EU: Agreement on directive reached, new tax avoidance rules

EU directive to address tax avoidance

The European Commission today announced that the EU Member States have agreed on new rules to eliminate certain corporate tax avoidance practices. These measures target tax avoidance reportedly practiced by certain large multinationals, and build on standards developed by the OECD in the base erosion and profit shifting (BEPS) project. The European Parliament has already issued its opinion. Accordingly, the new rules are expected to be formally adopted by the European Council.

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As explained in an EC release, the new rules—once implemented—will address certain common loopholes and aggressive tax planning currently used by certain large companies to avoid paying tax. For example:

  • All EU Member States will now have the authority to tax profits being moved to “low-tax countries” where the company does not have any genuine economic activity—referred to as “CFC rules.”
  • Previously untaxed gains on assets such as intellectual property that were moved from the EU's territory can also be taxed—“exit taxation rules.”
  • EU Member States will have the authority to address tax avoidance schemes that are not covered by specific anti-avoidance rules—a “general anti-abuse rule.”

Some amendments were made to the original proposal—such as concerning the scope of the provision on interest limitations and its transposition into law.

  • The interest limitation rules take the form of an earnings stripping rule, whereby in principle no deduction would be given for interest exceeding 30% of earnings before interest, tax, depreciation and amortization (EBITDA). 
  • Concerning "hybrid mismatches," the directive covers only intra-EU situations involving hybrid entities and hybrid instruments.

Prior actions, future actions

Today’s EC release states that these measures are at the “forefront in terms of the political and economic approach” to corporate taxation, following the BEPS recommendations. The EC agreed in March 2016 on country-by-country reporting by EU tax authorities, thus requiring large multinationals based in the EU to provide detailed tax-related information to tax authorities. The EC's proposal on the automatic exchange of information on tax rulings was agreed by the EU Member States in October 2015. A number of other substantial corporate tax reforms have been launched. 

The EC release states that work will continue on corporate tax reform throughout 2016, with possible re-launch of the “common consolidated corporate tax base” (CCCTB). The EU Member States have also signalled their intention to compile a common EU list of third-country tax jurisdictions that do not conform to international tax good governance standards.

 

Read a June 2016 report [PDF 380 KB] prepared by KPMG's EU Tax Centre

KPMG observation

Adoption of the directive, by the European Council, will be binding on EU Member States, and these measures potentially will have a significant impact on multinationals operating in the EU. A binding directive will provide a level of consistency among EU Member States, although there are a number of options to defer bringing these measures into force.

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