Brussels, 14/06/2016 (Agence Europe) - On Tuesday 14 June, the path was not yet clear for an agreement to be reached on the anti-tax avoidance directive at the meeting of the European finance ministers later this week. Over and above the technical issues still awaiting the meeting of the permanent representatives of this Wednesday 15 June, the fear seems to be emerging that the Czech government will oppose an agreement if it fails to secure satisfaction on the fight against VAT fraud.
In the pipeline since 2014, the Czech Republic is still waiting for authorisation to carry out a pilot project for a generalised reverse-charge mechanism. A number of sources explain that the Czechs want to see a legislative proposal on this point for the Ecofin Council of this Friday 17 June and will therefore use the threat of a veto on the anti-tax avoidance directive as leverage to secure this. The Czech finance minister, Andrej Babis, clarified his position in a statement published today by EUROPE.
The Commission has prepared a preliminary analysis of the Czech request, which it is to present to Ecofin. The document, of which EUROPE has had sight, is made up of some 30 pages of legal and technical arguments representing the opportunities and challenge of a pilot project of this kind, without reaching any conclusions. EUROPE will return to this matter in greater detail.
The Commission reiterates that it has kept its promises in terms of timetable: it has been stating for several months that it would present its assessment in June. At a legal level, the preliminary evaluation indicates that if the Commission was to make a proposal of this kind, it would be necessary to present an analysis proving that the pilot project complied with European law.
There are also a number of outstanding issues regarding the anti-tax avoidance directive, which seeks to translate the BEPS action plan of the OECD into European law. The so-called switchover clause (moving from tax exoneration to tax credit) is in brackets in the most recent version of the text, of which EUROPE has had sight. It will be left up to the ministers to withdraw it or keep it in, but it is expected to disappear. This clause is not part of BEPS, but was included in the initial proposal for a common consolidated corporate tax base (CCCTB). This initiative is to be relaunched before the end of the year and it remains to be seen whether the Commission will decide to keep it in.
Theoretically, Ireland is satisfied by the changes made to the rules on controlled foreign companies (CFC), which basically give the state in which a parent company has its headquarters the option to tax the income of a CFC based in a third country (and, in certain circumstances, in the EU) under certain conditions. The text put to Ecofin in April provided for these rules to be triggered if the effective rate of the country of the controlled entity was 50% less than the rate of the member state of the parent company. Ireland did not want a minimum effective rate in the directive, out of concerns that this could create a precedent. The most recent version of the text “is not pretty”, a European source conceded. The wording is indeed somewhat convoluted but, according to these sources, means exactly the same as the previous versions, but does not indicate the figure of 50%. In the most recent version of the text, the CFC rules will come into play if the actual corporate tax paid by a CFC is less than the difference between the tax that would have been paid in the member state of the parent company and the tax actually paid by the CFC. For instance, given a profit of €1,000, if the member state of the parent company practices a 50% tax rate and the income of the CFC is taxed at a level of 10%, this would mean that the entity would pay €400 in the member state parent company and €100 in the country in which it is itself located. The difference between the two is €300. As the tax paid by the CFC is lower than the difference, the CFC rules would, in this scenario, be triggered.
A number of issues were also raised on the application of these CFC rules within the EU. A number of member states wanted to limit them to purely artificial arrangements, in line with the case-law of the Court of Justice of the EU. Ecofin placed the burden of proof of the economic activity of the CFC onto the tax administrations. The most recent text states that the rules will not apply if the taxpayer can establish that the CFC pursues a substantive economic activity, supported by staff (changed from commensurate staff), equipment, assets and premises. Luxembourg is reported still to have objections regarding the burden of proof.
Lastly, there are still concerns related to the provision on the limitation of the tax deduction of loan interest. Austria is still calling to be able to use targeted measures rather than apply the rule laid down in the directive, which limits this tax deduction to 30% of EBITDA (the earnings of a company before deduction of interest, tax, depreciation and amortisation). A recital has therefore been clarified to state that the targeted measures may only be applied on top of the rule based on the 30% ratio.
Belgium is still talking about an exemption for third-party or bank loans, stressing that abuse has been observed between affiliated companies. As for the request made by a number of delegations, including the Belgian delegation, for an additional clause to link the obligation to apply this limitation on the tax reduction of loan interest in the EU to the point in time when the international partners also agree to implement minimum standards in this matter, the Presidency argues that this would pose legal questions and stresses that a number of delegations are steadfastly opposed to it. This provision on the limitation of the tax deduction of interest is therefore anything but consensual.
On behalf of the Dutch Presidency of the Council, the finance minister, Jeroen Dijsselbloem, told the European Parliament's committee on economic and monetary affairs on Tuesday morning that he believed that an agreement was possible this Friday. This Wednesday's meeting of the permanent representatives should shed more light on the possibility. (Original version in French by Élodie Lamer)