On Jan. 28, 2016, the European Commission (EC) presented its Anti Tax Avoidance Package, which aims to hamper aggressive tax planning and foster a better business environment throughout the European Union (EU). The package includes two legislative proposals: (1) a directive addressing certain anti-base-erosion and profit-shifting (BEPS) issues; and (2) an amendment to the Directive on Administrative Cooperation in Taxation to require automatic exchange of tax rulings and information with respect to country-by-country reporting.
The package also includes recommendations for: (1) the introduction of a general anti-abuse rule, based on a principal purpose test, in EU tax treaties; and (2) the adoption of revisions to the definition of permanent establishment in line with the recommendations of the Organisation for Economic Co-operation and Development (OECD). Finally, the package contains a Communication on an External Strategy for Effective Taxation, which proposes a common approach to tax good governance for other countries.
Comparing the EC's Package to the OECD's Recommendations
Many of the measures included in the package generally are consistent with the OECD's BEPS recommendations, and, in fact, one of the package's goals is to ensure implementation of those recommendations within the EU in a consistent and coordinated manner. However, as the EC acknowledged, the package goes much further in certain areas than the OECD's recommendations, in both its approach and its breadth. This item describes certain significant areas of divergence.
Hybrid mismatches: While the OECD recommends rules that would neutralize the tax advantage of hybrid mismatches, the EC's proposal would require EU member states to follow the source state's legal characterization of hybrid entities or instruments, provided that the source state is also an EU member state. It is unclear how the EC's proposal would interact with the OECD's recommended rules in cases in which an EU member state also implements the OECD rules. It is also unclear how the rule would work when a hybrid entity makes a payment and both jurisdictions would be the source country of that payment according to domestic law.
CFC rules: Unlike the OECD's recommended flexible approach to the controlled foreign corporation (CFC) rules, the EU's package proposes a framework under which income of a CFC is included in the parent's income if the generally applicable effective corporate tax rate is less than 40% of the tax rate in the parent's jurisdiction, and more than 50% of the CFC's income falls within certain categories of passive income.
Country-by-country reporting: The inclusion in the package of a proposal to require automatic exchange of country-by-country reporting information does not represent an extension of the OECD's recommendations on country-by-country reporting; it provides solely for the exchange among EU member states of the country-by-country reporting information. However, the package also indicates that the EC is initiating a consultation on the public reporting of country-by-country reporting information, which would extend beyond the OECD's recommendations.
Measures outside of the OECD's recommendations: A number of proposals in the EU's package were not addressed in any way in the OECD's recommendations. First, the package includes a proposed "switch-over clause" that would tax foreign income received as a dividend from, or profit on the disposal of shares in, an entity that is resident outside the EU or income from a permanent establishment situated outside the EU, where the entity or permanent establishment is subject to local corporate tax at a rate lower than 40% of the statutory rate in the member state of the entity receiving the income. In addition, the package proposes exit taxes on transfers of assets (or on migration of tax residency) within the EU or between the EU and a third country. Finally, the package proposes an overall general anti-abuse rule, which would include both motive and substance tests.
When May the Package's Proposals Become Effective?
The two legislative proposals, or directives, contained in the package will be submitted to the European Parliament for consultation and to the European Council for adoption. Although the EC is striving for quick adoption of the directives, it is unclear how feasible that is from either a political or practical standpoint. Implementing the changes by individual EU member states also would require significant time and effort. Nonetheless, once agreed upon by the member states, any directive would have direct effect, which generally means that a taxpayer could claim any benefits of the directive even if a member state fails to implement it.
In any event, as a result of the inconsistencies with the OECD recommendations discussed above, adoption of the package's proposals in the EU likely would introduce a certain degree of complexity and uncertainty with respect to the adoption of BEPS rules in other countries.
Mary Van Leuven is a director, Washington National Tax, at KPMG LLP in Washington.
For additional information about these items, contact Ms. Van Leuven at 202-533-4750 or firstname.lastname@example.org.
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