Twenty-fifth Report of Session 2015-16 Documents considered by the Committee on 9 March 2016 Contents

7Taxation: avoidance

Summary and Committee’s conclusions

Committee’s assessment

Politically important

Committee’s decision

(a), and (c) cleared from scrutiny; (b), (d) and (e) not cleared from scrutiny; further information requested; document (d) drawn to the attention of the Treasury Committee

Document details

(a) Commission Communication about its Anti-Tax Avoidance Package; (b) Commission Communication on an external strategy for effective taxation; (c) Proposed Council Directive concerning mandatory automatic exchange of information in the field of taxation; (d) Proposed Council Directive about tax avoidance practices that directly affect the functioning of the internal market; (e) Commission Recommendation about measures against tax treaty abuse

Legal base

(a) and (b) —; (c) and (d) Article 115 TFEU, consultation, unanimity; (e) Article 292 TFEU

Department

HM Treasury

Document Numbers

(a) (37480), 5636/16 + ADD 1, COM(16) 23; (b) (37481), 5637/16 + ADD 1, COM(16) 16; (c) (37482), 5638/16 + ADD 1, COM(16) 25; (d) (37483), 5639/16, COM(16) 26; (e) (37494), 5640/16, COM(16) 271

7.1In October 2015 the OECD published a report setting out an Action Plan with 15 measures to address a taxation problem known as Base Erosion and Profit Shifting in where companies artificially shift profits to low tax locations. This package of measures, the BEPS Action Plan, was endorsed by the G20 in November 2015.

7.2Directive 2011/16/EU on Administrative Assistance and Mutual Cooperation contains procedures for better cooperation between tax administrations in the EU, such as exchanges of information on request, spontaneous exchanges, automatic exchange of information, participation in administrative enquiries, simultaneous controls and notifications to other Member States of tax decisions.

7.3With the first Communication we consider in this chapter the Commission has published a package of hard and soft law measures, referred to as the Anti–Tax Avoidance Package, aimed at preventing tax avoidance by large multinational companies within the EU. This Communication sets out the objective of the package and the purpose of accompanying proposals. The Commission summarises the four initiatives contained within the package, and which we also consider in this chapter:

7.4In relation to the overarching Communication the Government tells us that the fight against tax avoidance and tax planning is a UK priority and that it welcomes the Commission’s consideration of what EU-level actions may be appropriate in this area. However, the Government comments that action at EU level must be effective, proportionate and consistent with the OECD recommendations. It says that it will not sign up to any measure that would undermine tax sovereignty, or damage the prospects for growth in the EU.

7.5Regarding the Communication on taxation issues with third countries the Government, while noting some concerns, acknowledges that the tax good governance clauses in agreements with third countries could be updated given international developments, but says that this should be agreed unanimously by the Council as tax is a Member State competence.

7.6The Government tells us that it welcomes the Commission proposal to amend the Directive on Administrative Assistance and Mutual Cooperation, as a means of ensuring that all Member States, including those who are not members of the OECD, adopt the OECD Country-by-Country reporting template, to which the UK has already committed.

7.7As for the other proposed Council Directive, aimed at preventing tax avoidance within the EU, the Government is less happy. It suggests that there are subsidiarity and proportionality problems. The Government welcomes the aim of the proposal and, in particular, the focus on ensuring that Member States implement the internationally agreed outcomes of the OECD project. But it tells us of the need to be sure of detail of how five of the measures will be dealt with in the proposed Council Directive and that it is positively opposed to the sixth proposed measure.

7.8The Government has not commented to us on the Commission Recommendation about Double Tax Agreements.

7.9We have no questions to ask on the Commission’s overarching Communication nor on the proposal to amend the Directive on Administrative Assistance and Mutual Cooperation. Accordingly, we clear these documents from scrutiny.

7.10We note the Government’s view that the proposals in the Communication on taxation issues with third countries need to be agreed unanimously by the Council. We will not consider this matter again until we hear from the Government about how its point is being addressed. Meanwhile this document remains under scrutiny.

7.11Given the policy issues the Government has mentioned to us in relation to the proposed Council Directive aimed at preventing tax avoidance within the EU, we await information about how these are being addressed in Council working group discussion before considering these issues again. Given the history of this matter we have considered whether the proposal complies with the principle of subsidiarity. Our preliminary conclusion is that it does for the reasons indicated below and that the concerns raised by the Government are matters of proportionality rather than subsidiarity. In reaching our subsidiarity conclusion we have taken into account the fact that the proposal:

7.12However, we would have been greatly assisted in our consideration of the current proposal and how it relates to the original CCCTB proposal (and Reasoned Opinion) if the Government had provided a much more detailed and helpful comparative analysis of the two proposals, identifying the Article numbers of the six anti-abuse measures in both the CCCTB and current proposal. We would be grateful if in future updates that relationship could be made clear. In the meantime, we retain this proposal under scrutiny.

