As the economy becomes increasingly global, so the response to tax avoidance is also moving onto an international stage, with the OECD emerging as the leading organisation for creating new standards. Supporting its position, the EU is also taking action to address aggressive tax avoidance and improve global tax good governance.
The Anti-Tax Avoidance Directive (ATAD I) was adopted in 2016 and implements three of the OECD BEPS standards in the EU. It introduces rules on interest deductibility, exit taxation, a general anti-abuse provision, controlled foreign companies and hybrid mismatches. In May 2017, the EU amended the Anti-Tax Avoidance Directive to extend its scope to hybrid mismatches involving third countries.
ATAD I and ATAD II are key for private equity, as the rules have an important bearing on interest deductibility. As a result of ATAD II rules in particular, some funds could become taxable contingent on how investors treat them from a tax perspective in their country. The impact of ATAD II provisions could be primarily relevant for fund structures which are funded with shareholder debt.
Action 6 of the OECD Base Erosion and Profit Shifting (BEPS) project released in summer 2013 identified tax treaty abuse, and in particular tax treaty shopping, as a major concern. In December 2017, the OECD released the updated OECD Model Tax Convention, which included three examples that provide guidance on how the Principal Purposes Test (PPT) will apply to alternative investment funds.
Although targeted at the aggressive tax policies of large multinational corporations, the OECD BEPS standards have the potential to change existing tax rules more generally. This could alter the tax environment for private equity funds as they raise capital and invest internationally. Specifically, changes to the rules on treaty abuse may pose risks to the continuing ability of private equity funds to access tax treaties that prevent double taxation when a fund invests cross-border.
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