To close the perceived corporate tax gap on 28 January the EU Commission published an anti-tax avoidance package intended to create 'fairer, simpler and more effective corporate taxation in the EU'.
The package includes proposals to enact a number of the outcomes of the OECD/G20 base erosion and profit shifting (BEPS) programme throughout the EU, and also goes further in some areas.
If approved, all EU member states (including those that are not OECD/G20 members) will need to ensure that their domestic law is compliant with the EU Commission’s proposals.
Whether the UK’s corporate tax regime would be impacted may depend on the outcome of the 23 June referendum that will dominate UK headlines in the coming months.
What is included?
An EU Anti-Tax Avoidance Directive is proposed to enact three of the BEPS actions consistently across the EU:
- interest deductions – corporate tax deductions for finance costs will be limited to a maximum of 30 per cent of the taxpayer’s adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) or €1m if higher, subject to an ‘equity escape’ clause modelled on Germany’s rules. Currently, financial and insurance institutions will be excluded from this rule;
- controlled foreign companies (CFCs) – EU member states will be required to enact CFC rules to subject artificially diverted profits to corporate tax. A number of EU jurisdictions, including Ireland, do not currently have CFC rules so could be impacted by this proposal; and
- hybrid mismatches – EU member states that are party to hybrid entity and hybrid instrument arrangements will be required to treat these consistently for corporate tax purposes, thereby preventing tax avoidance through hybrid mismatches in intra-EU situations.
The UK has existing corporate tax provisions on all of these areas (or is proposing to introduce rules in the near future), though differences between UK rules and the EU proposals could require amendments to UK law in some cases.
The Directive also includes proposed measures to create EU consistency on three areas that were not central to BEPS:
- exit taxation – an EU wide regime for the taxation of companies seeking to move their tax residence, or elements of their business operations, across borders;
- EU GAAR – a requirement for member states to adopt a general anti-abuse rule (GAAR) designed to capture ‘wholly artificial’ arrangements;
- ‘Switch-over’ – a provision to deny exemption from corporate tax where an EU taxpayer receives ‘income’ in certain circumstances from a non-EU source and the local applicable statutory tax rate is less than 40 per cent of the member state’s applicable statutory corporate tax rate; and
- the UK’s corporate tax code does not currently contain such provisions, and if enacted, this may lead to changes to our exemption regimes for dividends, overseas permanent establishments and substantial shareholdings (the SSE).
The package also makes a number of tax treaty recommendations, such as suggested wording for treaties that include a general anti-avoidance rule based on a ‘principal purpose test’ designed to prevent ‘treaty shopping’.
Finally, there is a further proposed directive for the mandatory sharing between EU tax authorities of information received under country-by-country reporting in accordance with BEPS Action 13.
What will happen next?
Full enactment of the anti-tax avoidance package is some way off and the introduction of the directives will require unanimity among the EU member states.
However, companies operating across the EU should keep a close eye on developments and be mindful of their possible impact when structuring their EU business activities.
If you would like to discuss any of the details in this article, please contact Dan Robertson.