On 28 January 2016 the European Commission (EC) published its Anti Tax Avoidance Package (ATA Package). The package is part of a wider plan of the European Commission to address tax avoidance by multinational enterprises (MNE's). Anti-avoidance measures that were proposed earlier by the EC include the altering of the EU Parent Subsidiary Directive in order to address hybrid mismatches and to introduce a general anti-abuse rule (GAAR) with respect to the holding of shares in other entities (per 1 January 2016) and the mandatory automatic exchange of cross-border rulings (per 1 January 2017).
The package is inspired by the OECD's project on Base Erosion and Profit Shifting (BEPS), the final reports of which were published in October 2015. With the currently proposed package the EC intends to make sure the BEPS outcome is implemented by the member states in accordance with EU law and that taxes are paid in the member states where the corresponding value is created. The core of the proposed package consists of four documents:
- an Anti Tax Avoidance Directive (ATA Directive);
- a Recommendation on Tax Treaties;
- a Revised Administrative Cooperation Directive; and
- a Communication on External Strategy on Effective Taxation.
Please be referred to the Annex for a more detailed overview of the proposed measures. Please note that the proposal can still (partially) change.
Initial reaction from the tax practice to the Package
Since there is no EU common tax system for direct taxes (such as corporate income tax), the respective member states will be impacted differently by the ATA Package. The different impact expected to the tax systems of the respective member states is reflected in the political reactions to the ATA Package. This has been covered in the press.
Below we will provide you with the reaction from a Dutch perspective. In order to provide you with even more insight, we have asked our tax colleagues from several European Bird & Bird offices to comment on the proposed measures in order to obtain an impression of how the ATA Package was received in tax practice of different EU member states. Please find the different responses below from Belgium, Czech Republic, Finland, France, Germany, Poland, Slovakia, Spain, Sweden and the UK.
In the Netherlands, the ATA Package was received by most tax practitioners with great scepticism on its effect and aversion for its impact on the Dutch fiscal climate for MNE's. For example, headquarters based in the EU and especially in the Netherlands may be negatively affected by the proposed switch-over clause because of the impact it would have on the long standing Dutch participation exemption; one of the cornerstones of the Dutch tax system. The participation exemption currently exempts capital gains and distributions from qualifying participations, including those from subsidiaries in low taxed jurisdictions as long as they are active. Changing this tax exemption arguably has a significant negative impact on the competitiveness of EU and Dutch based MNE's and contradicts the principles of an open economy. The Dutch Association of Tax Lawyers criticized the proposed measures, stating they would target bona fide structures and would end Dutch fiscal sovereignty. The Dutch government is yet to formally respond. Considering its current EU presidency, this response will be received with great interest.
An intervention on supranational level is generally deemed necessary by the Belgian tax practitioners in order to implement anti-tax avoidance legislation in a consistent and coherent way. However, some points of the proposed ATA Directive have not been welcomed with great acclaim. In general, the entrepreneurial environment fears that the Union will not be at a level playing field with the rest of the world in terms of fiscal attractiveness. Also the absence of an impact analysis – while it is generally expected that the effective taxation will surely increase for the majority of businesses – has been poorly appreciated. In addition, considerable doubt exists with regard to the additional country-by-country reporting duties, possibly resulting in an excessive administrative burden for bona fide companies.
Furthermore, three of the specific areas covered by the proposed ATA Directive could have an (in)direct impact on the Belgian tax environment. While Belgium already has exit rules, the nature of the current proposals would probably impose some modifications. Secondly, the switch-over provision aiming to increase the tax base by neutralizing the numerous tax exemptions for revenues from low taxed third countries, might force the Belgian government to renegotiate certaindouble tax treaties. Finally, Belgian law does not contain Controlled Foreign Company (CFC) measures and would therefore require rather drastic changes. In addition, implementation of the proposed CFC-measures in other countries will also seriously affect the Belgian subsidiaries of multinational enterprises, as they envisage to mitigate or exclude certain preferential tax regimes, such as the excess profit ruling, patent boxes and notional interest deductions.
The ATA Package as recently presented by the EC has the full support of the Czech government and has generally been supported across the Czech political spectrum, including both the socialist/centrist government coalition and the conservative/liberal opposition. The head of the Economic Committee of the Czech Parliament, and a former governor of Czech National Bank noted that 'despite a relatively low corporate tax level and a relatively narrow tax base under Czech tax legislation, sophisticated tax avoidance structures and transfer of profits abroad are the issues due to which the Czech state budget is deprived of considerable income each year, and therefore hopefully the EU member states would be supportive to the EC's initiative'. The views of the leading tax professionals on the ATA Package are also generally positive, although they do emphasize that it is the inexperience and inconsistent practice of the tax authorities, rather than missing legislative measures, which help MNE's to avoid Czech taxes.
