by Julie Martin
The European Commission today unveiled new tax proposals aimed at establishing a coordinated EU-wide approach to curb to multinational tax avoidance.
The anti-tax avoidance package, or ATAP, includes a proposed directive for six legally binding anti-avoidance measures, a proposal to revise an existing directive to implement EU-wide country-by-country reporting for multinationals, guidance for member states on revising tax treaties to prevent treaty abuse, and a revised method for identifying countries to be placed on the EU “tax blacklist” of non-EU countries.
“The work is based on the premise that profits should be taxed where they are generated,” EU tax commissioner, Pierre Moscovici, told a press conference.
Moscovici said that coordinated action among EU states is critical to curbing multinational tax avoidance. “We will not stop cross-border tax avoidance with 28 national responses,” he said.
Three of the anti-tax avoidance measures in the proposed directive implement global standards developed under the OECD/G20 base erosion profit shifting (BEPS) project, namely, rules limiting interest deductibility, controlled foreign corporation rules, and measures to prevent tax avoidance through hybrid mismatches.
Three proposals go beyond BEPS: a general antiabuse rule; an exit tax; and a “switch over” clause, requiring taxation of foreign income entering the EU in cases where the income was subject to a low rate of tax.
According to OECD Secretary-General Angel Gurría, the package is “entirely BEPS-compatible.” Gurría said that, if adopted, the measures will improve transparency and competition in Europe and will create a more certain tax environment.
Whether the ATAP will be adopted into law remains open question, though.
The Commission can’t force its proposals on the States, because a directive requires unanimity under Article 115 TFEU, noted Aisling Donohue, a tax partner with mgpartners, Dublin.
Donohue said that, so far, Member States have been implementing BEPS in a piecemeal fashion depending on their priorities. “I suspect in reality that until all the States are ready to implement BEPS fully, they won’t agree to this directive. They won’t allow the Commission to try and impose any tighter deadline,” she said. Donohue also said the exit tax may violate EU principles of freedom of establishment.
Similarly, Professor James Stewart of Trinity College, Dublin, said that given that countries such as Ireland, Luxembourg, and the Netherlands must sign on to the plan before it is adopted, “it is difficult to predict to what extent the draft directive proposals will in fact be implemented.” There is a conflict of interest between Members States relating to tax matters, Stewart said.
Stewart also said that the US may fight the heightened enforcement, particularly the exit tax and the proposal requiring multinationals to become subject to tax on foreign income. He said both measures potentially lower US revenue as US multinationals could claim foreign tax credits for additional tax paid upon repatriation of foreign earnings.
Moscovici was much more optimistic about the likelihood of passage of the anti-tax avoidance plan, though he acknowledged it is likely that the proposal will be altered before it is passed.
“I have every confidence in a very fast agreement on the architecture and the measures of this package,” Moscovici said. The public is demanding action to curb tax avoidance, and the OECD and G20 agreement in the BEPS project have set the stage for approval of the deal, he said.
Tax haven blacklist
The EU’s practice, initiated in June 2015, of compiling a list of non-EU tax havens based on the number of Member State blacklists the country is on, has met with enormous criticism, not only from the countries on the European list, but also from the OECD, which was displeased when OECD Global Forum on Transparency and Exchange of Information members were added the EU blacklist.
The Commission’s external strategy on effective taxation, also published today, proposes to replace the current procedure for identifying countries on the pan-European blacklist. Under the new plan, a common EU system for assessing, screening, and listing third countries would be used. A common approach to dealing with countries on the list would also be adopted.
“This process will be neutral, clear, and well-founded,” Moscovici said.
Treaty abuse
Recommendations on prevention of tax treaty abuse, also released as part of the package, suggest that countries negotiate to add to their tax treaties a general antiabuse rule based on a principal purpose test, as outlined in the BEPS report under action 6. Sample language for a provision consistent with EU law is provided.
The report also recommends that countries adopt provisions in tax treaties that are consistent with BEPS action 7 on preventing the artificial avoidance of permanent establishments.
– Julie Martin is a US tax attorney and a member of MNE Tax’s editorial staff.
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