The measures, which were revealed last week to the Financial Times include an anti–tax avoidance directive which would require all EU member states to introduce restrictions on interest deductibility, controlled foreign company (CFC) rules and an exit charge to prevent companies shifting assets or company residence to low tax jurisdictions. CFC rules are designed to prevent groups from diverting profits to low tax territories to avoid tax.
Countries would also need to implement a general anti-abuse rule (GAAR) to counteract aggressive tax planning when other rules do not apply.
The proposed directive also includes a rule to prevent 'hybrid mismatches'. These are arrangements which allow companies to exploit differences between countries' tax rules to avoid paying tax in either country, or to obtain more tax relief against profits than they are entitled to. The new rule would provide that where Member States treat the same income or entity differently for tax purposes, the legal characterisation given to a hybrid instrument or entity by the Member State where a payment originates would be followed by the Member State of destination.
According to the Commission the measures will "prevent aggressive tax planning, boost tax transparency and create a level playing field for all businesses in the EU".
The measures are designed partly to ensure consistent implementation within the EU of the measures recommended by the Organisation for Economic Co-operation and Development (OECD) in its base erosion and profit shifting (BEPS) project.
However, the directive also includes a requirement to introduce a 'switchover rule'. This was not recommended by the OECD. It would prevent 'double non-taxation' of dividends, capital gains and profits from permanent establishments which enter the EU from non-EU countries by enabling EU tax authorities to deny EU tax exemptions if the income had been taxed at a very low or no rate in the third country.
The interest deductibility restriction implements the OECD's recommendation that interest deductions should not be permitted to the extent that net interest exceeds a percentage of earnings before interest, tax, depreciation and amortisation (EBITDA). The directive sets the percentage at 30% of EBITDA, with the ability for member states to allow a lower limit if they chose. A group wide ratio is permitted and there would be a €1 million de minimis limit so that companies with interest expenses below this figure would not be affected.
The directive does not mention the 'public benefit exemption' that the OECD said could be introduced into the rules and which could exempt many highly geared PFI projects.
The Commission's package also includes changes to the Directive on Administrative Cooperation in Taxation to provide for country-by-country information to be exchanged by Member States. One of the minimum standards that OECD and G20 countries have agreed to introduce as part of the BEPS package is a country-by-country reporting system.
Under country-by-country reporting, the tax administration in the country where a multinational group is resident will collect information about its activities, and its global income and taxes paid. That information will then be automatically exchanged annually with all countries where the multinational operates. The first exchanges are expected to start in 2017-2018.
Catherine Robins, a tax expert at Pinsent Masons, the law firm behind Out-law.com said "The OECD country-by-country proposals only require information to be disclosed to tax authorities and not to be made public. However, the Commission has said it is considering how certain accounting and tax information could be made public and George Osborne has also said that he would like to see the information publicly available. The pressure for public access to country-by country information is therefore building."
Earlier this week 31 OECD countries signed the Multilateral Competent Authority Agreement (MCAA), which like the Commission's Directive on Administrative Cooperation in Taxation, is designed to provide the mechanism for countries to exchange country-by-country reports.