At first glance, the proposal would not have a major impact on the Finnish tax system. Finnish legislation already mostly corresponds to the proposed changes and in some aspects imposes even stricter requirements than the proposals in the ATA package. For example, the CFC-legislation is already wider in the Finnish legislation than in the EC proposal.
However, the Finnish business community does have concerns regarding the additional administrative burden and costs that the proposed package may bring about for taxpayers. It is also found important that investors will still find Finland an interesting and functional destination to operate in. The proposed changes should not reduce the predictability of the Finnish tax practice. Furthermore, it is seen as a predicament if tax law becomes more complex with multiple regulatory levels (both a national and an EU-level), if codification of the proposed measures should turn out to be cumbersome.
To summarize, the main goals of the proposals have been seen mostly positive, but enforcing the ATA Package on the legislative level of each member state may be a rather challenging task.
With the recent introduction of the new anti-abuse clause for parent-subsidiary distributions (provided in the Council directive EU 2015/121 of January 27th, 2015), France’s legislation already corresponds to the great majority of the measures proposed in the ATA Package. The exit tax, hybrid mismatches and thin capitalization rules are already implemented within French tax law. For many years now, France has been modifying its tax legislation in this direction.
So far the EU package has not caused many critical statements in Germany. As the German government supports the OECD and EU BEPS process from its beginning it can be expected that Germany also supports this EC initiative. However, the German Minister of Finance said the EU should exercise restraint in implementing the OECD BEPS-reports into EU hard law.
It has to be noted that many of the recommended regulations included in the proposed EC package already exist under German legislation. In particular, German tax rules include similar interest limitation rules as well as strict CFC and exit taxation rules. Hybrid mismatch situations for certain cases are also covered by current German tax laws. Nevertheless, there are rumors that the Federal Ministry of Finance is working on a BEPS-bill that could be finalized in the first half of this year. It can be expected that in this bill rules will be tightened in order to adopt the EU initiative.
The ATA Package has received support from the Polish government. According to an official statement, "Poland supports all efforts to eliminate tax base erosion and profit shifting and, therefore, the initiative of the European Commission in this regard".
In Poland, a discussion on taxation of holding groups has been ongoing for several years now. Poland does not have particular provisions which would attract foreign holdings to register in Poland, yet there are many foreign companies already present in Poland (mainly due to attractive employment costs and the large amount of EU funds Poland has received). Thus, the consequences of international tax avoidance practice are particularly negative for Poland as it loses potential profits from income tax. Therefore, prevention of tax optimization is one of the priorities for the Polish government. Recently, a draft amendment to the Polish Tax Ordinance has been revealed, which, inter alia, introduces a general tax avoidance clause. Moreover, Poland has always followed the EU's directions and implemented its directives. One would expect that Poland will also support and follow the ATA Package.
With respect to holding companies, practitioners have identified the need for Polish law which would provide clear rules for such companies to operate in Poland. Although Polish provisions concerning tax capital groups do exist, those are not up-to-date and are insufficient to address tax avoidance if international holding-companies are involved. A law aiming to address those problems has been drafted, and the market is expecting an update on further progress.
So far, there has not been a specific reaction of the Slovakian authorities to the ATA Package. However, the Slovakian government has put long term and continuous emphasis on the fight against tax avoidance (especially concerning VAT) and we expect the Slovakian government to positively respond to the ATA Package.
Although no official announcement has been made yet by the Spanish tax authorities on the envisaged implementation of the ATA Package, no significant changes are expected.
It may be upheld that many of the measures in the proposed ATA Directive have already been implemented in Spanish tax regulations, either because they are inspired on the OECD BEPS-project or because Spain has already enacted recommendations/tax practices generally followed in other jurisdictions with the introduction of new tax regulations (reference is made to the 2015 Corporate Income Tax Law).
Moreover, the country-by-country reporting obligations will only require the Spanish tax tuthorities to process the information in a different format. Spanish taxpayers already produce the appropriate information under the current regulations, duly aligned with OECD guidelines.
The recommendation on Tax Treaty abuse should be a measure with little impact in the short term, as such recommendations are likely inserted in the format of treaty clauses when new tax treaties are reached or when the old ones are amended. As Spain has an extensive network of recently renewed tax treaties, it is not expected to implement the recommendations shortly.
Finally, with regard to the Communication on the External Strategy, we feel it lacks strong commitments to reach shared goals such as a common consolidated corporate tax base, specific regulations which envisage transfer pricing requirements for related party transactions or other measures to ensure fair tax competition in areas other than direct taxes.
