OREANDA-NEWS. Corporate tax avoidance deprives public budgets of billions of euros a year, creates a heavier tax burden for citizens and causes competitive distortions for businesses that pay their share. It also undermines the EU goals of growth, competitiveness and a stronger Single Market. The cross-border nature of corporate tax avoidance means that action only at the national level cannot tackle the problem and can even lead to further problems. Unilateral efforts by Member States to protect their tax bases create administrative burdens for businesses, legal uncertainty for investors and new loopholes for tax avoiders to exploit.

Therefore, the Commission is pursuing an ambitious campaign for a coordinated EU approach against tax avoidance, following the global standards developed by the OECD last autumn, to boost Member States' collective stance against this problem, restore fairness in corporate taxation and ensure stability for businesses and investors in the EU.

Why did the Commission present a new Package against tax avoidance?

The Commission has set an ambitious agenda to clamp down on corporate tax avoidance and ensure fair and efficient taxation in the EU in its June 2015 Action Plan.

The Anti Tax Avoidance Package is the latest step in delivering on this agenda. Presented in January, it contains a series of initiatives for a stronger and more coordinated EU stance against corporate tax abuse – within the Single Market and beyond. It rests on three key pillars:

  • Effective taxation whereby all companies pay taxes where they make their profits;

  • Tax transparency so that Member States have the information needed to ensure fair taxation;

  • Addressing the risk of double taxation so that companies which pay their fair share of taxes are not penalised for making use of the EU's internal market 

It proposes key anti-avoidance measures, which will counter-act some of the most pervasive aggressive tax planning schemes. It advances the tax transparency agenda with a proposal for country-by-country reporting between all Member States. It also sets out a new EU strategy to protect the Single Market from external base erosion threats and to promote tax good governance internationally.

The initiatives in the Anti Tax Avoidance Package reflect discussions in Council, recommendations from the European Parliament and the outcomes of the OECD's Base Erosion and Profit Shifting (BEPS) project. As such, the groundwork has been done to allow Member States to quickly adopt and implement the proposed measures.

The Package built on the major initiatives presented by the Commission in 2015, which has already delivered results. Member States adopted the Commission's proposal for transparency on tax rulings in record time[2] and other important corporate tax reforms have been launched. The Commission will continue to advance its agenda for fair and effective taxation throughout 2016 and beyond, with a number of other important proposals in the pipeline, including the re-launch of the CCCTB.

What are the key elements in the Package and what do they seek to achieve?

The Package contains a number of legislative and non-legislative initiatives to help Member States protect their tax bases, create a fair and stable environment for businesses and preserve EU competitiveness vis-?-vis third countries.

The Package consists of:

  • An Anti-Tax Avoidance Directive, which proposes a set of legally binding anti-avoidance measures, which all Member States should implement to shut off major areas of aggressive tax planning

  • A Recommendation on Tax Treaties, which advises Member States how to reinforce their tax treaties against abuse by aggressive tax planners, in an EU-law compliant way

  • A revision of the Administrative Cooperation Directive, which introduces country-by-country reporting between tax authorities on key tax-related information on multinationals

  • A Communication on an External Strategy for Effective Taxation, which sets out a coordinated EU approach against external risks of tax avoidance and to promote international tax good governance

  • The Package also contains a Chapeau Communication and Staff Working Document, which explain the political and economic rationale behind the individual measures.

How does this Package relate to the internationally agreed measures against Base Erosion and Profit Shifting (BEPS)?

The Package complements and reinforces the OECD's BEPS project. It seeks to enshrine certain BEPS measures in EU law, so that they are swiftly and smoothly implemented in the Single Market. It creates a solid framework for Member States to deliver on their BEPS commitments in a coordinated way, and goes further so that the EU continues to lead by example in international tax good governance. The Package includes a new EU strategy to actively promote tax good governance globally – including the implementation of BEPS in third countries. As such, it also supports the OECD's work beyond the Single Market.

The initiatives build on work already undertaken to ensure a coordinated EU approach to BEPS. For a full overview of how the BEPS measures are being implemented in the EU, see Annex I.

Did the EU need this Anti Tax Avoidance Package if the CCCTB is to be re-launched this year?

The Common Consolidated Corporate Tax Base (CCCTB) will indeed serve as a comprehensive solution to profit shifting in the EU and the Commission will present proposals to re-launch the CCCTB later in 2016 (MEMO/15/5174).

However, we should not wait for the CCCTB to be proposed, agreed and implemented before taking action against major areas of tax avoidance. The Commission is determined to advance its agenda for fair and effective taxation as quickly as possible and is keen to respond to the European Parliament's calls for swift EU action against tax abuse. The Anti Tax Avoidance Package offers immediate and effective solutions to tackle tax avoidance, boost tax transparency and ensure a fairer and more stable business environment, while work on the CCCTB is underway.

Could the new measures against tax avoidance create administrative burdens for tax administrations or companies?

