Documents considered by the Committee on 14 December 2011 - European Scrutiny Committee Contents


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

Legal baseArticle 115 TFEU; consultation; unanimity
Document originated11 November 2011
Deposited in Parliament18 November 2011
DepartmentHM Treasury
Basis of considerationEM of 30 November 2011
Previous Committee ReportNone
Discussion in CouncilNot known
Committee's assessmentPolitically important
Committee's decisionCleared

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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Prepared 22 December 2011