EU finance ministers fail to agree on anti tax avoidance directive

The EU’s Economic and Financial Affairs Council (ECOFIN) has been unable to reach agreement on the European Commission’s proposed anti tax avoidance directive. The issue has therefore been postponed until the next ECOFIN meeting in June.

The European Commission announced its proposed anti-tax avoidance directive (ATAD) in January. The proposed directive is designed partly to ensure consistent implementation within the EU of the measures recommended by the Organisation for Economic Co-operation and Development (OECD) in its base erosion and profit shifting (BEPS) project.

An ECOFIN meeting on 25 May considered a compromise text of the draft directive proposed by the Dutch Presidency and was hoping to agree a general approach to the ATAD. The Dutch Presidency, the Commission, France and Germany backed the revised text, but as other EU countries had reservations in certain areas, agreement could not be reached.

Heather Self, a tax expert at Pinsent Masons, the law firm behind Out-law.com, said: “The issue of international tax avoidance remains high on the EU political agenda. The drive for consistent implication of BEPS [base erosion and profit shifting] is to be welcomed, but some aspects of the Anti-Tax Avoidance Directive would go beyond what is needed for BEPS, and risk damaging the fragile OECD-wide consensus which has been reached. The delay for further reflection is therefore welcome”.

If implemented the ATAD would require all EU countries to introduce restrictions on interest deductibility, controlled foreign company (CFC) rules and an exit charge to prevent companies shifting assets or company residence to low tax jurisdictions. CFC rules are designed to prevent groups from diverting profits to low tax territories to avoid tax.

Representatives from some countries expressed concerns that the application of the proposed CFC rule within the EU goes beyond the current EU case law because it is not expressed as only applying to wholly artificial entities.

The interest deductibility restriction would limit interest deductions to 30% of EBITDA, which means earnings before interest, tax, depreciation and amortisation. Earlier in the week, the Economic and Monetary Affairs Committee of the European Parliament approved the Commission’s proposals for the ATAD, but recommended stricter limits on deductions for interest payments, suggesting a cap of 20%. However, this was not adopted by ECOFIN.

There was general agreement at the ECOFIN meeting as regards the proposal in the draft directive that countries should implement a general anti-abuse rule (GAAR) to counteract aggressive tax planning when other rules do not apply.

The proposed ATAD also includes a rule to prevent ‘hybrid mismatches’. These are arrangements which allow companies to exploit differences between countries’ tax rules to avoid paying tax in either country, or to obtain more tax relief against profits than they are entitled to. The proposed new rule would provide that where EU countries treat the same income or entity differently for tax purposes, the legal characterisation given to a hybrid instrument or entity by the country where a payment originates would be followed by the country of destination.

The UK and Ireland expressed concerns at the ECOFIN meeting that the hybrid mismatch proposals did not go as far as the OECD’s recommendations and should be strengthened to apply outside as well as within the EU.

Countries would have to introduce a ‘switchover rule’ if the ATAD was enacted in its currently proposed form. This would prevent ‘double non-taxation’ of dividends, capital gains and profits from permanent establishments which enter the EU from non-EU countries by enabling EU tax authorities to deny EU tax exemptions if the income had been taxed at a very low or no rate in the third country.

The switchover rule was not recommended by the OECD and at the ECOFIN meeting a number of States opposed its inclusion in the directive.
ECOFIN is comprised of economic and finance ministers from EU countries. It is responsible for economic policy, taxation matters, financial markets and capital movements within the EU.

ATAD is part of the Commission’s anti-tax avoidance package, which also includes a revision of the Administrative Cooperation Directive to provide country-by-country reporting between Member States’ tax authorities on key tax-related information on multinationals operating in the EU. This part of the package was approved unanimously.

Under the directive multinationals will have to report information on revenues, profits, taxes paid, capital, earnings, tangible assets and the number of employees on a country-by-country basis. The information must be given to the tax authority of the Member State where the group’s ultimate parent entity is tax resident. Reporting will begin for fiscal years starting on or after 1 January 2016.

Separately the European Commission is proposing that certain country-by-county information should be made public. However this proposal has not yet been approved.

The UK is already enacting the OECD’s proposals in relation to county by country reporting and hybrid mismatches. It also published a consultation document earlier this month setting out further details of the way it proposes to implement from April 2017 the OECD recommendations in relation to limiting interest deductibility.