Member States have already committed to implementing new international tax standards and/or to introducing certain corporate tax reforms, in order to clamp down on tax avoidance. Doing this within a coordinated EU framework will greatly improve the impact of the measures that they introduce. The increased transparency and coordination amongst Member States will also make it easier for tax authorities to identify tax avoidance risks, better target their tax audits and clamp down on cases of tax abuse or situation of double non-taxation.

For businesses, a coordinated EU approach to corporate tax measures is preferable to a diverse medley of national approaches. It creates more legal certainty and reduces administrative burdens for companies operating in more than one Member State.

Why not harmonise corporate tax rates in the EU to remove all incentives for profit shifting?

Fair taxation does not require harmonised tax rates. It relies on Member States being able to tax companies where they make their profits, in an effective way and in line with their national rules. The headline corporate tax rate is not usually the main motivation for companies that shift profits in the EU – opaque tax rulings, special tax regimes and loopholes in national tax laws are far greater incentives for aggressive tax planners. Therefore the key to preventing tax avoidance lies in well-targeted corporate tax reforms and greater coordination between Member States, which the Commission is proposing.

How has work on the Package progressed?

Work has progressed extremely fast. The Directive on Country by Country reporting between fiscal authorities was formally agreed in Council in March 2016, while the Anti-Tax Avoidance Directive was agreed on June 21. The European Parliament has given a favourable opinion on both measures. The Council has formally taken note of the advice in the Tax Treaties Recommendation, and will take it into account when negotiating tax treaties. Member States have also formally endorsed the initiatives included in the new External Strategy and are working on taking these forward as quickly as possible. They have committed to introducing a common EU list in 2017.

How will the Anti Tax Avoidance Package help to ensure profits are effectively taxed?

Some companies exploit the differences in Member States' rules to minimise their tax bills by shifting profits within the EU. Aggressive tax planners also abuse weaknesses in one national system, or the absence of anti-avoidance measures in one Member State, to escape being taxed anywhere in the Single Market. Effective taxation is therefore heavily dependent on close coordination between Member States, to shut off opportunities for tax avoidance and prevent profit shifting in the Single Market.

The Package proposed that all Member States implement coordinated measures against tax avoidance, to boost their collective defences against aggressive tax planning. It also sets out a common approach to tackling external threats of tax avoidance and to help prevent companies from shifting untaxed profits out of the EU. The transparency provisions in the Package will ensure that all Member States have the information that they need to better detect and react to tax avoidance schemes. As such, all Member States will be better equipped to avoid situations of double non-taxation and ensure that companies operating in the EU pay taxes where they make their profits.

What anti-avoidance measures are contained in the new Directive and how will they help to prevent tax avoidance?

The Anti Tax Avoidance Directive sets out five key anti-avoidance measures, which all Member States should apply, to counter-act some of the most common types of aggressive tax planning (as identified in the discussions at the OECD, in Council discussions on tax avoidance and in the Study on Aggressive Tax Planning that we also published on 28 January). These are:

a) Controlled Foreign Company (CFC) rule: To deter profit shifting to no or low tax countries

Multinational companies sometimes shift profits from their parent company in a high tax country to controlled subsidiaries in low or no tax countries, in order to reduce the Group's tax liability. The proposed Controlled Foreign Company (CFC) rule should discourage them from doing this.

The CFC rule will allow the Member State where the parent company is located to tax certain profits that the company parks in a no or low tax country. The CFC rule will be triggered if the tax paid in the third country is less than half of that which would have been paid in the Member State in question. The company will be given a tax credit for any taxes that it did pay abroad. This will ensure that profits are effectively taxed, at the tax rate of the Member State in which they were generated.

Example: A company has its headquarters in an EU Member State. It sets up a re-insurance company as a subsidiary in a no tax third country. This subsidiary does not carry out substantive activities relating to this income. The insurance company makes inflated royalty payments to the offshore company, thereby reducing its taxable profits in the EU Member State. The payments received by the subsidiary are not taxed either, because of the third country's zero rate.

With the proposed CFC rule, the EU Member State can tax the subsidiary's profits as though they had not been shifted to the no-tax country, thereby ensuring effective taxation at the tax rate of the Member State concerned.

b) Exit Taxation: To prevent companies from re-locating assets purely to avoid taxation

Assets such as intellectual property or patents, usually valued at their projected future income, are often not taxed when they are moved from an EU Member State to a third country. Some companies shift their high value assets from Member States to no or low tax countries, to avoid paying tax in the EU on the profits they generate once they sell these assets.

The Directive proposes that all Member States apply an exit tax on assets moved from their territory. The exit tax should be based on the value of the assets at that point in time. Since companies are obliged to send tax authorities their balance sheets containing information on their taxable assets, Member States can see when an asset such as intellectual property has "disappeared". This will ensure that profits from high value assets cannot be shifted out of the EU untaxed.

Example: A pharmaceutical company based in a Member State develops a promising new product and deducts the costs of development from its taxable profits in that State. Just as the asset starts generating profits, it moves the product to a no-tax country and applies for the patent there. As a result, all value generated on the intellectual property of this product is now untaxed.