7.13We draw document (d) to the attention of the Treasury Committee.

7.14As for the Commission Recommendation on Double Tax Agreements we are also holding this document under scrutiny pending information from the Government about its view of the Recommendation.

Full details of the documents

(a) Commission Communication on the Anti-Tax Avoidance Package: Next steps towards delivering effective taxation and greater tax transparency in the EU: (37480), 5636/16 + ADD 1, COM(16) 23; (b) Commission Communication on an External Strategy for Effective Taxation: (37481), 5637/16 + ADD 1, COM(16) 16; (c) Proposal for a Council Directive amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation: (37482), 5638/16 + ADD 1, COM(16) 25; (d) Proposal for a Council Directive laying down rules against tax avoidance practices that directly affect the functioning of the internal market: (37483), 5639/16, COM(16) 26; (e) Commission Recommendation of 28 January 2016 on the implementation of measures against tax treaty abuse: (37494), 5640/16, COM(16) 271.

Background

7.15The OECD defines base erosion and profit shifting (BEPS) as “tax planning strategies that exploit … gaps and mismatches in [countries] tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid”. In October 2015 the OECD published a report setting out an Action Plan with 15 measures to address the BEPS problem. This package of measures was endorsed by the G20 in November 2015.

7.16Directive 2011/16/EU on Administrative Assistance and Mutual Cooperation (DAC) contains procedures for better cooperation between tax administrations in the EU, such as exchanges of information on request, spontaneous exchanges, automatic exchange of information (AEOI), participation in administrative enquiries, simultaneous controls and notifications to other Member States of tax decisions. It also provided for the necessary practical tools, such as a secure electronic system for the information exchange. The DAC was amended in 2014 to incorporate a new global standard for AEOI (the Common Reporting Standard) under which information will first be exchanged from 1 January 2017. The DAC was amended again in 2015 to provide for AEOI on cross-border tax rulings, which will also come into effect from 1 January 2017. Both these amendments were intended to implement agreements reached in the OECD and in the EU.

The documents

Commission Communication about its Anti-Tax Avoidance Package

7.17In its Communication, document (a), the Commission has published a package of hard and soft law measures, referred to as the Anti–Tax Avoidance Package (ATAP), aimed at preventing tax avoidance by large multinational companies within the EU. It follows on from the Commission’s June 2015 Communication about fair and efficient corporate tax in the EU.45 This present Communication sets out the objective of the ATAP and the purpose of accompanying proposals. This package:

7.18The Commission summarises the four initiatives contained within the ATAP:

7.19The Communication is accompanied by a Commission Staff Working Document, which presents the Commission’s assessment of some of the BEPS Action Plan measures, and the objectives of the ATAP initiative. The document also gathers economic evidence around profit shifting and base erosion and sets out the results of the Commission’s consultation with Member States and the general public.

Commission Communication on an external strategy for effective taxation

7.20In its Communication on an external strategy for effective taxation, document (b), the Commission proposes:

Re-examining EU good governance criteria

7.21In 2012, the Commission issued a Recommendation on measures to encourage third countries to apply standards of tax good governance. The criteria included transparency, information exchange and fair tax competition. The Commission proposes that this should be updated in two respects:

Enhancing tax good governance cooperation through agreements with third countries

7.22Agreements reached between the EU and Member States with third countries typically contain clauses on good governance. The standard paragraph used in such agreements was endorsed by the ECOFIN Council in May 2008. The Commission proposes that:

Assisting developing countries in meeting tax good governance standards

7.23The Commission has a “Collect More, Spend Better” approach to support developing countries in improving their domestic public finance, in particular by assisting developing countries through better international coordination with the BEPS and AEOI initiatives, the UN Committee of Tax Experts on International Cooperation in Tax matters and regional bodies such as the African Tax Administration Forum.

Developing an EU process for assessing and listing third countries

7.24The Commission proposes a common EU approach to assessing third countries on tax good governance standards building on the list of “non-cooperative tax jurisdictions” published alongside its June 2015 tax Communication. It sets out proposals for development of a scoreboard of indicators to determine the potential impact of jurisdictions on Member States’ tax bases. Based on the scoreboard, it is proposed that there would a screening process for deciding which jurisdictions should be assessed against the EU’s updated criteria on tax for good governance. Following on from the screening process and a subsequent Commission recommendation, Member States would decide whether to add a jurisdiction to the common EU list. It is not clear whether this would require legislation and no legal base is proposed.

