On January 1, 2019, several new EU regulations set up to combat tax avoidance in the region came into force.
As explained by the EU in a press release, the Anti-Tax Avoidance Directive (ATAD) “will ensure that all Member States implement coordinated measures against tax avoidance, to boost their collective defences against aggressive tax planning.”
Furthermore, this regulation establishes “a common approach to tackling external threats of tax avoidance and to help prevent companies from shifting untaxed profits out of the EU.”
Pierre Moscovici, the EU’s Commissioner for Economic and Financial Affairs, Taxation and Customs, said, “The Commission has fought consistently and for a long time against aggressive tax planning. The battle is not yet won, but this marks a very important step in our fight against those who try to take advantage of loopholes in the tax systems of our Member States to avoid billions of euros in tax.”
More specifically, three of the five rules set out by the Anti Tax Avoidance Directive became enforceable at the beginning of the year.
Controlled Foreign Company Rule
First, the Controlled Foreign Company (CFC) rule “will ensure that the Member State where the parent company is located will tax certain profits that the company parks in a no or low tax country,” kicking in “if the tax paid in the third country is less than half of that which would have been paid in the Member State in question.”
Furthermore, “the company will be given a tax credit for any taxes that it did pay abroad,” guaranteeing “that profits are effectively taxed, at the tax rate of the Member State in which they were generated.”
Some analysts, however, have their doubts as to whether this rule will ultimately be efficient and retain business in the region.
Speaking to Bloomberg Tax, Raymond Krawczykowski, a Deloitte LLP tax partner in Luxembourg, said that this specific rule might lead EU firms to transfer their offices abroad “and to flatten their European holding structure” as a result of “no or little relief for the tax paid upstream.”
Interest Limitation Rule
Second, the Anti-Tax Avoidance Directive will curtail “the amount of net interest that a company can deduct from its taxable income, based on a fixed ratio of its earnings,” making “it less attractive for companies to artificially shift debt in order to minimise their taxes.”
Keep in mind that this section of the Directive “includes an optional grandfathering rule, which means that Member States may exclude debt in place prior to 17 June 2016 from the scope of the rule, as they may for interest used to fund long-term public infrastructure projects.”
In this case, Deloitte’s Krawczykowski believes the rule will hinder people’s investments, reducing “the returns on capital for investors.”
“Multinationals filing statutory consolidated accounts may where possible increased their leverage at a group level to benefit from a specific exemption. In any case both measures will drastically increase the cost of compliance for EU multinationals,” he told Bloomberg Tax.
General Anti-Abuse Rule
Finally, the General Anti-Abuse Rule (GAAR) came into force to “tackle abusive tax arrangements if there is no other anti-avoidance rule that specifically covers such an arrangement” and ultimately working “as a safety net in cases where other anti-abuse provisions cannot be applied.”
This specific rule will let “tax authorities to ignore abusive tax arrangements and tax on the basis of the real economic substance.”
In an interview with Bloomberg Tax, Edoardo Traversa, a tax law professor at Catholic University of Louvain in Belgium, mentioned that the GAAR is problematic as it conflicts with the EU’s single-market rules.
“The anti-abuse rule is the most problematic as it gives member state tax authorities blanket powers to reject a multinational company tax regime. Unlike in previous ECJ law, there is no definition of what an artificial arrangement is,” Traversa said.
Two additional rules that are part of ATAD will become enforceable in 2020.
As reported by Bloomberg Tax, these “include restrictions on hybrid mismatches to prevent multinationals from using cross-border profit shifting to benefit from double non-taxation” and the imposition of “exit tax rules on multinational companies moving profits to low- or no-tax countries.”
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