On 25 May 2016, the EU Council was called on to reach political agreement on the Anti-Tax Avoidance Directive (“ATAD”). In addition, it was due to adopt two other texts: (i) a directive on EU country-by-country reporting by multinationals and (ii) conclusions on the external taxation strategy (EU-blacklist of non-EU tax havens), as well as measures against tax treaty abuse.
While the EU Council adopted the two latter mentioned texts, it was not able to reach agreement on the ATAD. A new compromise will be tabled for the upcoming EU Council meeting on 17 June 2016. Below we elaborate on the EU Council’s decisions and provide you with our preliminary remarks as to the relevance for multinational enterprises (“MNEs”) with operations in Switzerland.
The most awaited topic on the EU Council’s agenda was the Proposed ATAD. The EU Council was not able to achieve political consensus on the latest draft text of the ATAD. The ATAD aims at implementing some of the final recommendations of the OECD Base Erosion and Profit Shifting (“BEPS”) project into Member States’ national laws (see our International Tax Flash of 28 January 2016).
A new ATAD compromise will be tabled at the upcoming EU Council meeting on 17 June 2016. If the Council will find political agreement on such a compromise, we think that in particular the following aspects will have an impact on MNEs with operations in Switzerland:
- The controlled foreign company (“CFC”) rules provide for an immediate taxation at the level of an EU group company of certain low taxed undistributed income of – direct or indirect – entities in which they hold an interest of more than 50%. Under this provision, the undistributed profits from certain income sources of Swiss entities of (ultimately) EU parents may become subject to tax, if the Swiss entity’s effective corporate tax rate is lower than 50% of the effective tax rate that would have been applicable in the country of the EU parent. This will, in particular be an issue in relation to EU Member States with a high effective corporate tax rate.
- The proposed Interest limitation rule is limiting the deduction of interest on financing (be it related party or third party interest) to, in principle, 30% of EBITDA. If adopted, this measure is likely to have a substantial impact on how Swiss groups will finance their EU subsidiaries.
- We would expect that the proposed switch-over clause should, in general, not apply to Swiss entities, as Switzerland could apply the included exception due to double tax treaties with EU Member States. Moreover, chances are that this clause will be totally removed from the new ATAD text.
It can be expected that a new ATAD compromise will contain a further “dilution” of, inter alia, the CFC and interest limitation rules (i.e., less stringent / more discretion as to the implementation for EU Member States). This has to do with the fear of various Member States that a too severe ATAD will hamper their competitive position. If political agreement can be reached – which is still uncertain - the ATAD is not expected to enter into force until 1 January 2019.
2 EU Country-by-Country Reporting
The EU Council adopted the EU directive which introduces Country-by-Country (“CbC”) Reporting in the EU. Under this directive EU Member States are obliged to adopt legislation under which entities that are residing in the EU must file a CbC Report within 12 months after the end of the first reporting year, being 2016. Hence, the EU subsidiaries of e.g. a Swiss group (with a turnover of more than EUR 750mio) are in principle obliged to file a CbC Report in the EU for the reporting year 2016 by the end of 2017. Please note that – as a separate matter - the Commission is also tabling a proposal for a “public CbC”. It is still uncertain whether there is sufficient support for this latter proposal.
For Swiss MNEs it is interesting to know that EU Member States have the option to defer the obligation to file a CbC Report with one year for resident entities that otherwise should have used the so-called “Secondary Reporting mechanism”. This means that EU subsidiaries of for example a Swiss Ultimate Parent Entity are not obliged to file a CbC Report for 2016 as Switzerland did not yet implement CbC Reporting in that year. The question arises how EU Member States that already implemented CbC Reporting without such deferral possibility will react, i.e. whether they will discharge this Swiss MNE from its CbC Reporting obligations in the respective EU Member State for 2016 or whether this group still will have to appoint a Surrogate Parent Entity to file the CbC Report or accept the voluntary filing mechanism as proposed in Switzerland.
3 Conclusion on EU external strategy (list of non-cooperative jurisdictions)
The EU Council adopted conclusions on the third country (non-EU States) aspects of the European Commission anti-tax avoidance measures. The most important element is that an EU-list of third country non-cooperative jurisdictions will be established (and that defensive measures against those third states to be implemented in the tax as well as in the non-tax area will be explored). The Code of Conduct Group will work on this list and defensive measures as of September 2016 with a view to endorsement by the EU Council in 2017. For the time being, there are no indications that Switzerland is – again – on the list of countries to be screened.
Furthermore, the EU Council invited the European Commission to consider legislative initiatives on mandatory disclosure rules for aggressive or abusive transactions based on Action 12 of the OECD BEPS project with a view to introducing more effective disincentives for intermediaries who assist in tax evasion or tax avoidance schemes.
Finally, the EU Council welcomed the European Commission’s recommendation to implement OECD BEPS Actions 6 (tax treaty abuse) and 7 (artificial avoidance of permanent establishment) by including a principal purpose test and permanent establishment provisions as proposed by the OECD in tax treaties.