The European Council has agreed a draft directive aim at addressing tax avoidance practices commonly used by large companies, which it says is designed to tackle situations where multinationals take advantage of disparities between national tax systems in order to reduce their overall tax liability
The draft directive covers all taxpayers that are subject to corporate tax in a member states, including subsidiaries of companies based in third countries, and lays down anti-tax avoidance rules in five specific fields.
The first covers interest limitation rules designed to discourage the practice of financing multinational group entities in high-tax jurisdictions through debt, and then paying inflated interest to subsidiaries resident in low-tax jurisdictions. The draft directive limits the amount of interest that the taxpayer is entitled to deduct in a tax year.
Secondly, the directive introduces exit taxation rules to prevent tax base erosion in the state of origin when assets that incorporate unrealised underlying gains are transferred, without a change of ownership, out of the taxing jurisdiction of that state.
The third element is a general anti-abuse rule which is intended to cover gaps that may exist in a country's specific anti-abuse rules.
The final two elements are new controlled foreign company (CFC) rules which reattribute the income of a low-taxed controlled foreign subsidiary to its - usually more highly taxed - parent company, and rules on hybrid mismatches.
The Council said the directive will ensure that the OECD’s measures from its Base Erosion and Profit Shifting (BEPS) project are implemented in a coordinated manner in the EU, including by seven member states that are not OECD members.
The agreement was reached following discussion by the Economic and Financial Affairs Council and will now be submitted to a forthcoming Council meeting for adoption.
The member states will have until 31 December 2018 to transpose the directive into their national laws and regulations, except for the exit taxation rules, for which they will have until 31 December 2019.
Member states that have targeted rules that are equally effective to the interest limitation rules may apply them until the OECD reaches agreement on a minimum standard or until 1 January 2024 at the latest.
Pierre Moscovici, Commissioner for economic and financial affairs, taxation and customs, said: "For too long, some companies have been able to take advantage of the mismatches between different Member States tax systems to avoid billions of euros in tax. I congratulate our member states who are now fighting back and working together to make the changes needed to ensure that these companies pay their fair share of tax.’
Stella Amiss, international tax partner at PwC, said: ‘The EU directive goes further than recent OECD recommendations to tackle tax avoidance, but the jury is out on whether it will affect the UK as much as some other member states. The UK has most of the proposed rules in place already, such as a general anti-abuse rule, or in the pipeline, such as restrictions to tax relief on interest.
‘These new rules will be felt most in countries which don't currently have many of the anti-avoidance measures proposed. As the rules tighten, we might see these countries reduce their corporate tax rate in a bid to address their overall tax competitiveness.
‘As an early adopter of the OECD recommendations, the UK arguably put itself at a competitive disadvantage on tax, so this EU directive may level the playing field a little. In the longer term the directive is likely to become the European Commission's key weapon against tax avoidance.’
The Commission has indicated it plans to continue its campaign for corporate tax reform throughout 2016, including the re-launch of proposals for a common consolidated corporate tax base (CCCTB). Additionally the European Parliament’s special committee on tax rulings II has called for a number of other anti-avoidance proposals to be considered. They include an EU public register of beneficial owners of companies, a tax havens blacklist, sanctions against non-cooperative tax jurisdictions, action against abuse of patent box regimes, a code of conduct for banks and tax advisors, tax good governance rules in all EU trade agreements and a withholding tax on profits leaving the EU.
The committee’s report approved by 25 votes to 6, with 9 abstentions. It will be voted by Parliament as a whole during the July session in Strasbourg.
