The COUNCIL DIRECTIVE number 10539/16 contains new rules addressing some of the practices most commonly used by large companies to reduce their tax liability.
The member states will have until 31 December 2018 to transpose it 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.
2015 OECD recommendations
The directive is part of a January 2016 package of Commission proposals to strengthen rules against corporate tax avoidance. The package builds on 2015 OECD recommendations to address tax base erosion and profit shifting (BEPS), endorsed by G20 leaders in November 2015.
New provisions in five areas
The directive addresses situations where corporates, mostly multinational groups, take advantage of disparities between national tax systems in order to reduce their tax bills. It responds to the perception of many taxpayers and SMEs that some multinationals do not pay their fair share of tax, thereby distorting tax competition within the EU’s single market.
The directive covers all taxpayers that are subject to corporate tax in a member states, including subsidiaries of companies based in third countries. It lays down anti-tax-avoidance rules for situations that may arise in five specific fields:
- Interest limitation Multinational groups may artificially shift their debt to jurisdictions with more generous deductibility rules. The directive sets out to discourage this practice by limiting the amount of interest that the taxpayer is entitled to deduct in a tax year.
- Exit taxation rules, to prevent tax base erosion in the state of origin. Corporate taxpayers may try to reduce their tax bills by moving their tax residence and/or assets, merely for aggressive tax planning purposes.
- General anti-abuse This rule is intended to cover gaps that may exist in a country’s specific anti-abuse rules, and thereby enable tax authorities to deny taxpayers the benefit of any abusive tax arrangements that may occur.
- Controlled foreign company (CFC) rules. In order to reduce their overall tax liability, corporate groups can shift large amounts of profits towards controlled subsidiaries in low-tax jurisdictions. CFC rules reattribute the income of a low-taxed controlled foreign subsidiary to its – usually more highly taxed – parent company.
- Rules on hybrid mismatches. Corporate taxpayers may take advantage of disparities between national tax systems in order to reduce their overall tax liability, for instance through double deductions.
A common EU approach
The directive will ensure that the OECD anti-BEPS measures are implemented in a coordinated manner in the EU, including by 6 member states that are not OECD members.
Three of the five areas covered by the directive implement OECD recommendations, namely the interest limitation rules, the CFC rules and the rules on hybrid mismatches. The two others, i.e. the general anti-abuse rule and the exit taxation rules, deal with anti-tax-avoidance aspects of a 2011 proposal for an EU common consolidated corporate tax base.
Work has proceeded meanwhile on the rest of the January 2016 anti-tax-avoidance package. On 25 May 2016, the Council approved:
- a directive on the exchange of tax-related information on multinational companies;
- conclusions on the third country aspects of tax transparency.
Author: EMILIO MENEGHELLA