Explanatory Memorandum to COM(2016)26 - Rules against tax avoidance practices that directly affect the functioning of the internal market - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2016)26 - Rules against tax avoidance practices that directly affect the functioning of the internal market. |
|---|---|
| source | COM(2016)26  |
| date | 28-01-2016 |
Contents
- CONTEXT OF THE PROPOSAL
- BUDGETARY IMPLICATIONS
- 2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY4
- 3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS5
- 5. OTHER ELEMENTS6
- COUNCIL DIRECTIVE laying down rules against tax avoidance practices that directly affect the functioning of the internal market 10
- 1. FRAMEWORK OF THE PROPOSAL/INITIATIVE23
- 2. MANAGEMENT MEASURES23
- 3. ESTIMATED FINANCIAL IMPACT OF THE PROPOSAL/INITIATIVE23
- 1. FRAMEWORK OF THE PROPOSAL/INITIATIVE24
- 2. MANAGEMENT MEASURES27
- 3. ESTIMATED FINANCIAL IMPACT OF THE PROPOSAL/INITIATIVE28
- The threshold of low taxation
• Reasons for and objectives of the proposal3
• Consistency with existing policy provisions in the policy area3
• Legal basis4
• Subsidiarity (for non-exclusive competence)4
• Proportionality5
• Choice of the instrument5
• Stakeholder consultations5
• Impact assessment6
6
• Detailed explanation of the specific provisions of the proposal6
COUNCIL DIRECTIVE laying down rules against tax avoidance practices that directly affect the functioning of the internal market 10
CHAPTER I GENERAL PROVISIONS 14
CHAPTER II MEASURES AGAINST TAX AVOIDANCE 16
CHAPTER III FINAL PROVISIONS 21
LEGISLATIVE FINANCIAL STATEMENT 23
EXPLANATORY MEMORANDUM
1. CONTEXT OF THE PROPOSAL
• Reasons for and objectives of the proposal
The European Council Conclusions of 18 December 2014 cite 'an urgent need to advance efforts in the fight against tax avoidance and aggressive tax planning, both at the global and European Union (EU) levels'. Since December 2014, the Commission has quickly launched the first steps towards an EU approach. Meanwhile, the Organisation for Economic Cooperation and Development (OECD) finalised its work on defining the global rules and standards to these ends.
This Directive, which is often referred to as the Anti- Tax Avoidance Directive, lays down rules against tax avoidance practices that directly affect the functioning of the internal market. It is one of the constituent parts of the Commission's Anti- Tax Avoidance Package, which addresses a number of important new developments and political priorities in corporate taxation that require quick reaction at the level of the EU. In particular, it responds to the finalisation of the project against Base Erosion and Profit Shifting (BEPS) by the G20 and the OECD as well as to demands from the European Parliament, several Member States, businesses and civil society, and certain international partners for a stronger and more coherent EU approach against corporate tax abuse.
The schemes targeted by this Directive involve situations where taxpayers act against the actual purpose of the law, taking advantage of disparities between national tax systems, to reduce their tax bill. Taxpayers may benefit from low tax rates or double deductions or ensure that their income remains untaxed by making it deductible in one jurisdiction whilst this is not included in the tax base across the border either. The outcome of such situations distorts business decisions in the internal market and unless it is effectively tackled, could create an environment of unfair tax competition. Having the aim of combating tax avoidance practices which directly affect the functioning of the internal market, this Directive lays down anti- tax avoidance rules in six specific fields: deductibility of interest; exit taxation; a switch-over clause; a general anti-abuse rule (GAAR); controlled foreign company (CFC) rules; and a framework to tackle hybrid mismatches.
• Consistency with existing policy provisions in the policy area
This Directive builds on the Action Plan for Fair and Efficient Corporate Taxation, presented by the Commission on 17 June 2015. It sets out legally binding rules to enable Member States to effectively tackle corporate tax avoidance in a way which preserves their collective competitiveness and respects the Single Market, Treaty Freedoms, the EU Charter of Fundamental Rights and EU law in general. In this respect, it draws on two major areas of work at EU and international level.
