In accordance with the June 2015 Action Plan for Fair and Efficient Corporate Taxation in the EU, the Commission presented on 28 January 2016 the so-called Anti Tax Avoidance Package as a natural corollary of the OECD’s BEPS project. For multinational companies, the most noteworthy content of the package is the two legislative proposals aimed to tackle corporate tax avoidance with EU level measures.
The package introduces a proposal for an Anti Tax Avoidance Directive aiming at ensuring effective taxation in the EU. Effective taxation is based on the notion that companies should pay tax in the state where their profits are generated. By proposing legally-binding measures, the Directive intends to block the most common methods used by companies to avoid paying tax. The Directive comprises of the following six specific anti-abuse measures:
- Interest limitation rule: To tackle profit shifting by means of artificial debt arrangements between group entities resident in high-tax jurisdictions and low-tax jurisdictions, the Directive suggests setting an EBITDA based limit for deductibility of interest expenses. The proposed limit, 30% of EBITDA, is at the top of the scale (10 –30%) recommended by the BEPS project.
- Exit taxation: The rule targets to prevent taxpayers from reducing their tax burden by moving their residence or assets to a low tax jurisdiction.
- Switch-over clause: To impede double non-taxation of certain income, the Directive suggests clauses whereby taxpayers are subjected to tax, instead of being exempt, and given a credit for tax paid abroad.
- General anti abuse rule (GAAR): With the intention to cover the gaps that may exist in a Member State’s specific anti-avoidance rules, the proposal includes a rule that would act as a safety net in cases where other anti-abuse provisions cannot be applied.
- The controlled foreign company (CFC) rules: Under proposed CFC rules, the income of a low-taxed subsidiary can be re-attributed to its parent company, if the effective tax rate in the subsidiary’s country is less than 40% of that of the Member State where the parent company resides.
- Hybrid mismatches: The framework combats against abusing of differences in two legal systems that result in double deductions or deductions in one country on income that is exempt from tax in another country.
In addition to the effective taxation, the Anti Tax Avoidance Package aims at boosting transparency by a revision of the Administrative Cooperation Directive. Along with the revision national authorities are required to exchange tax information on multinational companies’ activities on a country-by-country basis.
The Anti Avoidance Package also includes the EU Recommendation on Tax Treaties which strives to prevent treaty shopping. The recommendation advises Member States on implementation of measures leading to non-applicability of tax treaties in situations where a company wishing to be subject to the tax treaty provisions does not perform genuine economic activities. Additionally, the package introduces actions observing the global nature of tax avoidance and harmful tax competition, such as promoting of tax good governance globally and a process to list third countries that refuse to comply with tax good governance standards.
The Anti Tax Avoidance Directive and the revision of the Administrative Cooperation Directive will be submitted to the European Parliament for consultation and to the Council for adoption. As initiatives in the Anti Tax Avoidance Package are in line with the views of the European Parliament and the Council and outcomes of BEPS project, Member States are anticipated to promptly implement the proposed measures.
The proposed anti-avoidance measures of the Anti Avoidance Directive are not new-found provisions in Finnish tax legislation but will further complicate the tax environment of global enterprises. For example, Finland has already adopted rules on deductibility of interest expenses. Moreover, Finnish tax legislation contains CFC rules preventing profit shifting to low tax jurisdictions. Amendments of Parent Subsidiary Directive introducing a limitation-on-benefits rule and a general anti-abuse rule with the intention to tackle hybrid mismatches were also implemented in Finnish tax legislation with the effect from the beginning of 2016.