17 Taxation
(33374)
16907/11
COM(11) 714
| Draft Directive on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States
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Legal base | Article 115 TFEU; consultation; unanimity
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Document originated | 11 November 2011
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Deposited in Parliament | 18 November 2011
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Department | HM Treasury
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Basis of consideration | EM of 30 November 2011
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Previous Committee Report | None
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Discussion in Council | Not known
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Committee's assessment | Politically important
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Committee's decision | Cleared
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Background
17.1 Directive 2003/49/EC, the Interest and Royalties Directive,
seeks to eliminate double taxation of interest and royalties paid
by a subsidiary company in one Member State to an associated company
in another. The purpose is to put cross-border interest and royalty
payments on an equal footing with domestic payments, by eliminating
juridical double taxation,[125]
burdensome administrative formalities and cash-flow problems for
the companies concerned.
The document
17.2 With this draft Directive the Commission proposes an update
to the Interest and Royalties Directive. The draft Directive would:
- extend the list of companies to which the present Directive
applies and reduce shareholding requirements to be met for companies
to qualify as associated (aligning it more closely with the Parent-Subsidiary
Directive);
- add a new requirement for the tax exemption,
whereby the recipient has to be subject to corporate tax in the
Member State of its establishment on the income derived from the
interest or royalty payment; and
- include a technical amendment to avoid situations
where exemptions are denied when payments do not constitute a
tax-deductible expense.
The proposal is accompanied by the Commission's impact
assessment and a summary of that assessment.
The Government's view
17.3 The Exchequer Secretary to the Treasury (Mr
David Gauke) says first that:
- while the proposed changes
would widen the scope of the existing Directive, it would remain
focused on interest and royalty payments between associated companies
of different Member States;
- it therefore respects Member
States' competence and passes the subsidiarity tests; and
- the proposed measure is also proportionate.
17.4 Turning to the policy implications the Minister
comments that:
- the proposal essentially seeks
to amend the existing Interest and Royalties Directive, which
the UK supported when adopted in 2003, and which was designed
to help eliminate tax obstacles to the smooth functioning of the
single market by introducing a withholding tax exemption for cross-border
interest and royalty payments between EU associated companies;
- extending the list of companies covered, and
including the European Company and European Cooperative Society,
would bring this Directive into closer alignment with the recently
recast Parent-Subsidiary Directive on the common system of taxation
applicable in the case of parent companies and subsidiaries of
different Member States,[126]
which the Government has already supported and implemented;
- Member State protection would also be strengthened
as the Directive would only have effect where the interest or
royalty is effectively subject to tax in the other Member State;
- the Directive is also likely to have a positive
impact for UK companies operating within the EU, as in some cases
they will be affected by withholding tax in other Member States;
and
- there would also be a reduction in compliance
costs.
17.5 On the financial implications the Minister says
that:
- according to the Commission's
impact assessment the new provisions would generate compliance
cost savings for EU companies amounting to between 38.4
million (£32.9 million) and 58.8 million (£50.3
million);
- on the other hand, the proposed changes would
result in net losses in tax revenue of between 200 million
(£171.2 million) and 300 million (£256.7 million)
for Member States that currently subject outbound interest and
royalty payments to withholding tax; and
- as, however, the UK already offers double tax
relief on the transactions that would come into scope, a preliminary
assessment suggests that the anticipated effect on UK revenues
is likely to be broadly neutral.
Conclusion
17.6 As it seems the benefit accruing to UK business
is likely to outweigh a possible revenue loss for the Government,
we are content, whilst drawing the proposal to the attention of
the House, to clear the document from scrutiny.
125 Juridical double taxation arises where persons
in different territories are taxable on the same amount of income. Back
126
(32431) 5162/11: see HC 428-xv (2010-11), chapter 12 (2 February
2011). Back
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