How and to what extent certain activities are taxed remains one of the most fiercely guarded national competences held by each and every one of the European Union’s (EU) 28 Member States (MS). In order for a change in policy to take affect here, there must be unanimity of support within the Council of Ministers, as opposed to a qualified majority. The uncertain fate that awaits the Financial Transaction Tax (FTT) is one of the most recent examples that serves to underline just how difficult a task it is to ratify legislation in the field of tax at EU level.
Yet, this has not stopped the EU from pursuing a particularly ambitious reform agenda in this regard in 2016. This kicked off on January 28 with the launch of the European Commission’s Anti-Tax Avoidance (ATA) package, which contained five different elements, undoubtedly the most significant of which was the ATA Directive. The release of a separate proposal on Public Country-by-Country Reporting in April dispelled any rumours that the Commission was not serious in its intentions.
The inspiration behind the former piece of legislation however comes from two sources. First, measures on Controlled Foreign Companies rules, limits on the amount of debt interest that can be written off against a (non-financial) entity’s tax liability, and rules clamping down on what are known as “hybrid mismatch” arrangements, closely resemble standards agreed as part of the Organisation for Economic Cooperation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) initiative. This was launched back in 2013.
Second, the roots of the other provisions that make up the directive – the so-called “switch-over clause”, exit taxation, and general anti-abuse rule – can all be traced back to the 2011 Commission proposal on a Common Consolidated Corporate Tax Base (CCCTB). Like many attempts at EU tax reform, the original CCCTB never saw the light of day.
Given half of the key provisions contained in the ATA Directive were agreed at international level, both the Commission and the Netherlands – who currently hold the Presidency of the Council of Ministers – remain optimistic that much of the groundwork has been laid that would enable unanimous agreement to be reached, possibly by this summer. While this is by no means guaranteed, doing so would help provide momentum in support of a separate and ambitious piece of draft EU legislation in the field of taxation: Public Country by Country Reporting.
Essentially, this Directive – officially launched on April 13 – would require those companies whose consolidated turnover exceeds EUR 750 million to disclose – publicly – on an annual basis information including (but not limited to) the number of employees and the amount of income tax paid in each respective EU jurisdiction in which there is a tax liability.
For those countries outside the EU, reporting can take place on an aggregated level, while there will but there will be granular disclosure requirements in relation to activities based in “jurisdictions that don’t abide by international good governance standards”. The Commission has allowed itself license when it comes to defining which countries will qualify here. Yet, Lord Hill – Commissioner for Financial Stability, Financial Services and Capital Markets Union – reassured the audience at the press conference accompanying the proposal’s release that Panama would not be meeting such standards any time soon.
And this is the key point. The Commission has been at pains to reiterate that the release of the “Panama Papers” – 11 million leaked files that purport to show businesses and government officials from around the world engaging in alleged illicit activity via the use of offshore companies – has not influenced the drafting of legislation.
These revelations however have undoubtedly generated fair political winds that may well help push the EU towards unprecedented agreement in this field. This bodes well for the prospects of a re-launched CCCTB – expected later this year – and the contents of the “VAT Action Plan”, released last month and set to be negotiated in the coming months.