The Economic and Financial Affairs Council of the European Union (ECOFIN), comprised of all European Union finance minsters, on December 5 announced they reached agreement on how the Code of Conduct Group should to interpret the fourth criterion of the Code of Conduct for business taxation, dealing with substance and internationally accepted principles.
The guidance will be used by the group in assessing whether an EU tax regime constitutes harmful tax competition.
The ECOFIN agreement provides that preferential business taxation measures will be particularly scrutinized by the Code of Conduct Group under the fourth criterion if:
1. The measure deviates from the arm’s length principle as applied in accordance with the most recent update of the OECD Transfer Pricing Guidelines for profit determination, unless
a. this deviation is proportionate and justified with reference to the size of the SMEs as defined in the Commission Recommendation 2003/361/EC, or
b. the measure uses “safe harbour” rules for profit determination that are proportionate and justified with reference to the reduction of the administrative burden which the measure is expected to produce.
2. The measure provides for a reduction of the tax base by a specific percentage. However, a reduction in the tax base should not be considered as falling within the scope of the fourth criterion in any specific case where it results that:
-the tax base before the fixed reduction has been calculated in accordance with the arm’s length principle, and
-the reduction leads to the same result as a reduced tax rate, and
-the reduction leads to a simplification of tax administration.
3. The measure deviates from the principle that the profits to be attributed to a permanent establishment (PE) are the profits that the PE would have earned at arm’s length, in particular in its dealings with other parts of the enterprise, if it were a separate and independent enterprise, regardless of t he OECD approach chosen;
4. The measure deviates from the minimum standard committed to under OECD BEPS;
5. The measure allows a deduction for costs or losses that is not symmetrical to the determination of the taxable earnings.
The agreement specifies that regimes that have already been assessed as not potentially harmful or for which the group decided there was no need for assessment will not be affected by the new guidance. The procedure for reopening past assessments remains in place, the Council said.
The Code of Conduct for business taxation was adopted in 1997 and, though not legally binding, it expresses EU States’ commitment to abolish tax measures that constitute harmful tax competition. Compliance with these measures is overseen by the Code of Conduct Group.