EU to announce proposals on corporate tax avoidance

Out-Law News | 22 Jan 2016 | 5:20 pm | 3 min. read

The EU is going to set out proposals next week to curb corporate tax avoidance, according to the Financial Times.

Pierre Moscovi, the European Commissioner for Economic and Financial Affairs, Taxation and Customs, is expected to announce restrictions on interest deductibility and the shifting of profits to low tax jurisdictions, according to the newspaper, which has obtained a copy of the proposals.

In October last year the Organisation for Economic Co-operation and Development (OECD) issued a report setting out its proposals for restricting interest deductions as part of its base erosion and profit shifting (BEPS) project. The OECD was asked by the G20 group of leading global economies to make recommendations for reform of international tax rules to prevent multinational companies from shifting profits to low tax jurisdictions and exploiting mis-matches between different tax systems so that little or no tax is paid.

Heather Self, a tax expert at Pinsent Masons, the law firm behind, said: "The OECD BEPS project is massively complex and one of the biggest risks is that implementation will be a piecemeal process across different countries. A co-ordinated EU approach is therefore welcome, but rushing ahead and going beyond the OECD recommendations is premature, and will add to the compliance burdens for businesses”.

The OECD recommended that countries should introduce into their tax systems an interest/EBITDA limitation on tax deductibility, with countries free to pick a percentage level from 10% to 30%. EBITDA means a company's earnings before interest, taxes, depreciation and amortisation.

The proposed restriction would apply to all interest, including amounts paid to third parties, with no 'arm’s length' escape route. However, the OECD said that countries could choose to have an additional allowance where interest does not exceed the group ratio.

The EU is proposing a new directive which would set out minimum standard for member states to incorporate in their tax rules. It would set a limit on the interest that could be deducted of 30% of EBITDA, with the ability for member states to allow a lower limit if they chose. There would be a €1 million de minimis limit so that companies with interest expenses below this figure would not be affected. The directive would need to be approved by all 28 member states to become law.

A consultation on the UK's implementation of the BEPS recommendations in relation to Interest deductibility closed earlier this month. An update on the way the UK proposes to implement the proposals into UK law is expected in the Chancellor's Budget on 16 March. Experts have expressed concerns about the detrimental impact of the proposals on infrastructure, energy and real estate projects in particular.

The EU draft directive also sets out minimum standards for an exit tax where a group transfers its head office or tax residence to another member state or to a third country and requires countries to have a general anti abuse rule (GAAR), according to the Financial Rimes. In addition it sets out requirements  in relation to controlled foreign company (CFC) rules and rules to counter hybrid mismatches - arrangements which allow companies to exploit differences between countries' tax rules to avoid paying tax in either country, or to obtain more tax relief against profits than they are entitled to.

CFC rules are designed to prevent groups from storing up profits in low tax jurisdictions. The UK rules allow a 75%, partial exemption from CFC charges in some circumstances where a UK group has a finance company located outside the UK.

Heather Self said: "Although it may be some time before agreement is reached on this directive, and therefore before changes will need to be made to national laws, the CFC proposals will put pressure on the UK's finance company partial exemption. Ireland is also likely to be amongst the countries which will have to amend their CFC and transfer pricing rules".

In a measure not suggested in the OECD recommendations, but included in the EU proposals for a consolidated common corporate tax base (CCTB), the draft directive proposes a 'switch-over' clause, according to the Financial Times. This is designed to prevent untaxed or low taxed income entering the EU and then circulating there free of tax. The new rule would impose a tax charge when such income enters the EU if the tax rate in the country of residence of the entity is less than 40% of the tax rate in the member state where the income enters the EU.