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EU agrees rules to tackle tax avoidance involving non-EU countries

The European Council of Ministers has agreed that rules to prevent 'hybrid mismatches' used for tax avoidance by multinational companies should be extended to cover arrangements with non-EU companies.23 Feb 2017

Hybrid mismatches are arrangements that 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.

Intra-EU mismatches are already covered by the anti-tax-avoidance directive (ATAD) adopted in July 2016 and due to be implemented by EU member states by 1 January 2019. ATAD is designed to ensure consistent implementation of measures recommended by the Organisation for Economic Co-operation and Development (OECD) in its base erosion and profit shifting (BEPS) project.

Once implemented, ATAD will also introduce restrictions on interest deductibility, controlled foreign company (CFC) rules and an exit charge to prevent companies shifting company residence or assets, such as intellectual property, to low tax jurisdictions. CFC rules are designed to prevent corporate groups from diverting their profits to low tax jurisdictions where no genuine economic activity takes place in order to avoid tax.

However, the UK argued that, so that the rules would be consistent with the OECD proposals, further rules were needed to cover tax arrangements involving third, non-EU countries. The Council has now agreed to accept proposals put forward by the European Commission in October 2016 to extend the ATAD hybrid mismatch provisions to arrangements with a non-EU counterparty.

Catherine Robins, a tax expert at Pinsent Masons, the law firm behind said: "UK companies are already subject to the UK's own new hybrid mismatch rules which took effect from 1 January. These changes to the directive will not therefore mean changes to UK law as the UK's rules are closer to those proposed by the OECD and are therefore more restrictive in many areas."

"However, UK companies will be pleased to see that once the provisions are eventually implemented throughout the EU, the playing field will be levelled to some extent so that they will not be at such a competitive disadvantage as a result of the UK's crusade to 'lead the way' in implementing the OECD's recommendations" she said.

The new rules agreed by the Council include some exceptions for consolidated banking groups and financial traders. The exceptions for the banking sector will be time-limited and will be evaluated by the Commission, the Council said.

In reverse hybrid mismatches, where non-resident entities hold a direct or indirect interest in 50% or more of the voting rights, capital interests or rights to a share of profit in a hybrid entity that is incorporated or established in a member state, and where these are located in a jurisdiction that regards that hybrid entity as a taxable person, the hybrid entity will be regarded as a resident of that member state and taxed on its income to the extent that this income is not otherwise taxed under the laws of the member state or any other jurisdiction.

The Council has given a longer timeline for implementation of the non-EU hybrid provisions than for ATAD. Implementation is set for 1 January 2020 for most of the rules, and for 1 January 2022 for the provision on reverse hybrid mismatches.

The European Commission welcomed the agreement.

"Today is yet another success story in our campaign for fairer taxation" said Pierre Moscovici, commissioner for economic and financial affairs, taxation and customs. "Step by step, we are eliminating the channels used by certain companies to escape taxation. I congratulate the member states for agreeing on this tangible measure to clamp down on tax abuse and install a fairer tax environment in the EU."

Commission vice-president Valdis Dombrovskis said: "It’s true that there were a couple of issues on which compromises were made. But overall, I think we have come to a positive and concrete result that should give another tool to tax authorities to recoup lost revenues. What is important now is that the work gets going in earnest."

The Council will adopt the directive once the European Parliament has given its opinion.

ATAD is part of a wider anti-tax avoidance package developed by the Commission, which also includes a revision of the Administrative Cooperation Directive to require country-by-country reporting between the tax authorities of different member states on certain tax information about multinationals operating in the EU. This part of the package was agreed in March, and will initially apply to tax years starting on or after 1 January 2016. 

Member states have also backed a proposal for automatic exchange of information relating to tax rulings, which came into force on 1 January 2017.

That directive will require member states to exchange information automatically on advance cross-border tax rulings, as well as advance pricing arrangements. This will remove the current discretion given to member states on what information they share, when and with whom.