First, in the context of the OECD BEPS, most Member States have committed to implement the measures contained in the BEPS Final Reports, which were published on 5 October 2015 and endorsed by G20 leaders in November 2015. However, the unilateral and divergent implementation of BEPS by each Member State could fragment the Single Market by creating national policy clashes, distortions and tax obstacles for businesses in the EU. It could also create new loopholes and mismatches that could be exploited by companies seeking to avoid taxation, thereby undermining Member States' efforts to prevent such practices. It is therefore essential for the good functioning of the Single Market that Member States – as a minimum - transpose the OECD BEPS measures into their national systems in a coherent and coordinated fashion.
Second, the Commission announced in the June 2015 Action Plan that it will re-launch its Proposal for a Common Consolidated Corporate Tax Base (CCCTB), as a holistic solution to creating fairer and more efficient taxation. It also called on Member States to continue work on some international aspects of the common base, linked to the OECD BEPS project, while the revised CCCTB proposal was being prepared. This Directive takes account of the outcome of Member States' discussions on these issues in Council.
This Directive aims to achieve a balance between the need for a certain degree of uniformity in implementing the BEPS outputs across the EU and Member States' needs to accommodate the special features of their tax systems within these new rules. The text thus lays down principle-based rules and leaves the details of their implementation to Member States, on the understanding that they are better placed to shape the precise elements of the rules in a way that best fits their corporate tax systems. As such, the Directive should create a level-playing field of minimum protection for all Member States' corporate tax systems.
The Directive is broadly inclusive and aims to capture all taxpayers which are subject to corporate tax in a Member State. Its scope also embraces permanent establishments, situated in the Union, of corporate taxpayers which are not themselves subject to the Directive.
2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY
• Legal basis
Direct tax legislation falls within the ambit of Article 115 of the Treaty on the Functioning of the EU (TFEU). The clause stipulates that legal measures of approximation under that article shall be vested the legal form of a Directive.
• Subsidiarity (for non-exclusive competence)
This proposal complies with the principle of subsidiarity. The nature of the subject requires a common initiative across the internal market.
The rules of this Directive aim to tackle cross-border tax avoidance practices and provide a common framework for implementing the outputs of BEPS into Member States' national laws in a coordinated manner. Such aims cannot be sufficiently achieved through action undertaken by each Member State while acting on its own. Such an approach would in fact only replicate and possibly worsen the existing fragmentation in the internal market and perpetuate the present inefficiencies and distortions in the interaction of a patchwork of distinct measures. If the objective is to adopt solutions that function for the internal market as whole (e.g. elimination of mismatches as a result of disparities in national tax systems) and improve its (internal and external) resilience against aggressive tax planning, the appropriate way forward involves coordinated initiatives at the level of the EU.
Furthermore, an EU initiative would add value, as compared to what a multitude of national implementation methods can attain. Given that the envisaged anti-abuse rules have a cross-border dimension, it is imperative that any proposals balance divergent interests within the internal market and consider the full picture, to identify common objectives and solutions. This can only be achieved if legislation is designed centrally. Finally, if the measures to implement BEPS are enacted according to the acquis, taxpayers can have the legal certainty that they comply with EU law.
Such an approach is therefore in accordance with the principle of subsidiarity, as set out in Article 5 of the Treaty on the European Union.
• Proportionality
The envisaged measures do not go beyond ensuring the minimum necessary level of protection for the internal market. The Directive does not therefore prescribe full harmonisation but only a minimum protection for Member States' corporate tax systems. Thus, the Directive ensures the essential degree of coordination within the Union for the purpose of materialising its aims. In this light, the proposal does not go beyond what is necessary to achieve its objectives and is therefore compliant with the principle of proportionality.
• Choice of the instrument
The proposal is for a Directive, which is the only available instrument under the legal base of Article 115 TFEU.
3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS
• Stakeholder consultations
The topics dealt with in this Directive have been discussed with stakeholders in the framework of the proposed Directive for a CCCTB over a number of years. Member States' delegates have regularly contributed their observations at the technical Working Party on Tax Questions in Council. Since March 2011 that the College adopted the CCCTB Proposal, the Working Party has met several times during each Presidency, to go through technical and policy questions in detail. In addition, the Commission Services have liaised with all major business stakeholders and heard their views on various topics of the Proposal. Similarly, many - primarily technical – themes of the Directive were debated in academic conferences where the Commission Services have participated.
