EU Anti-Tax Avoidance Package

On 28 January 2016, the European Commission introduced an “Anti-Tax Avoidance Package” including two legislative proposals, addressing certain anti-base erosion and profit shifting items, non-public country-by-country reporting, a common approach to tax good governance towards third countries and a recommendation to tackle treaty abuse. This package reflects in particular the outcome of the OECD’s Base Erosion and Profit Shifting (“BEPS”) project.

Further details of this package are as follows:

1. The proposal for an Anti-Tax Avoidance Directive (“Anti-BEPS Directive”) focuses on six key measures including: 

reinforced CFC (Controlled Foreign Company) rules to ensure that profits shifted in low/no tax countries are effectively taxed;
limitation of the switch-over clause to non-EU situations and providing a credit on the foreign tax (instead of an exemption), where the income received is taxed at a statutory rate lower than 40% of the rate applicable in the home Member State;
strengthening exit taxation if assets are transferred cross-border, a deferral mechanism for transfers within the EU/EEA and in case of transfers within the EU, the rule that the receiving Member State will have to accept the same market value as defined by the home Member State as the starting value of the transferred assets;
limitation of interest deductions of companies resident in the EU/EEA (limitation up to a 30% fixed ratio or EUR 1 million, whichever is higher);
tax characterisation used by the source Member State shall be followed to ensure consistent tax treatment within the EU (hybrid mismatch); 
an EU general Anti-Abuse Rule to ignore arrangements that do not comply with the standard, which would include both a motive test and a substance test.

2. A proposal for a revision of the Administrative Cooperation Directive which aims to introduce non-public country-by-country reporting between local tax authorities and the exchange of reports between them. 

The parent company of a multinational group will have to provide information on the whole group to the tax authority in its Member State of residence (such as turnover, pre-tax profit, income tax paid and accrued, number of employees, capital, tangible assets and business activities) on an annual basis and for each tax jurisdiction where they do business. 

3. A Recommendation to amend tax treaties and ensure implementation of the new permanent establishment definition, advice on how to revise tax treaties against abuse and focus on how to ensure it in an EU law compliant way. 

4. A Communication on an External Strategy for Effective Taxation to encourage third countries to apply minimum standards of good governance in tax matters, which involves notably updating the tax good governance criteria, developing countries to improve their tax administrations and an EU process for assessing and listing third-country non-cooperative tax jurisdictions. The publication of such a list is expected as from 2019. 

In this context, Ministers and top tax officials from more than 30 countries, including the Luxembourg Finance Minister, signed an international agreement of the OECD on 27 January 2016 that will significantly advance the fight against corporate tax avoidance. 

Next steps: The EU Commission and the Dutch presidency outlined their intention to find a political agreement on the Anti-BEPS Directive before the end of the Dutch six-month mandate.