On 17 June 2016 the Economic and Financial Affairs Council (ECOFIN) of the EU held discussions with a view to reaching a political agreement on the proposal for an anti-tax avoidance directive (ATAD). A final compromise text was put forward, and as no objections were raised by the 20 June 2016 deadline, political agreement was reached and the text will be submitted to a later ECOFIN meeting for formal adoption. There is clearly a strong desire within the EU to implement effective anti-tax avoidance measures in a consistent and coordinated manner, and there has certainly been very tangible progress towards this during the first half of 2016. The package of measures was first unveiled at the end of January 2016, and was positioned as a mechanism for ensuring consistent and appropriate implementation of the OECD’s BEPS recommendations by Member States.
At that time, there were concerns that the EU appeared to be going above and beyond the scope of the OECD’s BEPS project. However, in the period since its original proposal, it is clear that the EU has listened to the concerns of individual Member States and has made amendments and refinements. The ATAD is now, on the whole, consistent with the OECD’s recommendations.
The ATAD lays down common minimum rules on the areas of interest limitation, exit taxation, GAAR, controlled foreign companies and hybrid mismatches. Here we consider three of the measures in more detail in terms of their potential impact for UK corporates:
- The interest limitation rules will be of particular interest given the UK Government is currently consulting on a new BEPS-compliant regime. The rules allow for net interest expense to be deductible only up to 30 percent of EBITDA as was originally proposed, but have now been amended to allow for a higher de minimis, a group ratio rule and a public infrastructure project exemption, as well as an option to exclude loans which were concluded before 17 June 2016, provided that they are not subsequently modified. The rules are now broadly consistent with the OECD’s recommendations in this area. The ATAD allows Member States which have existing national rules which are equally effective as the interest limitation rules to continue to apply those rules up to 1 January 2024, unless agreement is reached on the interest limitation rules at the OECD level prior to that date, and subject to providing information prior to 1 July 2017 to allow the EC to evaluate the effectiveness of the existing national rules. The UK‘s proposed new regime would be expected to be consistent with the ATAD, although currently it seems unlikely that the UK will introduce grandfathering provisions and there is a clear intention to implement the new regime from 1 April 2017.
- In relation to controlled foreign companies (CFCs), the EU has made a number of changes to its original proposals. The UK completed a major CFC reform in 2013 and the UK Government has previously commented in relation to the OECD’s work on CFCs as part of the BEPS project that it did not anticipate that the UK’s rules would require further substantive changes. We would not expect the ATAD, which is broadly consistent with the OECD’s recommendations, to change this view.
- As regards hybrid mismatches, the ATAD is short on detail and only covers intra-EU situations. However, what is included is at least now consistent with the OECD’s recommendations. The EC has also been requested to put forward a proposal by October 2016 on hybrid mismatches involving third countries consistent with the OECD’s recommendations, with a view to reaching agreement by the end of 2016. The UK is already intending to introduce new anti-hybrid rules that follow the OECD recommendations from 1 January 2017.
We do have some concerns about whether the ATAD provides sufficient detail in the different areas covered to properly inform effective and consistent implementation across the Member States. The areas covered by the ATAD are complex and many jurisdictions already have well established rules within their national tax codes which have evolved over recent years. These factors may result in a divergence of local interpretation and implementation of the ATAD.
This Euro Tax Flash has further details on the ATAD, and also summarises the next steps towards finalisation and implementation.
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