"Why does the EU need new rules on tax avoidance?
The increasing complexity of business models and corporate structures facilitates tax avoidance and aggressive tax planning, impacting on the tax sovereignty of EU member countries.
Domestic rules cannot be fully effective, given the cross-border dimension of many tax planning structures and the use of arrangements which artificially relocate the tax base to another jurisdiction within or outside the European Union. In addition, relying on unilateral and domestic measures may fragment the EU Single Market.
The OECD has provided BEPS recommendations on how countries should design their tax systems to make them more resilient against profit-shifting and tax income where value is created.
How has the EU responded to BEPS?
Based on the OECD’s BEPS recommendations, the EU Anti-Tax Avoidance Package (ATAP) aims to ensure that member states take a co-ordinated stance both in the implementation of the BEPS project and against tax avoidance.
ATAP is structured around the following 4 elements:
- A proposal for an Anti-Tax Avoidance Directives (ATADs)
- A Recommendation on Tax Treaty issues
- A proposal for revising the Administrative Cooperation Directive
- A Communication on External Strategy for Effective Taxation
What is in the EU Anti-Tax Avoidance Directive?
Addressing specific areas of potential harmful tax practices, the EU Anti-Tax Avoidance Directive will affect all businesses either based or operating in the EU.
It proposes six specific legally-binding anti-abuse measures, which all Member States should apply against common forms of aggressive tax planning.
1. The rule on hybrid mismatches aims to limit companies from writing off the same expenses multiple times across jurisdictions. These can be cases where a payment would face double non-taxation resulting from a discontinuous interplay between separate tax systems in different jurisdictions. In particular, the scope of this measure is to prevent cross border payments generating either double deductions (“DD”) or deductions without symmetrical inclusion (“D/NI”) as per effect of cross-border hybrid mismatch of financial arrangements as well as the use of Hybrid entities producing DD or D/NI consequences.
2. The controlled foreign company (CFC) rule, which is designed to deter profit-shifting to low-tax countries by giving the right to tax company profits also outside a country’s territory; this measure addresses the potential ways of re-allocating profits to low tax jurisdictions.
3. The third measure is switchover rule aimed at preventing double non-taxation of certain income.
4. The exit-taxation, which deals with cases where the tax base is shifted within or outside the EU; it is designed to take effect before valuable assets, developed within one jurisdiction, are moved across borders.
5. The interest limitation rule, which is designed to prevent profit shifting activities that take place via the debt-shifting channel; this rule restricts the deductibility of interest expenses and similar payments from the tax base and, therefore, reduces the benefit from debt-shifting and makes it less lucrative from the company’s point of view. This is recommended to ensure that an entity’s net interest deductions are directly linked to its level of economic activity, based on earnings before interest, tax, depreciation and amortization.
6. The final measure is the general anti-avoidance rule (GAAR) allowing EU countries to tackle artificial tax arrangements if they cannot be justified by economic reasons, and if other measures are not able to capture these."
https://economia.icaew.com/features/january-2019/eu-anti-tax-avoidance-measures-qa
