Press Room: Tax Release

February 11, 2016

Goodbye BEPS – Hello EC Directive

On January 28, 2016, the European Commission (EC) issued a proposed Anti Tax Avoidance Package setting out of a series of proposed rules against various—what they view as abusive—tax practices. That package now begins to move the theoretical discussions from the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) project into actual law. It could significantly impact typical international tax planning for multinational corporations as well as significantly impact a private equity fund’s (and any of its multinational portfolio company investments) typical tax planning and investment returns. The proposals include:

  • Low-tax loans – would limit deductibility of interest paid on loans to low-tax country affiliates.
  • Hybrid mismatches –would eliminate differences in the legal and tax characterization of payments (financial instruments) or entities that now give rise to either double deductions or a deduction not matched with an income inclusion.
  • Limitation of exemption of foreign income from taxation – in situations where the tax rate on the foreign income is lower than 40% of the member state’s tax rate, a switch-over clause is proposed. The intended effect is that the taxpayer would be subjected to taxation in the member state (instead of being exempt) and given a credit for any tax paid abroad.
  • General anti-abuse rule (GAAR) – would add a GARR designed to cover gaps that may exist in a member country’s specific anti-abuse rules against tax avoidance.
  • Automatic exchanges of information on tax rulings – enhanced transparency between national tax administrators.

Treaty abuse – in a separate Commission Recommendation, it was proposed that the EU member state income tax treaties contain a principal purpose test to deny treaty benefits (i.e., if one of the principal purposes of the taxpayer was to obtain the treaty benefit), unless it were established that the arrangement reflected a genuine economic activity.

The Takeaway

The key difference between the OECD’s BEPS project and the EC proposal is that, with further review and approval, the EC proposal can result in actual legislation. Stay tuned as this develops and we provide you with more updates in the future.