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Tax anti-avoidance: Draft directive agreed by EU

Author

Andy Wood

Andy is a practical, creative tax adviser who assists a variety of clients in achieving their personal and commercial objectives in the most tax efficient manner.

General

It seems fitting that today, as the polls open and the UK heads out to make their decision on the UK’s membership of the EU ‘club’, the European Council (EC) has announced that is has agreed a draft directive aimed at the tax avoidance carried out by large business.

In particular, it is aimed at multinationals groups (“MNGs”) who take advantage of differences in national tax systems in order to obtain a tax advantage.

Scope

 

The draft covers all Companies (that are within the scope of corporation tax) in member states. It also includes any subsidiaries that may be based in other countries. It set outs anti-tax avoidance provisions in five specific fields.

  • Interest limitation

These are designed to discourage the strategy of financing MNG entities in high-tax jurisdictions via debt carrying excessive interest with that interest being payable to group companies resident in low-tax jurisdictions.

The draft directive will operate by limiting the amount of interest that the payor of the interest is entitled to deduct in a relevant tax year.

  • Exit taxes

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.

  • General Anti-Abuse Rules (GAAR)

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.

  • Controlled Foreign Company (CFC) & Hybrid mismatches rules

There are newly proposed Controlled foreign company (CFC) rules. These seek to reattribute the income of subsidiaries that are resident in a low tax jurisdictions. Usually, the result being that the income is reassessed on the usually more highly taxed parent company.

Finally, there were new proposals in relation to hybrid mismatches.

Next steps

For most of these proposals, Member States will have until 31 December 2018 to transpose the directive into their national laws and regulations. The exception to this is the proposal over exit taxes, which will need to be transposed by 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.

ETC comment

As things stand, the UK has already implemented (or is in the process of implementing) most of these proposals.

As such, it will be countries that don’t currently have a suite of anti-avoidance measures on statute that will be hardest hit by these. One suspect that there will be extreme competition between countries as a result of these proposals and a race to reduce their corporate tax rates

 

If these issues affect you or any of your clients then please do not hesitate to get in touch.

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