The EU finance ministers have reached an agreement in principle on the draft text of the proposed EU Anti-Tax Avoidance Directive ("ADAT"). Following the ECOFIN meeting held on 17th June, the political agreement reached entered into effect on the 21st June, since the silence period in which Member States could raise their objections expired.
ADAT is devised with the intent to combat tax avoidance and reflects the OECD BEPS action plans. It strives to target mismatches between the different tax systems of the Member States that have been applied by multinationals to avoid tax.
Combating tax evasion enjoyed high priority on the European Commission agenda, however some Member States were concerned that its initiatives were going beyond the OECD's BEPS recommendations, to the detriment of EU interests. As a result, a number of initiatives have been watered down in order to arrive at a compromise. Some examples of the watered-down provisions include the following:
- the removal of a switchover clause that would require the Member State in which the parent company is tax resident to tax any untaxed or low-tax revenues derived from other countries;
- the interest deductibility threshold has been set at EUR 3 million as opposed to the original EUR 1 million proposed by the European Commission. Existing loans benefit from a grandfathering provision and loans for public infrastructure projects are excluded. Existing interest limitation rules that are equally effective may remain in place until December 2023;
- the CFC test has been changed to focus on the effective tax actually paid being less than half of what would be due in the parent Member State rather than a threshold relating to the effective tax rate of the controlled entity being 40% of the parent country rate;
- Exit taxes will apply to the extent that the Member State concerned loses the right to tax the transferred assets in the future;
- In case of double deductions resulting from hybrid mismatches, the source state must grant a deduction. However if this results in a deduction without inclusion, the source state must deny the deduction. Legal characterisation is to be determined by the source Member State. This rule applies only to intra-EU situations. A proposal in relation to third countries is expected to be launched later in 2016.
The General Anti-Abuse Rule allowing Member States to introduce stricter anti-abuse provisions has been retained.
The adoption of the text is expected to occur later this year and Member States have up to the 31st December 2018 to adopt it into domestic law. Its provisions would become effective on the 1st of January 2019.
