Anti-tax avoidance directive EU/2016/1164 of 12.07 (1).pdfthe MS and the actual amount of CIT paid in state of CFC. CFC art.7 Conditions • I.e. effective tax rate in CFC state

Anti-tax avoidance directive

EU/2016/1164 of

12.07.2016

Prof. em. Frans Vanistendael

[email protected]

TABLE OF CONTENTS

• Context of the directive

• Scope & definitions

• Interest limitation rule

• Exit taxation

• GAAR

• CFC

• Hybrid mismatches

CONTEXT

• Explanatory memorandum analyses the

BEPS proposals and urges a common EU

solution with emphasis on CCTB.

• Basically the idea of the Commission was to

rally the MS around the protection of their

national tax base and entice them at the

same time to agree on the CC(C)TB. That

failed however and ATAD was approved and

CC(C)TB had to wait.

CONTEXT

• The Commission wanted to prevent that

each MS would follow its own national way

in implementing the BEPS rules. ATAD is

intended as a form of EU coordination of

BEPS for the MS.

• However in acting very quickly the EU is

now committed to BEPS, without knowing

whether other countries (US?) will

implement BEPS. Quid UK after Brexit?

CONTEXT

• Through the ATAD the Commission has

already obliged MS to take positions with

respect to BEPS actions that are not

mandatory.

• The BEPS actions that are mandatory under

the Multilateral Convention (LOB clauses,

MAP and Arbitration, if accepted) are not

integrated in the ATAD and each MS can

still go its own way.

CONTEXT

• The directive does not preclude national

and agreement based provisions to

safeguard a higher level of protection for

domestic corporate tax bases (art.3).

• This implies stricter protection of national

tax base through national or treaty rules

(MLConvention), also in cases where there

is clearly no cross-border abuse.

SCOPE art.1

• Directive applies to all taxpayers that

are subject to corporate income tax in

one or more MS, including PE’s in MS

of resident entities of third countries.

• Individuals are excluded.

SCOPE art.1

• Applies not only to groups, but also to

single cos., but some rules may not

apply to single cos. (interest limitation).

• Transparent cos. are excluded, i.e.

partnerships and other forms of

transparent cos. (many transparent

cos. in Germany) are not subject to

ATAD.

Definitions art. 2

• Borrowing costs

• Exceeding borrowing costs

• Associated entreprise: direct or indirect

holding by entity or individual of 25% -

hybrids 50% - CFC > 50%.

• Financial undertaking

Minimum protection art. 3

• This directive shall not preclude the

application of domestic or agreement

based provisions aimed at

safeguarding a higher level of

protection for domestic corporate

tax bases.

INTEREST LIMITATION RULE art.4

• Exceeding borrowing costs are deductible

in the tax period in which they are incurred

up to 30% of EBTIDA (earnings before

interest, tax, depreciation and amortisation).

• Exceeding borrowing costs (ExBC):

amount by which deductible borrowing costs

exceed taxable interest revenue or

equivalent taxable revenue from financial

assets.


• Borrowing costs: interest expenses on all

forms of debt and other costs equivalent to

interests and expenses connected to the

raising of finance in accordance with

national law.

• Borrowing costs are always deductible to

the extent that taxpayer receives interest or

other taxable revenues from financial

assets. But deduction of excess

borrowing cost is limited.


• Borrowing cost: 15 million €

• Interest & equivalent revenue: 10 million €

• Exceeding borrowing cost : 5 million €

• EBITDA 10 million € x 0,3 = 3 million €

• Non deductible interest: 2 million €


Options

• MS may exclude ExBC up to 3 million €

(limit for whole group of associated

enterprises)

• MS may exclude stand alone company,

which can deduct all borrowing costs.


Options

• MS may exclude loans concluded before

17.06.2016, but not subsequent

modification of such loans.

• MS may exclude loans used to fund long-

term public infrastructure projects, when

project operator, borrowing costs, assets &

income are all within the EU.


Options

• Long-term public infra-structure project

consists in providing, upgrading, operating

and /or maintaining a large-scale asset of

general public interest in a MS.

• Any income from loans for such projects is

excluded from EBITDA and any excluded

exceeding borrowing cost is excluded from

calculating the amount of group ExBC vis à

vis third parties, under art. 4.5.b(i).


Options

• Indefinite carry foward of amount of ExBC

that is non deductible in the taxable period.

• Indefinite carry forward of ExBC combined

with carry back for maximum 3 years.

• Indefinite carry forward of ExcBC for

maximum 5 years of any amount of excess

EBITDA exceeding interest deduction in the

tax period.


