Global and EU Work on Tax Fairness

Background

The requirement for unanimity amongst EU Member States on any legislative proposal tends to limit the amount of EU action on tax. This fact – and the global nature of the issues currently confronting tax policymakers particularly around erosion of the tax base – has helped to establish the Organisation for Economic Cooperation and Development (OECD) as the primary standard setter.

In summer 2013 the OECD, working to a mandate from the G20, published its Action Plan on Base Erosion and Profit Shifting (BEPS). The Action plan aiming to “provide countries with domestic and international instruments that will better align rights to tax with economic activity” contains provisions on preventing treaty abuse and interest deductibility, for example. The final OECD reports were released in October 2015 with certain specific areas being left open for further analysis.
Action 6 on Preventing Treaty Abuse in Inappropriate circumstances has led to 5 written consultations, of which the last 2 have been devoted entirely to non-Collective Investment Vehicles (i.e. alternative investment funds such as private equity). Invest Europe has responded to all of these consultations.
Echoing the OECD project, the European Commission released an Action Plan on Corporate Taxation in June 2015 calling for the re-establishment of the link between taxation and where economic activity takes place. In January 2016, the European Commission released its Anti- Tax Avoidance Package (ATAP) consisting of both legislative and non-legislative elements designed to curb illicit tax practices, and specifically to implement 3 of the OECD BEPS standards in EU law. As part of the Package, the legislative proposal for an Anti-Tax Avoidance Directive (ATAD), also known informally as the BEPS Directive was the flagship project and addresses 6 areas: interest deductibility, controlled foreign companies, hybrid mismatch arrangements, switch-over clause, general anti-abuse rule and exit taxation. Agreement was reached between the Council under Dutch Presidency at the end of June 2016, and the Directive was then adopted formally under the Slovak Presidency in July 2016.

The long-awaited Common Consolidated Corporate Tax Base (CCCTB) was released at the end of October 2016. The overarching aim is to provide companies with a single set of corporate tax rules for doing business across the internal market. The threshold for inclusion within the scope is annual turnover of €750 million, the same as the proposal for public Country-by-Country Reporting. As with the latter file however, private equity funds will be outside scope due to the exemption from consolidation requirement under the accounting rules. In addition, the proposals contain an “Allowance for Growth and Investment (AGI)” rule to target the so-called debt/equity bias (Article 11). This rule authorises the tax deductibility of notional interest corresponding to the cost of equity. Discussions are taking place in the Council albeit with slow progress and much opposition from several Member States.

In February 2017, EU Finance Ministers agreed a general approach on the hybrid mismatch Directive which extends the ATAD rules on hybrid mismatch arrangements to 3rd countries.

Also in February 2017, the Maltese Presidency of the Council released a roadmap on future BEPS work including measures to be addressed both in the short and long-term.

Invest Europe position

The on-going work of the OECD has the potential to change existing tax norms for all investors, including those investing into private equity funds. Invest Europe therefore follows this work closely and has responded to the relevant OECD consultations, most notably on Treaty Abuse. Although targeted initially at the tax strategies of multinational corporations, this work has the potential to change existing tax rules more generally and thereby alter the tax environment for private equity funds as they invest internationally. Specifically, changes to the rules on treaty abuse for example may threaten private equity funds’ access to those tax treaties that are designed to prevent double taxation when a fund invests cross-border.

With regard to interest deductibility, this is important as the creation and on-going development of a business strongly depends on the fiscal environment present in that business’ jurisdiction. An important factor for financing is whether portfolio companies can deduct interest and interest related expenses (on both related and unrelated-party loans). These deductions help businesses to finance their growth and improve their competitive position, and it is crucial therefore that limits for interest deductibility are set at levels that encourage businesses to do so. Any move to limit the current practice of interest deductibility would inevitably result in higher-financing costs for businesses with a knock-on effect for providers of finance.