Most Member States are members of the OECD and have participated in lengthy and detailed discussions on the anti-BEPS Actions, including on the elaboration of technicalities, between 2013 and 2015. The OECD organised extensive public consultations with stakeholders on each of the anti-BEPS Actions. Furthermore, the Commission has debated internally and with OECD experts several BEPS topics (e.g. CFC legislation), in particular where the Commission has had doubts about the compatibility of certain ideas and/or proposed solutions with EU law.
In the second half of 2014, the Italian Presidency of the Council launched the idea of an EU - BEPS Roadmap. The Council discussed the CCCTB proposal and specifically focused on its international and BEPS-related elements. In this context, the Presidency encouraged consistency with parallel OECD initiatives, while respecting EU law. This approach was endorsed by the High Level Working Party on Taxation and pursued by the subsequent Presidencies. Discussions on the EU - BEPS Roadmap continued into 2015. The aim was to contribute to the OECD debate and pave the way towards a smooth implementation of the future OECD Recommendations, whilst taking account of EU specificities.
The elements of this proposal for a Directive were presented in broad terms and discussed with Member States' delegations, business and non-governmental organisations' representatives at a meeting of the Platform for Tax Good Governance on 30 November 2015.
• Impact assessment
After its report on Addressing Base Erosion and Profit Shifting was published in early 2013 and the so-called Action Plan on BEPS was endorsed by the G20 Leaders in September 2013, the OECD embarked on a 2-year period of intensive work which led to the delivery of 13 reports, in November 2015. These reports lay down new or reinforced international standards as well as concrete measures to help countries tackle BEPS. In this framework, OECD/G20 members are committed to this comprehensive package and to its consistent implementation.
Many Member States, in their capacity as OECD Members, have undertaken to transpose the output of the BEPS project into their national laws, and to do so urgently. Considering this, it is critical to make fast progress on agreeing rules for coordinating the implementation of the conclusions on BEPS in the EU. In the light of a great risk of fragmentation of the internal market, which would possibly result from uncoordinated unilateral actions by Member States, the Commission is putting forward, in this proposal, common minimum solutions for implementation. The Commission has made every effort to respond simultaneously to both the urgency to act, and the imperative need to avoid that the functioning of the internal market is compromised either by unilateral measures adopted by Member States (whether OECD members or not) acting on their own, or lack of action by other Member States altogether. The possibility of proposing soft law was also considered as an option but was discarded as inappropriate for securing a coordinated approach.
To provide up-to-date analysis and evidence, a separate Staff Working Document (SWD) accompanying the draft Directive gives an extensive overview of existing academic work and economic evidence in the field of base erosion and profit shifting. This is based on recent studies, amongst others, by the OECD, the European Commission and European Parliament. The SWD highlights the drivers and most common identified mechanisms which, according to the OECD reports, are linked to aggressive tax planning. It summarises the conclusions of an in-depth review of key mechanisms for aggressive tax planning on a basis of analysis per Member State, as carried out on behalf of the Commission in 2015. The SWD outlines how the Directive is complementary to other initiatives aimed to implement the output of the OECD BEPS reports in the EU and contribute towards a common minimum level of protection against tax avoidance.
Against this background, no impact assessment was carried out for this proposal on the following grounds: there is a strong link to the OECD BEPS work; the SWD supplies a significant body of evidence and analysis; stakeholders were extensively involved in consultations on the technical elements of the proposed rules at a previous stage; and, in particular, there is an urgent current demand for coordinated action in the EU on this matter of international political priority.
4. BUDGETARY IMPLICATIONS
This proposal for a Directive does not have any budgetary implications for the EU.
5. OTHER ELEMENTS
• Detailed explanation of the specific provisions of the proposal
The Directive is broadly inclusive and aims to capture all taxpayers which are subject to corporate tax in a Member State. Its scope also embraces permanent establishments, situated in the Union, of corporate taxpayers which are not themselves subject to the Directive.