Options

• MS may exclude financial undertakings

from the interest limitation rule, including

when such financial undertakings are part of

a consolidated group for financial

accounting purposes.


Options for Groups

• Option1: When an entity is member of a

group for financial accounting purposes a

taxpayer may be given the right to deduct

the full amount of its ExBC, if it

demonstrates that the ratio of its equity over

total assets is equal to or > compared to the

equivalent rate of group equity over to total

group assets.


Options for Groups

Option1:

• EX. Full deductibility of ExBC:

Co. in group Group

Equity 1 million Equity 10 million

Total assets 2 million Total assets 30 mill.

Co ratio E/A = 0,5 > Group ratio E/A = 0,33


Options for Groups

• Conditions of comparison between group

and group member:

- a tolerance of 2% in the comparison

between single entity and group ratio

- all assets and liabilities are valued using

the same method in accordance with IFRS,

or national standards of a MS, or other

standards (US GAAP)


Options for Groups

• Option 2: The entity of a group may deduct

the amount of ExCB > 30% of EBITDA up to

a group maximum calculated in two steps:

- the group ratio is calculated by dividing

non deductible ExCB on debt vis à vis third

parties over the amount of group EBITDA

- that group ratio is multiplied by the amount

of EBITDA of the single entity.


Options for Groups

Option 2:

Ex.: Co. in group Group

3 million debt third p.

EBITDA 500K 5 million EBITDA

Deductible debt

0,6 x 500 K in stead of 0,3 x 500 K

Deductible ExBC = 300K > 150K

EXIT TAXATION art.5

• Taxpayer is subject to tax on the difference

between market value and tax value of his

assets, in case of:

- transfer of assets from the head office to a

PE in another MS or third country

- transfer of assets from a PE to the head

office or a PE in another MS or third country

- transfer of tax residence to another MS or

third country, except for assets left in PE

- Transfer of business of PE out of a MS.

EXIT TAXATION art.5

• Step up basis: When transfer of assets, tax

residence or PE is to another MS that MS

shall accept the market value of the assets

established in the MS of origin as the

starting value of the assets for tax purposes.

• Market value is the exchange value or value

of settlement between independent parties

in the market.

EXIT TAXATION art.5

• Return of assets:

• Exit tax does not apply to assets that are

set to return to the MS of the transferor

within a period of 12 months.

• Exception only for transfer of financial

assets related to financing securities,

assets posted as collateral, or transfer of

assets to meet prudential capital

requirements.

EXIT TAXATION art.5

• Quid return of physical assets?

The assets must belong to the taxpayer

and be transferred to be part of a PE in

the other country. A building site > 12

months can be treated as a PE.

EXIT TAXATION art.5

• Deferral of payment:

• Tax payable in installments over 5 years:

- transfer of assets between HQ & PE of MS

or countries of the EEA agreement

- transfers of tax residence or PE between

MS or countries of the EEA agreement

EXIT TAXATION art.5

• Deferral of payment:

- Only for EEA countries if a treaty has been

concluded for the recovery of tax claims

equal to the directive on the recovery of tax

claims.

• Deferral of payment is subject to interest.

• Guarantee in case of risk of non-recovery.

EXIT TAXATION art.5

• Deferral of payment: deferral ends

immediately in case:

- transferred assets are sold or disposed of

- assets are transferred to a third non EEA

country, or EEA without recovery treaty

- tax residence or PE is transferred to non

EEA country, or EEA without recovery treaty

- taxpayer goes bankrupt or is wound up.

GAAR art.6

• MS shall ignore an arrangement or a series

of arrangements, which having put into

place for the main purpose or one of the

main purposes of obtaining a tax

advantage that defeats the object and

purpose of the applicable tax law, are not

genuine regading all facts and

circumstances.

GAAR art.6

• An arrangement shall be regarded as non-

genuine to the extent that it is not put into

place for valid commercial reasons which

reflect economic reality.

• When an arrangement is ignored, the tax

liability shall be calculated in accordance

with national law i.e. depends on national

anti-avoidance clause.

CFC art.7

• CFC rule applies in principle to all PE’s &

cos. Including EU & EEA!

• MS of a taxpayer shall treat an entity

(subsidiary) or PE whose profits are exempt

or not subject to tax, as CFC, only in case of

exemption MS.

CFC art.7

Conditions

• The taxpayer & associated entreprises hold

directly or indirectly a participation > 50% of

the voting rights, of the capital or are

entitled to receive > 50% of the profits, of

the CFC.