With the exit tax, the Member State where the product was originally developed can tax the company on the value of this product before it is moved abroad. As such, taxation better reflects where the economic activity takes place.

c) Interest Limitation: To discourage companies from creating artificial debt arrangements designed to minimise taxes

Interest payments are generally tax deductible in the EU. Some companies arrange their inter-company loans so that their debt is based in one of the group's companies in a high-tax country where interest payments can be deducted. Meanwhile, the interest on the debt is paid to the group's "lender" company which is based in a low tax country where interest is taxed at a low rate (or not at all). In this way, the Group reduces its overall tax burden. Overall, the group has paid less tax by shifting its profits in loan arrangements between its companies.

The Directive proposes to limit the amount of net interest that a company can deduct from its taxable income, based on a fixed ratio of its earnings[3]. This should make it less attractive for companies to artificially shift debt in order to minimise their taxes. This rule only applies to companies which are part of a group, as standalone companies clearly cannot use debt to shift profits.

The interest limitation rule includes a grandfathering rule, which means debt in place prior to June 17 2016 will be excluded from the scope of the rule, as will interest used to fund long-term public infrastructure projects. Member States which have equivalent rules will be allowed to continue with those rules until the OECD recommends a minimum standard of interest limitation rules, or at the latest by 1 January 2024.

Example: A Group sets up a subsidiary in a no-tax third country, which then provides a high-interest loan to another company in the group, located in an EU Member State. The EU-based company must make high-interest payments – which are tax deductible - to the subsidiary. In doing so, it reduces its taxable income in the Member State, while the corresponding interest income is not taxed in the third country either.

Under the interest limitation rule, the Member State will put a fixed limit on the amount of interest that the company can deduct and will tax the remainder of the payments. This should discourage companies from shifting their debts purely to reduce their tax bills.

d) Hybrids: To prevent companies from exploiting national mismatches to avoid taxation

Some companies exploit the fact that Member States treat the same income or entities differently for tax purposes (hybrid mismatches).They take advantage of these mismatches to deduct expenses in both countries or to get a tax deduction in one country on income that is exempt from tax in the country of destination.

The Directive lays down that in the event of a double deduction, the deduction will only be given in the source country. In situations where a deduction is given, but the corresponding income is not taxed, the deduction shall be denied.

e) General Anti-Abuse Rule: To counter-act aggressive tax planning when other rules don't apply

Aggressive tax planning, by its nature, seeks ways around the rules in order to minimise the taxes a company has to pay. Aggressive tax planners continually try to find ways of by-passing anti avoidance provisions or new tax avoidance techniques that are not covered by specific rules.

The Directive sets out a General Anti-Abuse Rule, which would tackle abusive tax arrangements if there is no other anti-avoidance rule that specifically covers such an arrangement. The GAAR acts as a safety net in cases where other anti-abuse provisions cannot be applied. It would allow tax authorities to ignore abusive tax arrangements and tax on the basis of the real economic substance.

Do these anti-avoidance measures affect countries' right to decide their corporate tax rates?

There is no attempt to interfere with countries' sovereign right to decide their own corporate tax rates. However, countries also have a right to protect their tax bases against aggressive tax planning and unfair tax competition. If one country's policy decisions encourages tax planning schemes that negatively impact another country's revenues, the latter has the legitimate right to take measures to protect its tax base. The Package aims to ensure that each Member State is able to effectively tax profits that are generated in its territory, in line with its own national rate and rules.

Why has the Commission made a Recommendation on Tax Treaties and what does this aim to achieve?

Some companies avoid taxes by "treaty shopping" i.e. by setting up artificial structures to gain access to the most beneficial tax treatment under various tax agreements with other Member States or third countries. To counter-act this, OECD BEPS proposed that countries introduce a general anti-abuse rule in their tax treaties. The Commission fully supports the goal of tackling tax treaty abuse and the Recommendation advises Member States on how to introduce a general anti-abuse rule in their tax treaties in a way that is EU-law compliant and without hampering the freedom of establishment in the Single Market.

The Recommendation also encourages Member States to revise their definition of permanent establishment (PE), in line with the wording agreed in BEPS. The aim is to address the current situation, whereby some companies exploit weaknesses in the PE definition to avoid having a taxable presence in one or more countries where they are active.

What is in the study on Aggressive Tax Planning?

The Aggressive Tax Planning study, published by the Commission on 28 January 2016, looks at loopholes in Member States' corporate tax rulebooks may make aggressive tax planning possible. The study, which was carried out by an independent contractor, describes how multinationals can exploit the lack of coordination in tax systems – at EU level and globally – to reduce the taxes they owe. The study looks in detail at the corporate tax rules of EU Member States, focussing on several features which can facilitate aggressive tax planning. The study includes factsheets summarising the main findings for each Member State as well as an illustrative examples of tactics which can be used by multinationals to lower their taxes.