The EU Commission has announced that EU member states have agreed on new rules to eliminate certain corporate tax avoidance practices.
This anti-tax avoidance directive is one of the two legislative pillars of the European Commission's Anti-Tax Avoidance Package which was presented in January 2016. The directive is intended to provide a minimum level of protection for the internal market, while strengthening the average level of protection against aggressive tax planning. The rules in this proposal build on standards developed by the OECD in the base erosion and profit shifting (BEPS) project. While some amendments were made to the original proposal, the new rules are expected to be formally adopted by the European Council sometime in July. After they are adopted, the rules will then have to be incorporated in legislation in participating EU states.
The other legislative proposal included in the EU Commission's Anti-Tax Avoidance Package was the proposal for automatic exchange of country-by-country reports, which was formally adopted in May 2016. The EU Commission will continue to work on corporate tax reform throughout 2016, with a possible re-launch of the "common consolidated corporate tax base" (CCCTB). EU member states have also signaled their intention to compile a common EU list of third-country tax jurisdictions that do not conform to international tax good governance standards.
Main changes to proposal
The main changes from the previously published version of the Anti-Tax Avoidance Package relate to the CFC rules. The previous wording referred to an effective corporate tax rate of at least 50 percent of that of the parent's member state. That phrasing has been replaced with a test that is based on the difference between actual corporate tax paid and the tax that would have been paid in the parent's member state.
With respect to the interest limitation rules, a five year transition period (until 2024) was introduced for member states wishing to keep their domestic targeted rules, such as thin capitalization rules, as a substitute for the interest limitation rules.
Finally, the controversial switch-over clause, which was included as a sixth anti-tax avoidance measure in the original package, has been deleted.
The Anti-Tax Avoidance Directive should be formally adopted during the next EU Economic and Financial Affairs Council (ECOFIN) meeting on July 12, 2016. After that, member states will have until December 31, 2018 to implement the main provisions of the directive in their domestic legislation, which would then apply as of January 1, 2019.
For more information, contact your KPMG adviser.
Information is current to June 28, 2016. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500.