The EU Economic and Financial Affairs Council (“Ecofin”) was expected to adopt the so-called EU Anti Tax Avoidance Directive (the “ATAD”) during its meeting held on 25 May 2016. However, due to disagreements among the delegations of the EU Member States on certain measures included in the proposed ATAD, the aim of the meeting was no longer to adopt it, but to resolve the remaining political issues regarding the measures included therein and to agree on a general approach thereon. Its seems that during the meeting Ecofin did not manage to resolve these issues or to come to such agreement.
In addition to agreeing on the general approach on the ATAD, another important agenda item of this Ecofin meeting was the adoption of the amendment to the EU Exchange of Information Directive (the "EID") which in essence reflects the recommendations included in OECD BEPS Action 13.
Below, we will briefly discuss the status of the ATAD and the EID.
The ATAD is aimed at combating tax avoidance practices by setting minimum standards regarding the levy of corporate income tax from companies operating within the EU. It sets out principle-based rules and leaves the details of their implementation to the EU Member States. In that regard, EU Member States may choose to implement measures that are more stringent than the ones set out in the ATAD. Although 3 out of 6 of the ATAD rules are in line with the OECD’s BEPS Actions, namely the EBITDA interest limitation rule (Action 4), the controlled foreign corporation (“CFC”) rule (Action 3) and the hybrid mismatch rule (Action 2), it is important to note that the other 3 ATAD rules are not addressed under the BEPS Action Items at all, namely the switch-over clause, the exit tax rule and the general anti-abuse rule.
Based on the draft ATAD dated 24 May 2016, the rules included in the ATAD should be implemented in the domestic laws of the EU Member States ultimately by 31 December 2018 and they should become effective as from 1 January 2019. We will elaborate on the ATAD rules in detail once the ATAD has been agreed/adopted, but will in the following briefly describe the main clauses of the draft ATAD on which the views of the EU Member States are split.
Disagreements on ATAD
Based on the proposal for the general approach on the ATAD dated 24 May 2016 published in advance of the Ecofin meeting, the main disagreements among the EU Member States seem to relate to the scope of the CFC rule and the inclusion of the switch-over clause in the ATAD. The CFC rule would impose taxation on certain undistributed profits of controlled entities and permanent establishments that are subject to taxation at a low effective tax rate. The switch-over clause would force EU Member States not to exempt taxpayers from tax on foreign income, i.e. profit distributions and capital gains on shares, that do not arise from active business and originate from certain low tax third countries. As to the CFC rule, the discussions among the EU Member States seem to revolve around whether or not its scope should be limited to third countries or should also include EU/EEA countries, whether or not substance carve-outs should be provided for and whether the burden of proof should be on the taxpayer or the tax authorities. In respect of the switch-over clause, it is indicated that the views of the EU Member States are split as to whether or not a switch-over clause should make it into the final ATAD. On the one side of the spectrum there are EU Member States taking the position that the switch-over clause is a necessary complement to the CFC rule. On the other side of the spectrum there are EU Member States that take the position that since it is not part of the OECD BEPS Actions, it is not essential to include it in the ATAD either.
Other disagreements include the scope of the hybrid mismatch rule (limited to the EU/EEA or not), implementation date of the ATAD rules (pushed-back to 31 December 2018 in the latest draft) and the grandfathering provisions under the EBITDA-based interest deduction limitation (for loans entered into before 28 January 2016 or before a later date).
As a result of these disagreements, the EU Member States were unable to reach agreement on the general approach on the ATAD. In addition, it seems that further drafting sessions are required to come to a compromise on the ATAD. Provided that such compromise is reached during the first half of June, it may be feasible to adopt the ATAD during the next Ecofin on 17 June 2016.
EID Amendment & OECD BEPS Action 13
According to the press release on the Ecofin meeting of 25 May 2016, the amendments to the EID – required to cater for the implementation in the EU Member States of OECD Action 13 – were adopted by Ecofin without discussion. In the Netherlands, OECD Action 13 has already been implemented on 1 January 2016. We refer to our Tax Alert of 21 January 2016 for further background on the implementation of OECD Action 13 in the Netherlands. Therefore, the implementation of the amendments to the EU exchange of information directive are not expected to result in material changes in the Dutch domestic rules implementing OECD Action 13 that became effective last January. The adopted changes to the EID do not yet include the proposed requirement for public country-by-country reporting.
Given the many disagreements on the rules to be included in the ATAD and their scope, the draft ATAD published on 24 May 2016 will likely be subject to further change. Absent such changes, it seems difficult for the EU Member States to come to unanimous consent on the ATAD. However, provided that such consent can be reached in the first half of June 2016, it may still be possible to adopt the ATAD during the Ecofin meeting on 17 June 2016.
The implementation of the changes to the BEPS Action 13 in the EID are not expected to result in material changes in the Dutch domestic rules implementing OECD Action 13 that became effective last January.