CFC art.7

Conditions

• The actual amount of CIT paid by the CFC

is lower than the difference between amount

of CIT on the profit due under the CIT rate in

the MS and the actual amount of CIT paid

in state of CFC.

CFC art.7

Conditions

• I.e. effective tax rate in CFC state < 1/2 rate

in EUMS

• Income of PE of CFC that is exempt in CFC

state, is not taken into account :

PE MS3 – CFC MS2 – Parent MS1, exempt

income PE is not taken as CFC income.

CFC art.7

CFC income included in tax base: option1

• Non-distributed income of the entity or PE

derived from the following categories:

• interest or any income from financial assets

• royalties or any income from IP

• dividends & income from disposal of shares

CFC art.7


• income from financial leasing

• income from insurance, banking & other

financial activities

CFC art.7


• Income from invoicing companies that earn

sales and services income from goods and

services traded with associated entreprises

and with little or no economic value.

CFC art.7


• Exception: CFC rule does not apply when

controlled co. carries on a substantive

economic activity: staff, equipment, assets

& premises.

• MS may elect not to apply the substantive

economic activity exception to cos., resident

or situated in non-EEA third country.

CFC art.7


• The non-distributed income of the entity or

PE arising from non-genuine

arrangements which have been put into

place for the essential purpose of obtaining

a tax advantage (reference to Halifax i

contradiction with one of the principal

purposes under art.6).

CFC art.7


• An arrangement is non-genuine to the

extent that the entity or PE would not own

the assets or would not have undertaken

the risks which generate all, or part of its

income, if it were not controlled by a co.

where the significant people functions are

instrumental in generating the CFC income.

(Economic analysis of abuse).

CFC art.7

Exceptions

• When CFC income is calculated in

accordance with option 1 (tainted income

according to art. 7.2 (a)), a MS may opt to

exclude an entity or PE from the CFC rule,

if one third or less of the income falls into

CFC income under option 1.

CFC art.7

Exceptions

• When the tainted income (art. 7.2 (a)) of a

financial undertaking is equal or < a third

of the income of the CFC derived from

transactions with associated entreprises,

MS may exclude from CFC.

CFC art.7

Exceptions

• Small business exclusion

• When accounting profits are equal or < than

750.000 € & non-trading income is equal or

< than 75.000 €

• When accounting profits are equal or < than

10% of operating costs.

• Cos or PE’s may be excluded from tainted

CFC income under art. 7.2(b).

.

CFC art.8

Rules for calculation of taxable profits

• The calulation of tainted income of CFC

(art. 7.2 (a)) into the tax base (option 1) of

the taxpayer of the MS is done in

accordance with the CIT tax rules of that

MS. Losses of the CFC entity or PE are not

deducted but can be carried forward.

CFC art.8


• When tainted income is calculated in

accordance with option 2 (art. 7.2 (b))(non-

genuine arrangements) the tax base of the

taxpayer in the MS is limited to the amounts

of income generated through tainted

assets linked to the significant people’s

functions in the controlling co. (ALP!) No

common rules on defining tainted income.

CFC art.8


• Income included in the tax base of the

controlling co. is calculated in proportion to

the taxpayer’s participation.

• Double taxation is avoided by deducting

from the tax base of the controlling co. any

CFC income that previously has been

included in its tax base from the amounts of

profits later distributed by the CFC.

CFC art.8


• When the controlling co. sells or disposes of

its business in the PE or the participation in

the CFC and any part of the proceeds have

previously included in its tax base, that

amount shall be deducted from the tax base

in calculating the taxable amount of the

profits.

CFC art.8


• Tax credit for tax paid in CFC country: MS of

the controlling co. shall allow a deduction of

the tax paid (tax credit) by the CFC entity or

PE from the tax liability of the controlling co.

calculated on the tainted income that has

been integrated in its tax base.

HYBRID MISMATCHES art.9

• Council directive (EU)2017/952 of 29 May

2017, amending ATAD (EU) 2016/1164 as

regards hybrid mismatches with third

countries.

• Principle of single effective taxation in

one tax jurisdiction


Large scope of hybrids

• Mismatches from different characterisation

of financial instruments as debt or equity

for tax purposes.



• Mismatches between tax jurisdictions of

PE & HQ & between different PE’s in

allocating income and expenses between

different parts of the same entity including

mismatches because of disregarding the PE

by the tax jurisdiction of the PE.



• Mismatches that arise because of the

hybrid nature of the entity (transparent

entities for tax purposes).

