On 20 June 2014, the EU Economic and Financial Affairs Council reached agreement on modifying the EU Parent-Subsidiary Directive. The agreement proceeds with the prevention of double non-taxation via the use of hybrid financing arrangements, while agreeing to work separately on an amended General Anti-Avoidance Rule (GAAR). Links to the current EU Parent Subsidiary Directive (2011/96/EU), a PwC Tax Alert summarizing the proposal and the EU proposals are included for reference:
The amendment is limited to the 28 Member States of the EU, with a similar proposal envisioned in the OECD BEPS initiative. It is interesting to note the OECD BEPS provisions are being focused within the EU Community, in addition to the international OECD Guidelines. Timing for this EU proposal is for domestic legislative action by December 2015.
Re: Best Practices, it is prudent to review the EU legal structure for such hybrid arrangements to quantify the effect of this proposal, possibly requiring modification of hybrid debt and/or legal entities. Additionally, such hybrid instruments in non-EU countries should be noted for the forthcoming OECD BEPS corollary provision.
The OECD invites public comments with respect to Action 6 (Prevent Treaty Abuse) of the BEPS Action Plan.
A summary of the OECD press release, the OECD proposal and Best Practice comments are included herein for reference:
The Action Plan identifies treaty abuse, and in particular treaty shopping, as one of the most important sources of BEPS concerns. Action 6 (Prevent Treaty Abuse) reads as follows:
Prevent treaty abuse
Develop model treaty provisions and recommendations regarding the design of domestic rules to prevent the granting of treaty benefits in inappropriate circumstances. Work will also be done to clarify that tax treaties are not intended to be used to generate double non-taxation and to identify the tax policy considerations that, in general, countries should consider before deciding to enter into a tax treaty with another country. The work will be co-ordinated with the work on hybrids.
The Action Plan also provided that “[t]he OECD’s work on the different items of the Action Plan will continue to include a transparent and inclusive consultation process” and that all stakeholders such as business (in particular BIAC), non-governmental organisations, think tanks, and academia would be consulted.
As part of that consultation process, interested parties are invited to send comments on this discussion draft, which includes the preliminary results of the work carried out in the three different areas identified in Action 6:
A. Develop model treaty provisions and recommendations regarding the design of domestic rules to prevent the granting of treaty benefits in inappropriate circumstances.
B. Clarify that tax treaties are not intended to be used to generate double non-taxation.
C. Identify the tax policy considerations that, in general, countries should consider before deciding to enter into a tax treaty with another country.
These comments should be sent on 9 April 2014 at the latest (no extension will be granted). The comments received by that date will be examined by the Focus Group at a meeting that will be held on the following week.
Persons and organisations who intend to send comments on this discussion draft are invited to indicate as soon as possible, and by 3 April at the latest, whether they wish to speak in support of their comments at a public consultation meeting on Action 6 (Prevent Treaty Abuse), which is scheduled to be held in Paris at the OECD Conference Centre on 14-15 April 2014. Persons selected as speakers will be informed by email by 4 April at the latest.
This meeting will also be broadcast live on the internet and can be accessed on line. No advance registration is required for this internet access.
General observations of proposal:
The OECD proposal provides a three-pronged approach:
Treaty statement re: anti-avoidance rule and treaty shopping opportunities
Specific anti-abuse rule based on Limitation of Benefit (LOB) provisions
General anti-abuse rule
Other OECD recommendations include comments re: Permanent Establishment (PE), tax policy, and broad General Anti-Avoidance Rule (GAAR) interpretation (including allowance of domestic GAAR provisions notwithstanding the relevant double tax treaty). The GAAR proposal provides that obtaining a treaty benefit was one of the main purposes of any arrangement or transaction that resulted directly or indirectly in that benefit. Note this GAAR proposal supplements the LOB provisions.
Proposals are also introduced to address tax avoidance risks via changes to domestic laws. Such risks include thin capitalization, dual residence, arbitrage transactions (including timing differences), and transfer mispricing. Intentions of the UN Model Convention are also introduced for analogous interpretation.
The proposal notes that treaties should not prevent application of domestic law provisions that would prevent transactions re: CFC rules and thin capitalization.
Finally, the OECD proposal indicates that the treaty should clearly state that prevention of tax evasion and tax avoidance is a purpose of the tax treaties.
The proposal, in alignment with the overall OECD BEPS proposals, is targeted at avoidance of double non-taxation, without a balanced commentary and measures addressing the risk of double taxation. Additionally, the terms “tax evasion” and “tax avoidance” are used in tandem within the proposal, although such terms are literally construed as having significantly two separate meanings and relative intent. Finally, the allowance of domestic GAAR provisions in addition to, or in lieu of, treaty provisions and EU Parent-Subsidiary guidelines will promote additional uncertainty re: subjective interpretations of broad proposals that will ultimately lead to increased tax disputes, double taxation and the loss of multilateral symmetry.
This proposal has tremendous significance in the transfer pricing arena that must be seriously considered and reviewed in its entirety, including the possibility for early comment to ensure OECD consideration.
On 25 November, the European Commission will adopt a proposal to amend the Parent Subsidiary Directive (2011/96/EU) in order to close off opportunities for corporate tax avoidance. The Parent Subsidiary Directive was originally conceived to prevent the double taxation of same-group companies based in different Member States. However, loopholes in the Directive have been exploited by some companies to avoid paying any taxes at all. The proposal aims to close these loopholes. First, it will introduce a common anti-abuse rule into the Directive. This will allow Member States to ignore artificial arrangements used for tax avoidance purposes and to tax on the basis of real economic substance. Second, it will ensure that the Directive is tightened up so that specific tax planning arrangements are no longer eligible for the tax exemptions provided under the Directive.
The issue of corporate tax avoidance is very high in the political agenda of many EU and non-EU countries, and the need for action to combat it has been highlighted at recent G20 and G8 meetings.
One of the key problems to be addressed is that of double non-taxation i.e. where loopholes in national tax systems are exploited by companies to pay no tax at all. Double non-taxation deprives Member States of significant revenues and creates unfair competition between businesses in the Single Market. Tackling this problem requires urgent and coordinated action at EU level.
On 6 December 2012 the Commission presented an Action Plan for a more effective EU response to tax evasion and avoidance. This action set out a comprehensive set of measures, to help Member States protect their tax bases and recapture billions of euros legitimately due (IP/12/1325). The revision of the Parent Subsidiary Directive is one of the measures announced in the action plan.
Algirdas Šemeta, the European Commissioner for Taxation, Customs, Anti-Fraud, Statistics and Audit will present the proposal at the midday briefing in the Commission’s press room. Press materials will be available on the day.
Available on EbS
Information on fight against tax fraud and evasion: