Click to access COM_2022_216_1_EN_ACT_part1_v6.pdf
The European Commission (EC) issued today a proposal for a Council Directive to address the debt-equity bias, as part of the EU strategy on business taxation. The rules would introduce tax deductibility of notional interest on increases in equity, while providing for a limitation on net interest expense.
The effective date would be as of 1/1/2024, with Member States’ conforming their laws by 31 December 2023. The equity deduction is based upon a 30% limitation of EBITDA, with carryover provisions.
The proposal is a very interesting read, evidencing the intent to arrive at a practical and efficient methodology to place equity on a more level playing field as interest, from a tax deductibility aspect. Additionally, this intent would also minimize the placement of intercompany loans in entities which do not have a foreseeable ability to repay interest.
Although this is an EU proposal, other countries will be following these developments closely.
The European Commission has proposed a new Directive calling for additional transparency into cross-border arrangements. Initially, this proposal has the liability for such reporting borne by the advisor, however it may apparently be also transferred to the taxpayer. The effective date would be 1//1/2019 with recurring reporting by the EU Member States on a quarterly basis thereafter.
In a common theme when the “transparency’ envelope is opened, the relevant basket of potential transactions is widened from the most aggressive to ordinary tax-planning transactions. Hopefully, if the Directive is adopted, the Member States will use discretion and ask questions about such transactions prior to drawing intuitive conclusions and assessing taxpayers before having all facts and transactional history for consideration.
The potential transactions include arrangements:
- To which a confidentiality clause is attached
- Where the fee is fixed by reference to the amount of the tax advantage derived or whether a tax advantage is actually derived
- That involve standardized documentation which does not need to be tailored for implementation
- Which use losses to reduce tax liability
- Which convert income into capital or other categories of revenue which are taxed at a lower level
- Which include circular transactions resulting in the round-tripping of funds
- Which include deductible cross-border payments which are, for a list of reasons, not fully taxable where received (e.g., recipient is not resident anywhere, zero or low tax rate, full or partial tax exemption, preferential tax regime, hybrid mismatch)
- Where the same asset is subject to depreciation in more than one jurisdiction
- Where more than one taxpayer can claim relief from double taxation in respect of the same item of income in different jurisdictions
- Where there is a transfer of assets with a material difference in the amount treated as payable in consideration for those assets in the jurisdictions involved
- Which circumvent EU legislation or arrangements on the automatic exchange of information (e.g., by using jurisdictions outside exchange of information arrangements, or types of income or entities not subject to exchange of information)
- Which do not conform to the “arms’ length principle” or to OECD transfer pricing guidelines
- Which fall within the scope of the automatic exchange of information on advance cross-border rulings but which are not reported or exchanged
The proposal will be submitted to the European Parliament for consideration; this additional layer of transparent information will also be viewed by other countries as potential tools to uncover similar arrangements. Several “arrangements” are also highly subjective, leading to additional transfer pricing disputes and increased double taxation.
EY’s Global Tax Alert provides additional details for this important proposal: