EU finance ministers at a June 17 ECOFIN meeting were again unable to reach political agreement on an anti-tax avoidance directive aimed at multinational corporations despite being presented with a new compromise plan at the meeting.
The directive, proposed by the EU Commission in January, would combat multinational corporation tax avoidance by imposing EU-wide limits on interest deductibility and adding controlled foreign company (CFC) 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.
The ministers had failed to reach agreement on the proposal at an ECOFIN meeting last month, raising particular concerns about the CFC rules. Compromise proposals have since been offered and were made public June 13. The compromise was the subject of today’s discussions.
The problem reaching agreement today mostly involved the proposal to limit interest deductions. The proposal uses a fixed ratio consistent with the common approach recommended in the OECD/G20 base erosion profit shifting (BEPS) plan.
Belgian Finance Minister Johan Van Overtveldt said his country could not accept the interest deduction limits. Van Overtveldt said that to ensure a level playing field at the international level, the EU should not act until OECD agreement is reached to make the interest deduction limits a binding minimum standard.
Slovinia’s finance minister, Dušan Mramor agreed, stating that EU should not adopt any rules until the OECD’s rules are binding. EU legislation “should give more emphasis to competitiveness,” Mramor said.
In response, Jeroen Dijsselbloem, Dutch finance minister and president of the Eurogroup, proposed a further compromise at the meeting and asked ministers respond to his proposal by midnight on Monday.
Dijsselbloem said a longer transition period could be applied to the interest deduction limitation proposal. Countries could agree to work toward convincing the OECD to adopt interest deduction limits as a minimum standard and, if the OECD agrees, would adopt the interest deductions limits along with the OECD. If there is no OECD agreement by the end of the transition period, though, the interest deduction limits would take effect in the EU at that time, Dijsselbloem said.
“Having an end date is the only way forward; otherwise, there would have been strong opposition from other Member States,” he said.
Van Overtveldt said he could not agree to such a plan immediately; he said he would consult first with his government.
To address the ministers’ concerns, Dijsselbloem also proposed to alter the CFC rules, removing language that placed the burden of proof on the taxpayer for purposes of determining a carve out relating to CFCs that are EU subsidiaries.
The amended text would provide that the CFC rules would not apply “where the controlled foreign company carries on a substantive economic activity supported by staff, equipment, assets and premises.”
The recitals would 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, Dijsselbloem said.
Dijsselbloem also said he would, in a compromise, consider removing the switch over clause from the anti-tax avoidance directive, but only if the final CFC rules were strong enough.
Czech Republic finance minister Andrej Babiš said his country would agree to the directive. Earlier this week, the minister threatened to block the directive unless his country’s concerns over VAT fraud were addressed. The minister said he would now support the directive because the European Commission since made a commitment to present a proposal for pilot mechanism on a reverse charge mechanism by end of 2016.
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