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


20 Taxation

Committee's assessment Politically important
Committee's decisionCleared from scrutiny
Document detailsDraft Council Directive concerning parent companies and subsidiaries in different Member States
Legal baseArticle 115 TFEU; consultation; unanimity
Department

Document numbers

HM Treasury

(35589), 16918/13 + ADDs 1-3, COM(13) 814

Summary and Committee's conclusions

20.1 The purpose of 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.

20.2 The Commission proposed this draft Directive to make two amendments to the PSD. Both are intended to prevent tax avoidance. The first amendment, related to Article 1 of the PSD, was to provide for what the Commission refer 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, related to Article 4 of the PSD, was to remedy a specific tax loophole concerning the use of hybrid loan arrangements in cross-border situations resulting in double non-taxation.

20.3 We have examined this proposal several times and learnt that the Government's overarching concern was to ensure any agreed Directive would be in line with developments in the OECD Base Erosion and Profit Shifting (BEPS) project. When, in April, we last considered the matter we heard that:

· the Greek Presidency proposed splitting the proposal, to focus only on reaching agreement as regards the amendment to Article 4 of the PSD;

· the other element of the proposal would be left for future discussion under the next, Italian, Presidency;

· there was a broad consensus amongst Member States, including the UK, that the Article 4 amendment would effectively eliminate avoidance opportunities through the use of hybrid loans;

· in addition, Member States agreed that it complemented related work being carried out as part of the OECD BEPS project; and

· the Government continued to support this solution, which was in line with how the UK's current dividend exemption rules operate.

20.4 On the presumption that the proposal would now only concern Article 4 of the PSD we cleared the document from scrutiny. The Article 4 proposal has been adopted as Council Directive 2014/86/EU.

20.5 The Government tells us now, in relation to developments on the Article 1 proposal, that:

· in the event the Italian Presidency, rather than split out the rule into a new proposal, reframed the rule, in the context of the existing draft Directive, as a minimum standard requirement, which would not prevent Member States from applying domestic or agreement-based anti-abuse measures;

· a Presidency compromise text incorporates improvements suggested by the Government and follows OECD recommendations on BEPS;

· the Presidency is likely to seek Political Agreement on the proposal at the ECOFIN Council of 9 December; and

· the Government wishes to provide its full support when a Political Agreement is tabled.

20.6 Given the improvements secured in relation to Article 1 of the PSD we now clear the proposal from scrutiny.

Full details of the documents: 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: (35589), 16918/13 + ADDs 1-3, COM(13) 814.

Background

20.7 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.

20.8 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. The first amendment, related to Article 1 of the PSD, would provide for what the Commission refer 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, related to Article 4 of the PSD, would remedy a specific tax loophole concerning the use of hybrid loan arrangements in cross-border situations resulting in double non-taxation.

20.9 We have noted previously that the Government's overarching concern was to ensure any agreed Directive would be in line with developments in the OECD Base Erosion and Profit Shifting (BEPS) project.

20.10 When we last considered this matter we learnt that:

· in April, the Presidency proposed splitting the proposal, to focus only on reaching agreement as regards the amendment to Article 4 of the PSD, to address the specific loophole concerning the use of hybrid loan arrangements;

· the other element of the proposal would be left for future discussion under the next, Italian, Presidency;

· there was a broad consensus amongst Member States, including the UK, that the Article 4 amendment would effectively eliminate avoidance opportunities through the use of hybrid loans;

· in addition, Member States agreed that it complemented related work being carried out as part of the OECD BEPS project to address avoidance through the use of mismatch arrangements in other areas;

· this proposed change would ensure that, in situations where cross-border payments under a hybrid loan are classified in the Member State of the payer as a tax deductible expense, then the Member State of the payee should tax this amount where it would otherwise treat the payment as a tax-exempt dividend distribution;

· the Government continued to support this solution, which is in line with how the UK's current dividend exemption rules operate; and

· the proposed change to Article 1 of the PSD would now form a separate new proposal and was likely to progress during the Italian Presidency.

20.11 On the presumption that the proposal would now only concern Article 4 of the PSD we cleared the document from scrutiny. But we noted that we would, of course, be scrutinising in the normal way any new proposal made in relation to Article 1 of the PSD.

20.12 The Article 4 proposal has been adopted as Council Directive 2014/86/EU.

The Minister's letter of 18 November 2014

20.13 The Minister writes now about developments in relation to amendment of Article 1 of the PSD, first reminding us that:

· the Greek Presidency had split the original draft Directive, dealing only with the Article 4 proposal and leaving the Article 1 proposal to be carried forward by the Italian Presidency; and

· along with other Member States, the UK opposed the original Commission proposal on the grounds that it would add much complexity with few benefits and would fit poorly with domestic legislation.

20.14 The Minister then tells us that:

· consequently the Article 1 proposal went for technical discussion in the Council working groups;

· the Italian Presidency, rather than split out the rule into a new proposal, reframed the rule, in the context of the existing proposal, as a minimum standard requirement, which would not prevent Member States from applying domestic or agreement-based anti-abuse measures;

· initial assessment of the Presidency proposal was that it was too general;

· following further analysis, however, the Government concluded that risks to tax sovereignty were low, the measure would only require minimal amendment to UK law with negligible business impact and it supports the UK's overall BEPS objectives;

· the Government has since worked successfully with the Presidency in order to incorporate UK changes into the text and thereby secure further improvements;

· notably, it has ensured that the text follows OECD recommendations on BEPS, is aligned with current provisions in the Mergers and Interest and Royalties Directives and is proportionate in tackling instances of wholly artificial arrangements, where gaining a tax advantage through exploiting the PSD is a main purpose;

· following further developments in the negotiations, the Italian Presidency tabled this anti-abuse compromise proposal for discussion at the 7 November ECOFIN Council;

· as a direct tax measure, unanimity is required for agreement to be reached and this had seemed unlikely due to a number of objections to the wording of the text raised by Member States and the Commission;

· however, by the time of the Council the majority of Member States had withdrawn their objections or been satisfied by the revised text;

· while Member States broadly welcomed the Presidency proposal, agreement was not reached at the Council;

· the Dutch abstained citing parliamentary scrutiny and additionally outlined substantive concerns with the compromise text;

· the Government intervened to express general support for principle of the proposal and stated that, following further consideration by national parliaments, it looked forward in the hope that agreement could be reached during the Italian Presidency; and

· discussions will continue and it is currently expected that the proposal will return to the ECOFIN Council for agreement on 9 December.

20.15 The Minister concludes that he hopes that this information enables us to clear this outstanding element of the draft Directive, so that the Government is able to provide its full support when a Political Agreement is tabled.

Previous Committee Reports

Twenty-seventh Report HC 83-xxvii (2013-14), chapter 6 (15 January 2014), Thirty-fourth Report HC 83-xxxiv (2013-14), chapter 11 (26 February 2014) and Forty-second Report 83-xlii (2013-14), chapter 24 (30 April 2014).


(34548), 17637/12 + ADDs 1-16: see Twenty-seventh Report HC 86-xxvii (2012-13), chapter 3 (16 January 2013), Thirty-first Report HC 86-xxxi (2012-13), chapter 5 (6 February 2013) and Fifth Report HC 83-v (2013-14), chapter 8 (12 June 2013).

See http://hb.betterregulation.com/external/Council%20Directive%202014_86_EU.pdf.

This text can be seen at http://data.consilium.europa.eu/doc/document/ST-14531-2014-REV-1/en/pdf.

 
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