The schemes targeted by this Directive involve situations where taxpayers act against the actual purpose of the law, taking advantage of disparities between national tax systems, to reduce their tax bill. Taxpayers may benefit from low tax rates or double deductions or ensure that their income remains untaxed by making it deductible in one jurisdiction whilst this is not included in the tax base across the border either. The outcome of such situations distorts business decisions in the internal market and unless it is effectively tackled, could create an environment of unfair tax competition. Having the aim of combating tax avoidance practices which directly affect the functioning of the internal market, this Directive lays down anti- tax avoidance rules in six specific fields: deductibility of interest; exit taxation; a switch-over clause; a general anti-abuse rule (GAAR); controlled foreign company (CFC) rules; and a framework to tackle hybrid mismatches.
• The deductibility of interest
Multinational groups often finance group entities in high-tax jurisdictions through debt and arrange that these companies pay back inflated interest to subsidiaries resident in low-tax jurisdictions. In this way, the tax base of the group (or more precisely, of the entities paying out inflated interest) decreases in the high-tax jurisdictions whilst it increases in the low-tax State where the interest payment is received. Overall, the outcome is a reduced tax base for the multinational group as a whole.
The aim of the proposed rule is to discourage the above practice by limiting the amount of interest that the taxpayer is entitled to deduct in a tax year. In this way, it is also expected to mitigate the bias against equity financing. For this purpose, net interest expenses will only be deductible up to a fixed ratio based on the taxpayer's gross operating profit. Given that this Directive fixes a minimum level of protection for the internal market, it is envisaged setting the rate for deductibility at the top of the scale (10 to 30%) recommended by the OECD. Member States may then introduce stricter rules.
Although it is generally accepted that financial undertakings, i.e. financial institutions and insurance undertakings, should also be subject to limitations to the deductibility of interest, it is equally acknowledged that these two sectors present special features which call for a more customised approach. This is chiefly because, contrary to other sectors of the economy, financial costs and revenues are incurred by, or accrue to, financial undertakings as part of their core trade. Given that the discussions in this field are not yet sufficiently conclusive in the international and Union context, it has not yet been possible to provide for specific rules in the financial and insurance sectors. It is however necessary to clarify that despite the temporary exclusion of these financial undertakings, the intention is to ultimately conclude an interest limitation rule of broad scope which is not subject to exceptions.
• Exit taxation
Taxpayers may try to reduce their tax bill by moving their tax residence and/or assets to a low-tax jurisdiction. Such practices distort the market because they erode the tax base of the State of departure and shift future profits to be subject to tax in the low-tax jurisdiction of destination. If taxpayers move their tax residence out of a certain Member State, this State will be deprived of its future right to tax revenues of these taxpayers, which may have already been created but not yet realised. The same complication arises where taxpayers transfer assets (without disposing of them) out of a Member State and those assets incorporate unrealised profits.
Exit taxation serves the purpose of preventing tax base erosion in the State of origin when assets which incorporate unrealised underlying gains are transferred, without a change of ownership, out of the taxing jurisdiction of that State. As the application of exit taxation within the Union shall be in line with the fundamental freedoms and in line with the case law of the Court of Justice of the European Union (CJEU), this Directive also addresses the EU law angle of exit taxation by giving taxpayers the option for deferring the payment of the amount of tax over a certain number of years and settling through staggered payments.
• A switch-over clause
Given the inherent difficulties in giving credit relief for taxes paid abroad, States tend to increasingly exempt foreign income from taxation. The unintended negative effect of this approach is that it may encourage untaxed or low-taxed income to enter the internal market and then, circulate – in many cases, untaxed - within the Union, making use of available instruments within the Union law.
Switch-over clauses are commonly used against such practices. Namely, the taxpayer is subjected to taxation (instead of being exempt) and given a credit for tax paid abroad. In this way, companies are discouraged from shifting profits out of high-tax jurisdictions towards low-tax territories, unless there is sufficient business justification for these transfers.
