Luxembourg, 14/03/2016 (Agence Europe) - Without a green light from the Belgian finance minister, who did not have the required mandate, at the Ecofin Council of Friday 17 June, a “silent procedure” was launched to continue until midnight on Monday 20 June for an agreement on the tax avoidance directive. All of the other delegations agreed on the most recent proposed compromise. The reservation of the Czech minister had nothing to do with the substance, but was due to waiting to see whether the Commission would put into writing its promise of a legislative proposal authorising it to carry out a pilot project on a reverse-charge mechanism to fight VAT fraud.
Ultimately, therefore, it was due to the Belgian finance minister and not his Czech colleague that the Ecofin was suspended, on Friday 17 June, regarding the possibility of an agreement on the tax avoidance directive, just five months after it was presented by the European Commission. The Czech minister, who initially placed conditions on his agreement, ended up depending on the goodwill of the Belgians. The Commission will not agree to promise it a proposal before the end of 2016 on this pilot project unless an agreement is reached on the tax avoidance directive.
The Belgian minister, for his part, must consult his government regarding the the plan to link the implementation of one specific provision of the agreement - implementation of the tax deduction of loan interest - to the point in time when an international agreement is reached within the framework of the OECD on a binding minimum standard. A number of delegations which have similar rules on the limitation of the deduction of interest called to be able to keep these rules in place until an agreement is reached at the OECD. Austria, for instance, feels that its own rules are easier to implement and highly effective. There is no discussion underway on this point of the OECD, but the final report on the BEPS project to fight tax optimisation contains a sort of revision clause. According to a source close to the dossier, a number of countries, including Germany, raised the possibility of a “BEPS-2” in the framework of the OECD, in which certain best practices from BEPS-1 would become minimum standards.
Belgium had no mandate to agree to a text specifying a deadline for the implementation of this rule if the OECD did not make it a minimum standard. The United Kingdom, Germany, Italy, France and Spain took the floor during the public debate to insist on including a date, in order to make the process more credible. The text therefore ultimately states that, if there is not an agreement at the OECD, the deadline to implement the rule on limiting the deduction of loan interest (based on a fixed ratio) for countries which have similar measures to those of the directive will be 1 January 2024.
Commissioner for Taxation Pierre Moscovici said that he was confident that there would be an agreement on Monday evening. “Belgium has all the guarantees it wanted”, he said.
The issue is that Belgium's measures are much more limited in terms of scope of application. According to a number of European sources, they are not sufficiently effective. The states affected by this derogation must, by 1 July 2017, notify their measures to the Commission, which will be responsible for assessing them to see whether these countries are entitled to this. When asked about the possibility that Belgium would not be eligible for this derogation, the Dutch minister and president-in-exercise of the Ecofin Council, Jeroen Dijsselbloem, simply said that the decision was the Commission's to make. He went on to observe that the OECD felt that the other approach, that used by Belgium and Austria, could be effective. The devil, once again, will therefore be in the detail.
More generally, Dijsselbloem explained that there would be aggressive corporate tax planning as long as there were differences between the legislation of different countries.
Readers may recall that the rule of the directive on limiting the tax deduction of interest specifies that companies' borrowing costs would be deductible only at a level of 30% of the gross operating profit of the taxpayer (EBITDA), i.e. the maximum provided for by the OECD, or the amount of €3 million (€1 million in the Commission's proposal). Loans taken out up to 17 June 2016 will be exempted from this measure.
Rules on controlled foreign companies watered down. In the final version, the rules on controlled foreign companies (aiming to prevent income from leaving the high-taxation state of a parent company for a subsidiary established in another, low-tax country) have been watered down. “The establishment of a minimum standard is work in progress. However, the contents of this standard are below the most effective existing instruments on controlled foreign companies (CFC)”, Pascal Saint-Amans, Director of the Centre for Tax Administration and Policy of the OECD and the brain behind BEPS, told us.
The road has been a long one. Initially, these rules were not to be triggered unless the tax rate of the country in which the subsidiary is located was 40% less than the rate of the member state of the parent company. By request of Ireland, this figure has been removed from the text and replaced with convoluted wording meaning much the same thing. However, in the view of Aurore Chardonnet of Oxfam, there is also an issue with the definition of economic activity which, if it is “substantive”, will spare CFCs from these rules in an intra-EU situation. The definition, which was solid throughout the entire negotiation period, has ended up being eroded.
“It is clear that the aim was to reduce the obligations to consider a subsidiary has a real economic activity (…), the requirements regarding staff numbers have been removed. Now, just one employee is enough”, she said. Additionally, the reference to personnel, offices etc. to justify the income of the subsidiary has also been removed. “This means that the single employee of the subsidiary could just be mopping the floor and have nothing to do with the economic activity generating the profits in the subsidiary”, she added. The switchover clause (moving from tax exoneration to tax credit), which the Commission wanted to add to the rules on CFCs, will also be effectively removed from the text.
Civil society disappointed by the text. Dijssebloem refused to accept that the text was not ambitious. “If it was not, it would not have been so difficult to reach this outcome”, he said, adding that the states would need a change in attitude. “We are all going to have to change our legislations”, he explained. He added that the new rules would apply from 2019. It is worth noting that the directive will be amended by the end of the year to extend the rules of hybrid mismatches. (Original in French by Elodie Lamer)