Reinforcing the link between EU funds and tax good governance

7.25The Commission proposes that the provision in Regulation (EU, EURATOM) 2015/1929, the Financial Regulation governing budgetary and financial management, prohibiting EU funds being invested in third countries that do not comply with international tax transparency standards, should be extended to include the EU’s principles for fair tax competition. The Commission proposes to integrate the EU’s updated tax good governance standards as part of the revision of the Financial Regulation.

7.26The Communication is accompanied by two annexes, with updated good governance criteria and an updated standard paragraph for agreements with third counties, which the Commission wishes to see endorsed by the Council and Member States.

Proposed Council Directive concerning mandatory automatic exchange of information in the field of taxation

7.27With the proposed Council Directive, document (c), the DAC would be further amended to increase transparency between businesses and tax authorities by ensuring that all Member States require large Multinational Enterprises (MNEs) to file annual Country-by-Country reports, and automatically exchange information on these reports via the existing DAC AEOI mechanisms. The amendments would take effect from 1 January 2017.

7.28The proposed Council Directive would implement the Country-by-Country reporting template that was published under Action 13 of the BEPS Action Plan. This template was designed to help tax authorities gather information on multinational companies’ global activities, profits and taxes so as to make a more informed assessment of where risks lie and thus where their efforts to counter such activity should be focused. The proposal would require the Ultimate Parent Entity, or another designated reporting entity, of an MNE Group to submit a Country-by-Country report, following the OECD template, to the Member State in which it is resident for tax purposes. The Member State concerned would then automatically exchange the report with the tax authorities of other relevant Member States. Member States would be required to impose penalties for non-compliance.

7.29In order to minimise compliance burdens, only MNEs with total consolidated group revenue equal to or higher than €750 million (£573 million) in an accounting period would be required to file a report.

7.30In line with the BEPS model, the information contained within the Country-by-Country reports would not be made public under this proposal. Separately, the Commission is preparing an impact assessment on whether public Country-by-Country reporting is desirable, and how this could be achieved. Publication of the results of this analysis is expected to be in March and it is possible that this will be followed by a legislative proposal.

7.31The proposed Council Directive would add a third annex to the DAC, setting out defined terms and general reporting requirements, and including a template for the Country-by-Country report.

Proposed Council Directive about tax avoidance practices that directly affect the functioning of the internal market

7.32The proposed Council Directive, document (d), referred to as the Anti-Tax Avoidance Directive (ATAD), is intended to introduce a common set of rules aimed at preventing tax avoidance practices in the EU. These rules would apply to all taxpayers subject to corporate taxation on profits in one or more Member States, including permanent establishments of entities that are resident for tax purposes in a non-EU country. The proposal is presented as a minimum level of protection, which would not prevent Member States from applying other domestic or double tax treaty-based anti-avoidance provisions. The individual measures contained within the proposal are also intended to be minimum standards or principle-based rules, which would leave the detail of implementation to Member States.

7.33The proposed Council Directive includes six measures that were previously put forward by the Commission as part of its proposal for a Council Directive on a Common Consolidated Corporate Tax Base (CCCTB).49 The present proposed rules have been amended to reflect discussions held at Council Working Party level in the context of the international aspects of the CCCTB, as well as the recent BEPS developments.

7.34Three of the proposed measures relate to the BEPS Action Plan, as follows.

Interest limitation

7.35The final OECD recommendations on interest deductions are set out in the BEPS Action 4.

7.36The Commission proposes:

7.37This proposed measure on interest limitation would not apply to financial undertakings, which are usually net interest recipients. The financial sector requires specific rules, which are currently being considered within the OECD.

Controlled Foreign Companies

7.38The final OECD recommendations on Controlled Foreign Companies rules are set out in the BEPS Action 3.

7.39The Commission proposes a common regime for Controlled Foreign Companies which, in cases of low taxation, would require Member States to treat the non-distributed income of entities that are controlled by or related to a resident taxpayer, and which are based in a third country that is not party to the Agreement on the European Economic Area (EEA), (which created the EU/EFTA single market)50 as the income of the resident taxpayer. The proposal has computational detail on, for example, how income would be calculated and how losses and distributed profits should be treated.

7.40The proposed rule is subject to certain conditions, including for example:

7.41The rule would also apply within the EEA with respect to artificial arrangements without economic substance, in line with EU law. It would not apply to financial undertakings that are tax resident in a country party to the EEA Agreement, or to their permanent establishments in one or more Member State.

