The European Union has reached political agreement on a directive designed to combat multinational corporation tax avoidance, with all 28 countries signing on to the deal.
The directive requires countries to adopt general antiabuse rules, new rules on exit taxation, and rules to combat hybrid mismatches consistent with a June 13 draft compromise proposal made public last week.
The final directive also adopts controlled foreign company (CFC) rules and interest deduction limits, but, to reach a compromise, these rules will be more lenient than those in the June 13 draft.
A proposed switch over clause, which would have limited tax exemptions for income from tax havens, has been eliminated altogether from the final compromise agreement.
The directive, first proposed in the Commission’s January 2016 anti-tax avoidance package, builds on OECD/G20 tax base erosion and profit shifting (BEPS) agreements.
The agreed-to compromise was offered last Friday by Jeroen Dijsselbloem, Dutch finance minister and president of the Eurogroup, following discussion by the Economic and Financial Affairs Council (ECOFIN). To address ministers’ concerns, Dijsselbloem proposed several amendments to the June 13 draft, subject to a silent procedure.
The Council said in a press release that the procedure expired on midnight June 20 without objections being raised and thus the directive will be submitted to a forthcoming Council meeting for adoption.
Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs, hailed the agreement, stating that it “strikes a serious blow” against tax avoidance.
“For too long, some companies have been able to take advantage of the mismatches between different Member States tax systems to avoid billions of euros in tax,” Moscovici said.
Interest deduction limits
The compromise adopts interest limitation rules consistent with final BEPS plan recommendations, denying deductions for interest exceeding 30 percent of earnings before interest, tax, depreciation, and amortization (EBITDA).
Special transition rules will allow Member States that have targeted interest deduction rules that are considered equally effective to apply those rules until the OECD agrees to a minimum standard for interest deduction limits, or until 2024, at the latest.
At Friday’s ECOFIN, Belgian and Slovenian ministers would not agree to a proposal to limit interest deduction which set the end date at 2020, arguing that the EU should not adopt the deduction limits until the OECD makes its interest deduction proposal a minimum standard. Belgium and Slovenia did not object to the revised interest limitation proposal bearing a 2024 end date, though, allowing the measures to pass.
CFC rules
The final compromise also modifies language in earlier drafts that placed the burden of proof for establishing “substantive economic activity” on the taxpayer when a CFC is an EU subsidiary.
The new language provides that the CFC rules will not apply where the CFC carries on a substantive economic activity supported by staff, equipment, assets and premises.
The recitals will confirm that it is important for both the tax administration and the taxpayer to cooperate in gathering relevant facts and circumstances to determine whether the carve out rule is applicable.
Missed opportunity
European Parliament Greens spokesperson Eva Joly said the EU agreements on exit taxation and requiring a general antiabuse clause are “important,” but said that, otherwise, the deal is “a major missed opportunity.”
“This minimalist legislation shows EU governments are not taking the problem seriously and that there is a huge gap between the political rhetoric following each tax scandal and the concrete actions of EU decision-makers,” Joly said.
Joly particularly noted “loopholes” in the interest deduction limits that will exempt loans until 2019 and that allow member states to apply national rules until 2024.
The EU Commission’s proposed rules for taxing profits of companies’ subsidiaries located in tax havens have been “seriously watered-down and fall behind the OECD recommendations,” Joly said.
Aurore Chardonnet, EU Policy Advisor on Inequality and Taxation at Oxfam International, was also critical, stating that it is “outrageous” that EU governments have been unable to agree on an effective approach to counter multinational groups that park profits in tax havens.
“Finance ministers destroyed the European Commission’s proposal, turning the anti-tax avoidance directive into wastepaper,” Chardonnet asserted.
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