2 Sept 2016
EU’s Efforts to Clamp Down on Tax Avoidance Strategies Swiftly Advance
On 16 July 2016, Council Directive 2016/1164 laying down rules against tax avoidance practices that directly affect the functioning of the EU’s internal market was published in the Official Journal. Hong Kong companies may recall that the Directive, also known as the “Anti-Tax Avoidance Directive” forms part of the European Commission’s Anti-Tax Avoidance Package (the Package) that was presented in January 2016.
The Package may have an impact for Hong Kong traders and those they supply within the EU as the measures are intended to align the EU Member States’ corporate tax laws and to coordinate their measures to ensure effective taxation in the EU.
Tax avoidance is felt to be a significant issue at EU level as Member States cannot tackle the cross-border nature of corporate tax avoidance. Corporate tax avoidance is believed to deprive public budgets of billions of euros each year, creating heavier tax burdens for EU citizens and causing competitive distortions for businesses.
The main principles of the Package include ensuring that companies pay taxes in the countries where they make their profit; ensuring fair taxation together with mandatory country-by-country reporting between all Member States; and addressing the risk of double taxation. The Package sets out a common approach for tackling external threats of tax avoidance and preventing companies from shifting untaxed profits out of the EU.
The Anti-Tax Avoidance Directive is intended to end the most common tax loopholes and aggressive tax planning schemes currently used by some large companies to avoid paying their fair share of tax. The Directive sets out five key anti-avoidance measures, for all Member States to apply, to counteract the most common types of tax planning and avoidance.
Firstly, there is the Controlled Foreign Company (CFC) rule, which will enable the EU Member State where the parent company is based to tax profits that have been shifted to a subsidiary in a low or no tax country. Secondly, all EU Member States will be able to apply an exit tax on assets moved out of their territory. For instance, EU Member States will be able to apply exit tax on all intellectual property assets moved to other jurisdictions. Thirdly, in order to prevent artificial structures of intra-group loans, the amount of net interest that a company can deduct from its taxable income will be limited.
Fourthly, there is a measure to prevent “hybrid mismatch” which is when corporations shift their profits to low-tax countries, including within the EU, to redefine their gains as tax-deductible loans to their subsidiaries. Lastly, the Directive introduces the general anti-abuse rule to help tax authorities tackle artificial tax arrangements and to tax companies on the basis of actual economic substance.
In addition to the Anti-Tax Avoidance Directive, the Package also includes a Recommendation on Tax Treaties, an Administrative Cooperation Directive, an External Strategy for Effective Taxation, and a Staff Working Document.
In related news, Hong Kong traders should bear in mind the European Commission’s confirmation that Member States have signalled their intention to compile a common EU list of third country tax jurisdictions that do not conform to international tax governance standards. Member States have committed to introducing the list in 2017. Hong Kong traders may be aware that when the pan-EU list of third countries and territories blacklisted by EU Member States was published on 17 June 2015, Hong Kong was blacklisted by ten Member States. In October 2015, the Commission updated the list and removed Hong Kong for several countries. However, Hong Kong still remains blacklisted for Bulgaria, Croatia, Greece, Latvia, Lithuania, Poland and Portugal.
Furthermore, Hong Kong traders should note that on 6 July 2016, in a further effort by the EU to curb tax evasion and tax havens, the European Parliament voted in favour of the report prepared by the Parliament’s Special Committee on Tax Rulings and Other Measures Similar in Nature or Effect (“TAXE2”). The report welcomes the Commission’s plans to draw up a common EU blacklist of uncooperative jurisdictions, commonly referred to as “tax havens”. Members of the European Parliament (MEPs) supported sanctioning uncooperative jurisdictions as well as sanctioning companies, banks, accountancy firms and law firms that are involved in illegal, harmful or wrongful tax activities in those jurisdictions.
The MEPs also called for EU Member States to draw up sanctions against company managers that are involved in tax evasions and to revoke their businesses’ licences. Mr Jeppe Kofod, one of the co-drafters of the recommendations, stated that this report is part of Europe “stepping up to the plate on the fight against tax evasion and tax havens”.
EU Member States must transpose the Anti-Tax Avoidance Directive into national law by 31 December 2018 in order for it to be effective by 1 January 2019.