Earlier this year the European Council agreed the terms of a proposed Directive with the intention of setting out rules to prevent tax avoidance practices that affect the proper functioning of the European internal market. The Directive is a reflection of the plan proposed by the OECD that is intended to limit base erosion and profit shifting (BEPS).
It is the intention of the draft Directive to ensure that profits are taxed where they are earned and, to that end, seeks to prevent companies from adopting practices and methods that would defeat that object and avoid paying tax that would otherwise be due. The Directive also seeks to impose a single common definition of frequently used terms, including ‘permanent establishment’, ‘minimum economic substance’ and ‘transfer prices’.
The draft Directive was presented to the European Parliament which, on the 8 June, passed a resolution that welcomed the proposed Anti-Tax Avoidance Directive.
The European Parliament not only approved the Directive but also made a number of recommendations for additional matters that should be considered to be included in the Directive. The principal suggestion, in line with the action plan against BEPS, is that earnings taxed outside of the EU before being transferred into an EU Member State are often exempt from tax in the Member State under the rules to prevent double taxation of foreign income, a step known as the ‘switch-over rule’. The Parliament proposed that such income should be taxed at a minimum rate of 15% with a credit being given for any tax paid outside the EU.
Other recommendations made by the Parliament include:
> The preparation of an exhaustive global ‘black list’ of tax havens and jurisdictions with a corresponding list of sanctions to be applied to non-cooperative jurisdictions and financial institutions operating within black listed jurisdictions. It is proposed that the black list would include those non-compliant countries within the EU.
> The introduction of a common consolidated corporate tax base and the introduction of a common method to calculate the corporate tax rate in Member States, which would enable valid comparisons to be made across the EU.
> Limiting the deductibility of borrowing costs to 20% of the tax payer’s earnings or €2million whichever is the higher.
> The introduction of a common European tax payer identification number (TIN) to ensure the most effective automatic exchange of information between EU Member States.
> A cross border tax dispute resolution mechanism with clear rules and timelines.
> Steps to increase the transparency of trusts and foundations and a prohibition against the use of ‘letterbox’ companies.
There remain many steps to be taken before the Directive becomes a reality as it requires the unanimous agreement of all the Member States.