6 Taxation
| (35589)
16918/13
+ ADDs 1-3
COM(13) 814
| Draft Council Directive amending Directive 2011/96/EU on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States
|
| Legal base | Article 115 TFEU; consultation; unanimity
|
| Document originated | 25 November 2013
|
| Deposited in Parliament | 29 November 2013
|
| Department | HM Treasury
|
| Basis of consideration | EM of 7 January 2014
|
| Previous Committee Report | None
|
| Discussion in Council | Not known
|
| Committee's assessment | Politically important
|
| Committee's decision | Not cleared; further information requested
|
Background
6.1 Directive 2011/96/EU, the Parent Subsidiary Directive
(PSD), is to ensure that companies from the same group are not
taxed twice. It achieves this by exempting dividends paid by a
subsidiary in one Member State to a parent in another Member State
and prohibiting withholding tax on these dividends.
The document
6.2 The draft Directive would make two amendments
to the PSD. Both are intended to prevent tax avoidance and reflect
specific action points detailed in the Commission's 2012 Communication,
Action Plan to strengthen the fight against tax fraud and tax
evasion.[19]
6.3 The first amendment would insert what the Commission
refers to as a general anti-abuse rule (GAAR), although in the
UK it would be considered a targeted anti-abuse rule (TAAR) as
it is confined to a specific piece of legislation rather than
applying generally to aggressive tax planning. It would require
Member States to withdraw the benefits of the PSD (the dividend
exemption) in respect of tax arrangements that have been put into
place for the essential purpose of obtaining an improper tax advantage
under the Directive and which defeat the "object, spirit
and purpose" of the tax provisions invoked.
6.4 The second amendment would remedy a specific
tax loophole concerning the use of hybrid loan arrangements in
cross-border situations resulting in double non-taxation. Hybrid
loans are financial instruments with characteristics of both debt
and equity. Double non-taxation can arise where, due to different
tax qualifications given by Member States to hybrid loans (debt
or equity), payments under a cross-border hybrid loan are treated
as a tax deductable expense in one Member State (that of the payer)
and as a tax exempt distribution of profits (dividend) in another
Member State (that of the recipient).
6.5 The draft Directive is accompanied by three documents:
the Commission's impact assessment, an executive summary of the
assessment and an Implementation Plan. In the impact assessment
the Commission says that:
· reducing the scope for companies to engage
in abusive tax avoidance through the amendments proposed would
bring benefits in terms of competition, economic efficiency, transparency
and fairness; and
· Member States may also benefit from additional
tax revenues, although this cannot be quantified because it is
not possible to estimate the revenue that is currently lost through
tax structures that are deemed to constitute abuse of the PSD.
6.6 The Commission also considers an option for making
the GAAR aspect of the proposal optional for Member States, saying
that:
· it found that an optional rule would reduce
instances of abuse of the PSD compared to no action; but
· an optional rule would be less effective
than the mandatory rule proposed.
The Government's view
6.7 The Exchequer Secretary to the Treasury (Mr David
Gauke) says that an overarching concern of the Government will
be to ensure any agreed Directive is in line with developments
in the OECD Base Erosion and Profit Shifting project.
6.8 On the proposed hybrid loan mismatches rule the
Minister says that:
· the tax exemption benefits in the PSD
would be denied to profit distribution payments which are deductible
in the source Member State;
· the UK already unilaterally follows this
approach in its dividend exemption rules;
· accepting this amendment to the PSD would
therefore have no policy implications for the UK; and
· it is desirable from the UK's point of
view that this solution is adopted at an EU level, as this will
reduce instances of double non-taxation, which creates unfair
competition between businesses in the single market.
6.9 On the general anti-abuse rule (GAAR) the Minister
says that:
· the UK already has a GAAR in place (introduced
in the Finance Act 2013), which targets businesses and individuals
that engage in abusive avoidance, that is "tax arrangements
that cannot reasonably be regarded as a reasonable course of action
with regard to the relevant legislation";
· the Government's starting point on an
EU-wide GAAR is that it should be up to each individual Member
State to legislate for their own GAAR;
· in most circumstances, a one-size-fits-all
EU GAAR would be less effective than one that is tailored to the
requirements of the domestic tax code;
· in the specific context of the PSD Directive,
however, where a lack of coordination between Member States in
the recognition of abusive arrangements could undermine the effectiveness
of the measure, the Government could support a well-targeted EU
approach to anti-abuse in cross-border situations;
· the proposal by the Commission is indeed
targeted at counteracting abusive arrangements that specifically
relate to the PSD (in contrast to the domestic UK GAAR, which
applies to all kinds of abusive tax arrangements); and
· agreeing to this proposal would commit
the UK to introducing a new anti-abuse rule in the domestic distribution
exemption legislation.
6.10 The Minister tells us that the Government supports
the Commission's impact assessment. As for financial implications
he says, of the hybrid loan mismatches rule, that:
· it is not possible to quantify the benefits
of this initiative;
· the UK's dividend exemption rules already
have an anti-hybrid rule;
· the additional financial benefit for the
UK in all other Member States adopting such a rule is likely to
be minimal;
· the Government agrees, however, with the
Commission's assessment that the figures involved are not crucial
to the decision to counteract the harmful effects of hybrid financial
arrangements; and
· addressing these distortions brings additional
benefits in terms of competition, economic efficiency, transparency
and fairness.
6.11 On the GAAR the Minisiter says that it is not
possible to calculate the revenue lost through abuse of the PSD
and which could be recovered by the proposed anti-abuse provision.
Conclusion
6.12 We note that the Government's overarching
concern will be to ensure any agreed Directive is in line with
developments in the OECD Base Erosion and Profit Shifting project.
So, before we consider this proposal again, we should like to
hear about progress in Council working group negotiations in securing
this objective. Meanwhile the document remains under scrutiny.
19 (34548) 17637/12 + ADDs 1-16: see HC 86-xxvii (2012-13),
chapter 3 (16 January 2013), HC 86-xxxi (2012-13), chapter 5 (6
February 2013) and HC 83-v (2013-14), chapter 8 (12 June 2013). Back
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