Documents considered by the Committee on 26 February 2014 - European Scrutiny Committee Contents

11 Taxation



+ 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 baseArticle 115 TFEU; consultation; unanimity
DepartmentHM Treasury
Basis of considerationMinister's letter of 12 February 2014
Previous Committee ReportHC 83-xxvii (2013-14), chapter 6 (15 January 2014)
Discussion in CouncilNot known
Committee's assessmentPolitically important
Committee's decisionNot cleared; further information requested


11.1 The purpose of 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.

11.2 This 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.[62] 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. 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.

11.3 When we considered this proposal last month we heard that the Government's overarching concern would be to ensure any agreed Directive is in line with developments in the OECD Base Erosion and Profit Shifting (BEPS) project. So we asked to hear, before considering this proposal again, about progress in Council working group negotiations in securing this objective. Meanwhile the document remained under scrutiny.[63]

The Minister's letter

11.4 The Exchequer Secretary to the Treasury (Mr David Gauke) first explains that:

·  the BEPS Action Plan is wide-ranging in scope and sets out a detailed work programme covering 15 specific items spread over a two year period;

·  the Government expects, however, that the first outputs will be achieved by September and these will include action 2 (hybrids), action 6 (treaty abuse), action 8 (transfer pricing aspects of intangibles) and action 13 (transfer pricing documentation and the reporting template), along with a report identifying the issues raised by the digital economy and a review of member country's tax regimes regarding harmful tax practices; and

·  most of the rest of the work is due for completion by September 2015, with the exception of some of the work on transfer pricing and harmful tax practices and action 15 to develop a multilateral instrument to make the necessary changes to bilateral treaties.

11.5 The Minister then tells us, with regard to this draft amending Directive, that it is action 2 of the BEPS Action Plan that is most relevant. This calls for the development of:

    "model treaty provisions and recommendations regarding the design of domestic rules to neutralise the effect (e.g. double non-taxation, double deduction, long-term deferral) of hybrid instruments and entities."

11.6 He continues that:

·  the amendment that is being proposed with respect to Article 4 of the current Directive is intended to close a specific tax loophole with respect to hybrid loan arrangements and would therefore fall within the scope of the OECD work;

·  the Government has therefore reiterated, in the Council working group, that EU work to address hybrid mismatches should acknowledge the parallel discussions in the OECD;

·  there has been acceptance of this point, with a number of Member States intervening to support the UK; and

·  the Greek Presidency committed to ensuring that any relevant developments in the OECD would be notified within the Council working group.


11.7 We are grateful to the Minister for his prompt response on the issue of compatibility with developments in the OECD Base Erosion and Profit Shifting project. We look forward to hearing in due course about progress in firmly securing this and other UK interests in the Council working group discussions. Meanwhile the document remains under scrutiny.

62   (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

63   See headnote. Back

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Prepared 11 March 2014