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

However, the long implementation period for the rules may cause uncertainty for business and implementation is likely to vary across countries, said tax expert Heather Self of Pinsent Masons, the law firm behind Out-Law.com.

The EU Council of Ministers agreed in February to extend rules preventing 'hybrid mismatches' used for tax avoidance by multinational companies to cover arrangements with non-EU companies.

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, including 'Action 2' which covers hybrid mismatch arrangements. However, the hybrid mismatch provisions of ATAD only address arrangements between EU countries.

Under ATAD, hybrid mismatches resulting in a double deduction are counteracted by allowing a deduction only in the source member state. Hybrid mismatches resulting in a deduction without a corresponding inclusion are addressed by denying a deduction in the payer’s member state.

The new directive, ATAD II, introduces measures to address types of hybrid mismatch that are not covered by ATAD including arrangements with non-EU companies and reverse hybrids.

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.

EU countries will be required to implement most of the provisions of ATAD II by 1 January 2020, although the rules governing reverse hybrids will not come into force until 1 January 2022.

"Although it is positive to see the EU taking a co-ordinated approach to anti-avoidance rules, this is a very complex area and will give rise to uncertainty for business during a long implementation period," Self said.

"The EU intends its measures to be 'consistent with and no less effective than' the BEPS Action 2 recommendations. However, it is likely that there will be differences in the detailed implementation, both between the EU and OECD recommendations, and between different member states of the EU," Self said.

"There is also a potential disadvantage for member states that choose early adoption, as the UK has done with its own anti-hybrid rules effective from January this year. The compliance burdens are particularly heavy where a payment within the scope of the rules is made by a UK entity to an entity in a country which has not yet implemented these measures," she said.

Under UK rules, the UK will deny a deduction for a payment that would otherwise be deductible in the UK and not taxable for the recipient. Where the recipient is in the UK and the payer is overseas, the overseas jurisdiction should deny the deduction, but if it does not, perhaps because it has not yet implemented its BEPS anti-hybrid rules, the UK's rules will tax the recipient. Where there is an 'imported mismatch', a UK payment that is part of a series of arrangements with a hybrid included in the chain, the UK is again likely to be the jurisdiction which imposes a tax charge or refuses a deduction.

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.