by Julie Martin
EU finance ministers at a meeting of the ECOFIN today failed to reach agreement on the EU Commission’s proposed anti-tax avoidance directive, though officials remained optimistic that a compromise agreement can still be reached.
The proposal, issued in January, would add EU-wide limits on interest deductibility, controlled foreign corporation rules, hybrid mismatch rules, a general antiabuse rule, an exit tax, and a “switch over” clause. The proposal requires unanimous support from all 28 EU countries to pass.
At the same meeting, the ministers did approve, as expected, a directive implementing country-by-country reporting between tax administrations consistent with OECD/G20 base erosion profit shifting plan (BEPS) agreements, the Commission’s external tax strategy, measures to combat tax treaty abuse, and a directive maintaining for a further two years the minimum standard VAT rate at 15 percent.
Jeroen Dijsselbloem, Dutch finance minister and president of the Eurogroup, said that though his goal was to reach agreement on the anti-tax avoidance directive, he was still very pleased with the outcome of the meeting. He said the ministers made significant progress identifying key issues. He also offered a proposed compromise for the ministers’ consideration based on their input.
“There is some reason for optimism” that a deal will be struck at the next ECOFIN, slated for June, Dijsselbloem said.
Dijsselbloem said that an agreement could have been reached very quickly on the anti-tax avoidance measures simply by giving in to all the objections of all the ministers. “But that is not the way we are doing it, we need an effective deal, not just a deal,” he said.
Much discussion at the meeting concerned a proposal to require Member States to adopt controlled foreign company (CFC) rules, which attribute to a parent corporation the income of a low-taxed controlled subsidiary that has significant passive mobile income.
Several ministers argued that the CFC rules should be made inapplicable to EU subsidiaries. Others argued that the CFC rules should be limited in the case of an EU subsidiary to entities considered as being “wholly artificial,” as the Commission had first proposed in January.
According to Dijsselbloem, making the CFC rules inapplicable to EU subsidiaries, though an “easy way out,” is not a “credible deal,” and limiting the CFC rules applicable to EU entities to wholly artificial arrangements “excludes a lot of things with high BEPS risks.”
Dijsselbloem suggested that the ministers compromise by adopting an effective, more precise, definition of “substance” for EU subsidiaries. Also, as a part of the compromise, Dijsselbloem suggested that the burden of proof be shifted to the tax authorities.
Responding to concerns raised by the Irish Minister for Finance, Michael Noonan, Dijsselbloem said that the preamble or the political conclusions associated with the CFC rules can include language making it clear that, by including a benchmark tax rate in the CFC rules, EU is not “heading down a road that is affecting [Member State] sovereignty on minimum tax rates in the EU.”
Dijsselbloem also recommended that the compromise include an extension of the hybrid mismatch rules to third countries. Dijsselbloem said it is not possible make such a significant change to the current proposal, but he said agreement could be reached now on some issues, which could be incorporated into the political conclusions, along with a pledge to adopt the rules. He said that the Commission could come up with a proposal by October, and an agreement could be reached by year-end.
Further, he suggested that amendments be made to the existing hybrid mismatch proposal to increase their scope so they are consistent with the BEPS rules, as suggested by the UK minister.
Dijsselbloem also recommended that the Commission’s proposal for a switch over clause be deleted as a part of the compromise, but only if the entire package is strong enough.
– Julie Martin is a US tax attorney and a member of MNE Tax’s editorial staff.
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