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.
This wait-and-see attitude is also being driven by uncertainty about what specific changes will be made to tax laws as a result of the OECD BEPS project. The BEPS initiative has been fully supported by the Austrian government, and the indications are that it will implement the recommended reforms.
While the details are pending, companies are reviewing their current structures with an eye to curbing practices that may be viewed as aggressive. Structures that are purely tax-driven, for example, could be subject to alteration.
Due to a recent Corporate Income Tax (CIT) Act amendment, interestpayments to low-taxed group companies are no longer deductible fortax purposes as of 1 March 2014. The restriction applies: (1) if the recipient is a group-affiliated corporation or a corporation under the controlling influence of the same shareholder as the group; and (2) if 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 low effectivetaxation will be assumed if the receiving entity is subject to a (partial) tax exemption or benefits from fictitious interest deductions. Harmful low taxation will not be assumed if the receiving company pays little or no tax because of its own losses or lossesfrom a group taxation arrangement.
Further, if the direct recipient of the interest payments is not considered to be the beneficial owner of the interest income, taxation at the level of the beneficial owner of the interest payments will apply.
New rules governing transfer pricing are also likely to arise from the BEPS initiative. Currently, only transactions involving Austrian companies must be reported. The new requirement to report on a CbyC basis will create additional layers of effort and transparency for companies in Austria, especially smaller companies, which will be forced to spend more on administration.
While not strictly related to BEPS, horizontal monitoring is an innovative and increasingly popular means of tax reporting in Austria. The taxpayer signs a declaration obliging their company 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 a certain amount of effort, in the long term the system provides a win–win: 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 and PE regulations, the exact nature of these changes has yet to be determined. Given the current appetite for reform in Europe, we are unlikely to wait very long to find out.