One of the most frequently heard comments by our Swedish Bird & Bird colleagues from representatives of the Swedish business community, are concerns surrounding the growing difficulties the industry faces in prevising their future tax position. These concerns have already grown significantly with the introduction of the OECD BEPS-project and are likely to grow even more with the introduction of the EC's extensive ATA Package. Along with domestic anti-avoidance rules, we now have three set of avoidance norms (domestic, OECD/BEPS and EU) to consider. This is a problem not to be taken lightly.
Generally speaking, the UK has highly sophisticated anti-avoidance laws which one would expect to catch most of the items within the ATA Directive. However, when reading the details, there are a number of areas where UK law will need to change to meet the proposals. In particular:
- the mathematical interest limitation rule is likely to be unattractive in many sectors – in particular the real estate sector – where historically debt equity ratios have been high;
- the exit taxation provisions which apply to transfers to and from permanent establishments (PE's) go wider than existing UK exit rules;
- the switch-over clause is likely to be controversial, particularly in respect of capital gains arising on disposals of subsidiaries. There are also areas where the Directive is a lot lighter than existing UK avoidance rules.
We would feel that, generally, introducing an additional layer of anti-avoidance rules would further complicate the tax system. Given that the BEPS proposals are fairly prescriptive, it is not entirely clear why the EU feel that this additional level of complexity is required. It may be that, as stated in the proposal, the EU is again pushing for an EU corporate tax base (the so-called Common Consolidated Corporate Tax Base), so perhaps this is felt to be a useful stepping stone in that direction. Given the current political mood in the UK and talk of a 'Brexit', it will be interesting to see whether the UK Government will accept all the proposals and, going forward, the appetite for the UK to be party to a Common Consolidated Corporate Tax Base.
The ATA Package still needs approval of the European Parliament and the European Council. The ATA Directive is tabled for (unanimous) approval by the European Council on 25 May 2016. Bird & Bird will closely monitor all developments concerning international tax law. Please contact us or your regular contact person with Bird & Bird if you have any questions about the proposed ATA Package or other (international) tax developments.
I. Anti Tax Avoidance Directive
The proposed ATA Directive contains six anti-avoidance measures which, if adopted by the European Council and European Parliament, will be legally binding. We will briefly discuss the proposed measures below.
1. Interest limitation rule
This rule stipulates that the deductible net interest (incoming interest minus outgoing interest) is limited to the higher of 30% of the taxpayer's earnings before interest, tax, depreciation and amortization (EBITDA) or € 1 million. If a taxpayer has interest expenses exceeding 30% of the EBITDA, those interest expenses may be carried forward to subsequent years. Moreover, if 30% of the EBITDA exceeds the interest expenses in a certain year, the difference may also be carried forward.
The interest limitation rule does not apply if the ratio between equity and total assets of a taxpayer is equal to or higher than the equivalent ratio of the group, where a ratio of up to two percentage points below the group's will be deemed equivalent to the group's ratio. However, only if payments to associated enterprises do not exceed 10% of the group's total net interest expense, will the excess interest be deductible.
This rule does not apply to financial undertakings as defined in the Directive.
2. Exit taxation
Based on this rule a tax is levied on the transfer of assets if:
- Assets are transferred from the taxpayer's head office to its permanent establishment (PE) in another member state or third country;
- Assets are transferred from a PE in a member state to the head office or another PE in another member state or in a third country;
- The tax residence is transferred to another member state or to a third country, but not for as far as the assets remain effectively connected with a PE in the first member state;
- A PE is transferred out of a member state.
The taxable base is formed by the difference between market value and value for tax purposes at the time of exit of the assets concerned. If assets are transferred to member states, those member states are obliged to allow taxpayers to value the assets at market value. Taxpayers may defer tax claims arising from exit taxation by paying it in instalments for at least five years. If a taxpayer chooses to defer such tax claim, interest may be charged and securities may be demanded by the member state involved. The deferral ends if the transferred assets are disposed of, the transferred assets are transferred to a third country, the taxpayer's tax residence or its PE is transferred to a third country or the taxpayer goes bankrupt or is wound up.
3. Switch-over clause
This measure prohibits member states from exempting income (profit distributions and proceeds from the disposal of the shares) derived from low-taxed entities or PE's in non-EU states. Entities and PE's are regarded as low-taxed if they are subject to a statutory corporate tax rate lower than 40% of the statutory tax rate in the country of residence. The country of residence will grant an ordinary credit for taxes paid in the low-tax jurisdiction. The prohibition to exempt does not apply to losses incurred by the PE's and from the disposal of shares of the low-taxed entity.
4. General anti-abuse rule
This general anti-abuse rule (GAAP) is similar to the one in recently introduced in the EU Parent-Subsidiary Directive implemented in the 'foreign substantial interest'-provision of Dutch Corporate Income Tax Act and in the Dividend Tax Act. Whilst the latter would only tax foreign parents, the proposed GAAP would work throughout all corporate tax acts of member states and target any situation of alleged abuse.
