enters into force. During the debate behind closed doors, the Belgian representative called for an additional clause to link the obligation to apply this limitation on the tax deductibility of loan interest in the EU to the point in time at which the international parties also agree to implement minimum standards on this issue.
Estonia is also expected to be granted a derogation to the provision on exit taxation, as it has different rules that are deemed to be stricter.
Finally, the switchover clause (moving from tax exoneration to tax credit), which the Commission wanted to add to the rules on CFCs, may still fail to make the final cut, Dijsselbloem said. The Czech Republic, Romania, Denmark and Croatia, however, have expressed their support for this clause. (Original version in French by Elodie Lamer)