Austria has been notably affected by the tax morality debate, and public and political pressure to address the issue has been intense. Tax authorities are scrutinizing companies with multinational operations more closely, and in response, many companies are taking a cautious approach to tax planning, wary of unwanted and unwarranted media attention.
Also driving this wait-and-see attitude is uncertainty aboutwhat specific tax law changes will result from the OECDBEPS project. The Austrian government has fully supportedthe BEPS initiative, and the indications are that it willimplement the recommended reforms.
While the details are pending, companies are reviewing theircurrent structures with an eye to curbing practices that maybe viewed as aggressive. Structures that are purely taxdriven,for example, could be subject to alteration.
Due to a recent Corporate Income Tax (CIT) Act amendment,interest payments to low-taxed group companies are nolonger deductible for tax purposes as of 1 March 2014.The restriction applies where:
— the recipient is a group-affiliated corporation or acorporation under the controlling influence of the sameshareholder as the group, and
— the interest payments are either tax-exempt or subject either to a nominal tax rate of less than 10 percent or to an effective tax rate of less than 10 percent due to a beneficial regime in the receiving state.
The explanatory notes to the law indicate that harmful loweffective taxation will be assumed if the receiving entity issubject to a (partial) tax exemption or benefits from fictitiousinterest deductions. Harmful low taxation will not be assumedif the receiving company pays little or no tax because of itsown losses or losses from a group taxation arrangement.
Further, if the direct recipient of the interest payments is notconsidered to be the beneficial owner of the interest income,taxation at the level of the beneficial owner of the interestpayments will apply.
The Austrian legislator is not expected to introduce generalinterest limitation rules in the next few years.
Austria implemented new rules governing transfer pricingdocumentation in line with Action 13, taking effect forbusiness years starting 1 January 2016. Master andlocal-files are required for Austrian companies that are partof a multinational group with sales exceeding EUR50 millionin the two preceding financial years. CbyC reporting isrequired for multinational groups with sales reported in theconsolidated financial statements of EUR750 million or more.These requirements are adding more layers of effort andtransparency for companies in Austria.
While not strictly related to BEPS, horizontal monitoring is an innovative and increasingly popular means of tax reportingin Austria. The taxpayer signs a declaration obliging theircompany to disclose records to the authorities. The two sides meet on an ongoing basis to discuss which tax practices are allowable and which are not, and after some years, audits are no longer conducted.
Although the start-up phase requires effort, the system provides a win-win in the long term: Both sides get security and certainty, and animosity and its associated costs are avoided.
While we expect changes to other tax measures, such as taxation of IP, CFC rules, PE regulations and general interestlimitations, the exact nature of these changes has yet to be determined. Given the current appetite for reform in Europe, we probably would not have to wait long to find out.