Brussels, 21/06/2016 (Agence Europe) - On Tuesday 21 June, the member states of the EU reached a political agreement on the anti-tax avoidance directive, after the silence procedure started on Friday of last week ended without being interrupted by any delegation.
At the Ecofin Council of 17 June, Belgium called for more time to give its agreement, as its minister did not have the necessary mandate to agree to the text as it stood, as it refers to the rule on the limitation of the tax deduction of loan interest (EUROPE 11575). Belgium wanted to be able to implement its own rules on this matter until an international agreement has been reached on a minimum standard, but other delegations wanted a deadline to be included anyway. The countries which will be entitled to the derogation, as long as the Commission feels that their national role is as effective as the one contained in the directive, will therefore have until 2024 to implement the new rule.
The Czech Republic wanted a written commitment from the Commission that it will present a legislative proposal by the end of the year on Prague's request to carry out a pilot project for a reverse-charge mechanism. This written commitment was still not in place on Tuesday 21 June, but the Commission pledged that this would be done.
Although civil society and certain political groups of the European Parliament have expressed their disappointment with the final compromise, which they feel has been watered down, the European employers' association still stresses that it is worried.
Employers fear disparate provisions at global level. Krister Andersson, chair of the 'tax policy' group of BusinessEurope, told us that the directive was still more ambitious than the 'BEPS' action plan of the OECD, from which it takes its inspiration, particularly as it contains minimum binding standards. “Europe is going in one direction, whilst the United States is reluctant” to implement BEPS, as are the countries of Asia, which have opted for a wait-and-see attitude, according to Andersson, who fears that there will be no “uniform implementation”.
However, he welcomed the fact that the 'switchover clause' (moving from tax exoneration to tax credit) has been withdrawn from the text by the member states. This aimed to discourage untaxed or low-tax revenue from entering the single market and then, completely free from all tax in many cases, from circulating within the EU. This clause did not come from BEPS, but from the proposed common consolidated corporate tax base (CCCTB). It is entirely possible that the Commission will return it to its initial place when it relaunches its CCCTB project in November of this year.
This provision is not the only one which may crop up again towards the end of 2016, as the Commission has pledged to flesh out the provisions of the anti-tax avoidance directive between now and October 2016 regarding the issue of hybrid mismatches. Currently, the directive only covers intra-EU situations, but the UK had made proposals to go further on this.
Andersson would also have liked to see the provision on exit taxation deleted from the text as well. This provision also comes from CCCTB and is not included in BEPS. Exit taxation is not compatible with the single market, BusinessEurope argues. The directive provides for all member states to apply exit taxation to assets transferred outside their territory. It should be based on the value of the assets on that date. Estonia will, incidentally, be able to enjoy a derogation from this provision, as it has different rules that are considered stricter. Unlike the other provisions of the directive, which must be implemented in 2019, exit taxation will come in from 2020.
Criticism from NGOs. The criticism levelled by various NGOs mainly concerns the rules on controlled foreign companies ('CFC'). These rules will allow a member state in which the parent of a group is established to tax the profit this company places in a country of low or zero taxation. The Commission takes the view that these rules are tightened up in the final compromise, as it states that permanent establishments can also be treated as controlled foreign companies (CFC).
According to Oxfam's Aurore Chardonnet, however, the finance ministers have made it impossible for tax administrations to implement these rules on CFC. On behalf of the British NGO ActionAid, Diarmid O'Sullivan told us that the requirement to have an economic activity, one of the conditions for the rules on CFC to come into play, has been “watered down so severely that it will be easy for companies to get around”.
A number of aspects from a previous version of the text have indeed been withdrawn, such as the need for the CFC to have been “set in place for valid commercial reasons”, or that staff numbers need to be “commensurate” in number. The most recent version of the text will have the same effect, however, a Commission source stressed, but acknowledged that this issue has caused no end of discussions between the member states in recent weeks.
It will not be enough to state that a CFC has a substantive economic activity, this will have to be reflected in its equipment, personnel and assets, the source added.
Andersson believes that the CFC rules are strict and he does not see how businesses could get round the need to have an economic substance, as the directive also contains a general anti-abuse rule.
Cautious welcome at the Parliament. Over at the European Parliament, the Belgian MEP Hugues Bayet (S&D), rapporteur on this directive, cautiously welcomed the political agreement. He said that in the short term, further proposals will be necessary, along with an assessment of the rules adopted, to make sure that these are effective. On behalf of the Greens/EFA, French MEP Eva Joly spoke very much along the same lines, stressing that the relaunched CCCTB and public country-by-country transparency would be the next major tests. (Original version in French by Elodie Lamer)