• These mismatches are only addressed in

cases where an associated enterprise has

effective control (50%, entity in

consolidated group, significant influence in

management)



• Mismatches do not only include double

deduction resulting from payments but also

from expenses that are not treated as

payments under domestic law, like

deduction of losses resulting from

amortisation and depreciation.



• Mismatches also include double deduction

(payments, expenses, losses) made by

taxpayer having a double residence. MS

should deny double deductions arising with

respect to dual resident cos. to the extent

that the deduction is not set off against an

amount that is not treated as income in the

other tax jurisdiction (art. 9b).



• When both jurisdictions are MS, the MS

where the taxpayer is not deemed to be a

resident in accordance with the DTC, shall

deny the deduction.

• Why not apply the same rule to thrid

countries?


Limits of scope: exemption for payee

• Pa yment under a financial instrument is not

a mismatch when the non-taxation in the

payee jurisdiction is solely due to the tax

status of the payee (exempt taxpayer) or the

fact that the financial instrument benefits

from a special (beneficial) tax regime.


Limits of scope: differences in value between

income and expense

• Differences in tax outcomes that result

exclusively from differences in the value for

which the payments are accounted for in

two tax jurisdictions do not fall within the

scope of a hybrid mismatch.

• Ex.: differences in transfer prices as income

and expense between tax jurisdictions.


Limits of scope: timing differences

• When the payer jurisdiction allows the

deduction for a payment to be carried

forward to a subsequent tax period (in case

of amortisation or depreciation, or payments

by disregarded PE), the adjustment in the

payee jurisdiction can be deferred until the

deduction is actually set off against non-

dual inclusion income in the payer j.


Limits of scope: timing differences

• When the mismatch occurs in the form of a

payment under a financial instrument

which cannot be expected to be included in

taxable income within a reasonable period

of time, then the hybrid rules apply.

• Inclusion in income in payee jurisdiction

within 12 months of the end of the payer’s

tax period, or fixed period determined by

MS.


Principle of single effective taxation

• To the extent that a hybrid mismatch results

in a double deduction, the deduction shall

be denied in the MS of the investor

jurisdiction and if the deduction is not

denied in the investor jurisdiction it shall be

denied in the payer jurisdiction.


Principle of single effective taxation

• To the extent that a hybrid mismatch results

in a deduction without inclusion, the MS of

the payor shall deny the deduction of

such payment and when the deduction is

not denied in the payer jurisdiction it shall

be included as income of the MS of the

payee.


• Entry into force: MS shall implement ATAD

by 31.12.2018 and apply as of 01.01.2019.

• Entry into force art. 9: MS shall implement

art. 9 by 31.12.2019 and apply as of

01.01.2020.

• Entry into force of art. 9a (reverse hybrids):

MS shall implement art. 9a as of 31.12.2021

and apply as of 01.01.2022.


Interpretation: BEPSACTION 2

• In implementing art. 9 MS should use

examples and explanations of OECDBEPS

report on action 2, to the extent that they

are consistent with EU law.

Questions & comments

Competence of EU?

• Art. 115 TFEU states that directives can be

issued for the approximation of (tax) law

that directly affect the establishment or the

functioning of the internal market.

• ATAD is about national tax base and

incidental about internal market: interest

limitation rule, imposition of exit tax, anti-

avoidance rule, CFC & hybrids


Competence of EU?

• ATAD allows more restrictive national rules

if necessary, is that compatible with

freedoms?


Options

• ATAD allows many options to widen or

tighten the ATAD rules. The harmonisation

goal of reaching a common solution is not

satisfied. There may be considerable

disharmony between EU MS, which is

particularly difficult for multinational groups.


Is this anti-avoidance directive or base

erosion directive?

• Interest limitation is purely budgetary

measure of national nature.

• Exclusion of stand alone cos. and financial

institutions is only option for MS and should

be mandatory.


GAAR <-> ECJ case law

• The new PP test in GAAR is a carbon copy

of the GAAR in the LOB clauses of the

Multilateral Convention and contrary to

controlling ECJ case law (Halifax, Cadbury

Schweppes).

• GAAR with PP test is also <-> CFC anti-

avoidance rule with essential purpose test.


CFC rule applies to EU cos.

• Differentials in CIT rates within EU are

within scope of CFC rule: IRL 12,5%, BG &

Cyprus 10%, are caught by tax rates > 25%.

• Free movement of financial activities

involving passive income will be restricted

by CFC rule.

Documents

Anti-tax avoidance directive EU/2016/1164 of 12.07 (1).pdfthe MS and the actual amount of CIT paid in state of CFC. CFC art.7 Conditions • I.e. effective tax rate in CFC state