The GAAP stipulates that any non-genuine arrangement (i.e. arrangement or series thereof to the extent that they are not put in place for valid commercial reasons which reflect economic reality) carried out for the essential purpose of obtaining a tax advantage that defeats the object or purpose of the otherwise applicable tax provisions, is to be ignored for the purposes of calculating the corporate tax liability. The tax liability shall then be calculated by reference to economic substance in accordance with national law. The GAAP does not affect the applicability of specific anti-abuse rules. Its application should be limited to 'wholly artificial arrangements': a taxpayer may in principle still choose the most tax-efficient structure.
5. Controlled foreign company legislation
The Controlled Foreign Company (CFC) rule intends to attribute non-distributed income of a foreign company to the domestic parent company. The proposed CFC-rule targets taxpayers that (together with associated enterprises) directly or indirectly hold more than 50% of capital or voting rights or are entitled to receive more than 50% of the profits of low-taxed foreign entities. For the purpose of the CFC-rule, low-taxed entities are entities that under the general regime in its resident jurisdiction are subject to an effective corporate tax rate lower than 40% of the effective tax rate that would have been charged under the applicable corporate tax system in the parent jurisdiction. The CFC-rule only applies if more than 50% of the income accruing to the low-taxed subsidiary falls within one or more categories included in the Directive. Those categories are passive income such as dividends, royalties, interest etc. The CFC-rule will not apply to financial undertakings as defined in the Directive.
If a subsidiary is located in a member state or third country party to the EEA Agreement, the CFC-rule only applies if the establishment of the entity is wholly artificial or to the extent that the entity engages in non-genuine arrangements which have been put in place for the essential purpose of obtaining a tax advantage. Arrangements are deemed non-genuine to the extent that the foreign entity would not have undertaken the risks which generate income if it were not controlled by a company where the significant people's functions are carried out and are instrumental in generating the controlled company's income. In that case, the income to be included in the tax base of the controlling company will be limited to the income attributable to those significant people's functions in accordance with the 'arm's-length'-principle.
The income to be included in the tax base of the controlling company will be calculated in proportion to the entitlement of the profits of the subsidiary. The amount of tax due over that income is calculated in accordance with the corporate tax laws of the controlling company's jurisdiction. Losses will not be allocated to the controlling company, but the CFC-rule provides for a carry-forward to subsequent tax years.
Finally, the CFC-rule includes a provision to prevent double taxation.
6. Hybrid mismatches
This measure intends to tackle double deductions or deduction/no inclusion-situations as a result from different classifications of the same entity by different member states. In such cases, the member state where the payment has its source will follow the legal classification of the member state of the entity receiving the payment. A similar rule applies to cases in which two member states give different classifications to the same payment.
II. Recommendation on Tax Treaty abuse
The EC advises member states to implement a general anti-avoidance rule (GAAR) based on a principal purpose test in their tax treaties. If the principal purpose of an arrangement or transaction is to obtain treaty benefits, those benefits should be denied under the GAAR, unless it is established that the arrangement or transaction reflects a genuine economic activity or that granting the benefits would be in accordance with the object and purpose of the treaty. Additionally, the EC recommends implementing the outcome of BEPS Action 7 (Preventing the Artificial Avoidance of Permanent Establishment Status). In order to do so, member states should amend article 5 of the double tax treaties.
III. Proposal for a Directive implementing Country by Country Reporting
In this proposal the EC intends to implement BEPS Action 13 in the EU. Based on the proposal, the ultimate parent entity of an MNE with a total consolidated group revenue of at least EUR 750 million is obliged to file a Country by Country-report (CbC-report) in its member state of residence. If the parent is located in a non-EU state, a subsidiary must file the report. The report must contain i.a. information about profits, revenue and number of employees about all companies within the group. Tax authorities receiving such a report will be obliged to automatically exchange the report with other member states where a company of the MNE is resident or liable to tax.
IV. Communication on an External Strategy for effective taxation
This communication to the European Parliament and the European Council proposes a framework for a new EU external strategy for effective taxation. The EC intends to 'help the EU promote tax good governance globally, tackle external base erosion threats and ensure a level playing field for all businesses'. It aims to accomplish those objectives by increasing tax transparency and endorse fairer tax competition. For instance, the EC announces it investigates public country by country-reporting requirements for other sectors than those to which the requirements currently apply (i.e. the banking and financial sector and the logging and extracting sector). Moreover, a common list of countries the EU considers to be tax havens will be drafted. Once a state is on that list, all member states are to take measures against that state in order to protect the own tax bases and to incentivise the state concerned to make adjustments to its tax system.