In its proposal for a Directive on a CCCTB, the Commission introduced a switch-over clause to capture situations where the income flowing into the internal market from a third country had been subject to a tax on profits in the third country at a statutory corporate tax rate lower than 40 percent of the average of statutory corporate tax rates in the Union. This rule would ensure that income of a third-country origin enters the Union after having been taxed at a level which at least equals the lowest level of taxation that this payment would have been subject to had it originated in a Member State. For this purpose, the proposal for a CCCTB refers, as a comparator, to the average of statutory corporate tax rates in the Union.
Considering that this Directive does not establish a standalone corporate tax system, neither does it include a mechanism for consolidating the tax bases of group companies across the Union in such a way as under the proposal for a CCCTB, it would be logical to use, as a reference, the statutory corporate tax rate in the Member State of the taxpayer receiving the foreign income – at least, until the plans to re-launch the CCCTB materialise, as announced by the Commission.
The proposed scheme takes into account the fact that there is no harmonisation of corporate tax rates in the Union. In order to target tax avoidance practices, the threshold should, in any event, be set to capture situations where taxation is at a level below 50 percent as compared to the State of the recipient taxpayer. Yet, neither should the threshold be fixed so low as to deprive the measure of any meaning by capturing only the most aggressive tax jurisdictions. In this light, a test whereby the statutory corporate tax rate in the entity’s country of residence or the country in which the permanent establishment is situated is lower than 40 percent of the statutory corporate tax rate in the Member State of the taxpayer would strike a balance between recognising the scope for fair tax competition and the need to prevent tax avoidance practices.
Furthermore, by applying the switch-over clause, income of a third-country origin that flows into the Union would be taxed by the Member State of the taxpayer at the same level as income of a domestic origin, which would ensure equal treatment between Union and third-country origin payments. In this way, Member States would remain compliant with their undertaken obligations under both European and international law.
• A general anti-abuse rule (GAAR)
Tax planning schemes are very elaborate and tax legislation does not usually evolve fast enough in order to include all necessary specific defences to tackle such schemes. This is why a GAAR is useful in a tax system; it thus allows abusive tax practices to be captured despite the absence of a specific anti- tax avoidance rule.
The GAAR is designed to cover gaps that may exist in a country's specific anti-abuse rules against tax avoidance. It would allow authorities the power to deny taxpayers the benefit of abusive tax arrangements. In compliance with the acquis, the proposed GAAR is designed to reflect the artificiality tests of the CJEU where this is applied within the Union.
• Controlled foreign company (CFC) rules
Taxpayers with controlled subsidiaries in low-tax jurisdictions may engage in tax planning practices whereby they shift large amounts of profits out of the (highly-taxed) parent company towards subsidiaries which are subject to low taxation. The effect is to reduce the overall tax liability of the group. The analysis above about the threshold of low taxation is also valid for CFC rules.
The income shifted to the subsidiary is usually mobile passive income. For example, a common scheme would consist of first transferring, within a group, the ownership of intangible assets (e.g. IP) to the CFC and as a second step, shifting large amounts of income in the form of royalty payments in consideration for the right to use the assets owned and managed by the CFC. The functioning of the internal market is clearly affected by such practices of profit shifting, primarily where the income is shifted out of the EU towards low-tax third countries.
CFC rules re-attribute the income of a low-taxed controlled foreign subsidiary to its parent company. As a result of this, the parent company is charged to tax on this income in its State of residence – usually, this is a high-tax State. CFC legislation, therefore, aims to eradicate the incentive of shifting income, so that this is taxed at a low rate in another jurisdiction.
• A framework to tackle hybrid mismatches
Hybrid mismatches are the consequence of differences in the legal characterisation of payments (financial instruments) or entities when two legal systems interact. Such mismatches may often lead to double deductions (i.e. deduction on both sides of the border) or a deduction of the income on one side of the border without its inclusion on the other side. Taxpayers, especially those engaged in cross-border structures, often take advantage of such disparities amongst national tax systems and reduce their overall tax liability in the Union.
This problem has been explored by both the Group of the Code of Conduct on Business Taxation and the OECD. In order to ensure that Member States introduce rules to effectively combat against these mismatches, this Directive prescribes that the legal characterisation given to a hybrid instrument or entity by the Member State where a payment, expense or loss, as the case may be, originates shall be followed by the other Member State which is involved in the mismatch..