Malta Pushes to Ease EU Cross-Border Interest, Withholding Tax
European Union presidency holder Malta has launched a new attempt to salvage pending EU legislation designed to eliminate withholding taxes for cross-border interest and royalty payments in the EU single market.
One of the key hurdles the Interest and Royalties Directive has faced in the Council of Economic and Financial Affairs over the years concerns demands by some countries for inclusion of a minimum effective taxation (MET) clause. Despite the efforts of several EU rotating presidencies to get an agreement on an MET, various low-tax EU countries continue to oppose it.
Malta has drafted various compromises designed to meet some EU countries’ concerns about transfer of payments to low-tax EU countries, despite numerous failed attempts by previous EU presidencies to get unanimous consent on the EU Interest and Royalties Directive (IRD) since it was proposed in 2011.
“A substantial number of member states are reluctant or negative on the principle to introduce a MET clause, particularly if this is contemplated in isolation,” a confidential document drawn up by the Maltese presidency and seen by Bloomberg BNA states.
On the other hand, the document states, “some member states continue to argue that a ‘dry/mechanical MET clause’ is required by which, when the effective taxation would be lower than the minimum tax threshold, the right to apply withholding taxes on an interest and royalty payment would remain at the level of the source member state.”
ATAD Safeguards
Some proponents of the IRD insist that concerns about abusive profit shifting to avoid tax on interest and royalty payments have been sufficiently addressed in the recently approved EU Anti-Tax Avoidance Directive. The directive includes measures to limit interest on deductions, as well as strict controlled foreign company rules that clamp down on entities devoid of economic substance. In addition, the EU Code of Conduct Group for Business Taxation has adopted numerous measures to eliminate abusive preferential tax regimes.
A further safeguard, according to IRD proponents, concerns reforms to EU member state patent box regimes to comply with the modified nexus approach as outlined in the Organization for Economic Cooperation and Development’s plans to combat tax base erosion and profit shifting.
Malta Compromise
The Maltese presidency has proposed the following measures to ease concerns about preventing abuse of preferential or harmful tax regimes, to find common ground in the Council of Ministers:
- insertion of a subject-to-tax clause;
- insertion of a targeted anti-abuse rule similar to what was adopted in the EU Parent-Subsidiary Directive; and
- an amendment allowing the source member state of an interest or royalty payment to not apply the IRD to payments going into preferential measures in the destination country.
Other measures in the original European Commission proposal, or drawn up by previous EU rotating presidencies and highlighted by the Maltese presidency in the confidential document, include:
- extension of the list of companies to which the IRD would apply;
- reduction in the shareholding requirements in line with the Parent-Subsidiary Directive;
- allowing payments flowing out of permanent establishments to benefit from the IRD if they are treated as expenses for accounting but not necessarily tax purposes.
Among most tax practitioners, there is little doubt that the EU IRD is needed now more than ever. At the same time, there are significant concerns that some of the pending safeguards, as outlined by Malta’s presidency as well as those that preceded it, will undermine the goal of the IRD.
The envisioned changes “will hamper the application of the EU IRD and further increase the administrative burden of business,” said Dirk Van Stappen, a KMPG transfer pricing practitioner in Belgium who also teaches tax management at the University of Antwerp. “The latter is already skyrocketing at the moment and as such these consequences are not to be welcomed.”
