20 Taxation
| Committee's assessment
| Politically important |
| Committee's decision | Cleared from scrutiny
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| Document details | Draft Council Directive concerning parent companies and subsidiaries in different Member States
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| Legal base | Article 115 TFEU; consultation; unanimity
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| Department
Document numbers
| HM Treasury
(35589), 16918/13 + ADDs 1-3, COM(13) 814
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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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