Hybrid Mismatches

7.42The final OECD recommendations on hybrid mismatch arrangements are set out in the BEPS Action 2.

7.43The Commission proposes a common rule aimed at counteracting hybrid mismatch arrangements that exploit differences between Member States’ tax rules and are used by some MNEs to avoid paying tax, or to get excessive tax relief by deducting the same expense in more than one country. The rule proposed is that the legal characterisation given to the payment (hybrid instrument) by the Member State from where it is sourced shall be the legal characterisation that the other Member State must follow.

7.44A subgroup of the EU’s Code of Conduct Group for Business Taxation has also undertaken work on hybrid mismatches. The rule proposed for the proposed Council Directive is based on the reports of the Code of Conduct Group, which were submitted to the European Council on 11 December 2014 and 11 June 2015.

7.45The three measures in the proposed Council Directive not related to the BEPS Action Plan are as follows.

Switch over

7.46The Commission proposes a switch-over rule requiring Member States to tax certain types of foreign income, rather than providing for an exemption, where there has been low or no taxation in the country of origin.

Exit taxation

7.47The Commission proposes that in specific circumstances Member States be required to impose an exit tax on unrealised gains when a taxpayer transfers its assets to another Member State or a third country. Proposed provisions:

General Anti-Abuse Rules (GAAR)

7.48The Commission proposes an EU-wide GAAR that would require Member States to ignore non-genuine arrangements that have been put in place for the essential purpose of obtaining a tax advantage. Arrangements would be considered non-genuine to the extent that they are not put in place for valid commercial reasons that reflect economic reality.

Commission Recommendation about measures against tax treaty abuse

7.49The Commission Recommendation, document (e), on tax treaty issues, recommends that Member States should include a provision in their Double Tax Agreements between each other and with third countries. This provision is based on a Principal Purpose Test described in the BEPS Action 7, which assesses whether the purpose of a structure or arrangement is put in place for genuinely commercial purposes or in order to obtain treaty benefits.

The Government’s view

7.50In his first Explanatory Memorandum of 12 February 2016 the Financial Secretary to the Treasury (Mr David Gauke) comments on the Commission’s overarching Communication, document (a). He says that:

7.51In his second Explanatory Memorandum of 12 February 2016, concerning the Commission Communication about third country taxation, document (b), the Minister says that:

7.52The Minister repeats that the Government’s view is that action at the EU level must be effective and proportionate and that it will not sign up to any measure that would undermine the UK’s tax sovereignty, or damage the prospects for growth in the EU.

7.53In his third Explanatory Memorandum of 12 February 2016, concerning the proposal to amend the DAC, document (c), the Minister says that the Government is committed to tackling tax avoidance and aggressive tax planning by MNEs, and strongly supports efforts to increase tax transparency. He comments that:

7.54The Minister tells us that HM Revenue and Customs conducted an impact assessment on implementing the OECD Country-by-Country reporting template in the UK and reviewed the financial implications, both for the Autumn Statement 2014. It suggested that:

7.55The Minister notes that in presenting the proposed Council Directive the Commission has said that the costs of any additional IT tools required for the AEOI on the Country-by-Country reports would be funded out of the FISCALIS 2020 programme, which provides financial support for activities to improve administrative cooperation between tax authorities in the EU.52

7.56In his fourth Explanatory Memorandum of 12 February 2016c, concerning the proposed Council Directive about rules against tax avoidance practices, document (d), the Minister first discusses subsidiarity and proportionality. He says that:

7.57As for the policy implications of the proposed Council Directive the Minister says that:

7.58Noting again that the Commission’s proposed Council Decision is not accompanied by an impact assessment, the Minister says that the Government has, therefore, been unable to fully ascertain what the costs and benefits of the proposal as a whole would be. He comments, however that:

Previous Committee Reports

None.

45 See (36940), 9949/15 + ADDs 1–2: First Report, HC 342-i (2015–16), chapter 80 (21 July 2015).

47 See Harmful tax competition.

49 See (32617), 7263/11 + ADDs 1–2: Thirty-seventh Report, HC 219-xxxvi (2014–15), chapter 16 (18 March 2015), Forty-third Report, HC 428-xxxviii (2010–12), chapter 11 (19 October 2011), Fortieth Report, HC 428-xxxv (2010–12), chapter 5 (7 September 2011) and Twenty-seventh Report, HC 428-xxv (2010–12), chapter 2 (4 May 2011).




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Prepared 16 March 2016