Adopting BEPS in the EU: the impact of the EC's anti tax avoidance package.

• Author: Robinson, Stephanie
• Position: Base-erosion and profit-shifting, European Commission

On Jan. 28, 2016, the European Commission (EC) presented its Anti Tax Avoidance Package, which aims to hamper aggressive tax planning and foster a better business environment throughout the European Union (EU). The package includes two legislative proposals: (1) a directive addressing certain anti-base-erosion and profit-shifting (BEPS) issues; and (2) an amendment to the Directive on Administrative Cooperation in Taxation to require automatic exchange of tax rulings and information with respect to country-by-country reporting.

The package also includes recommendations for: (1) the introduction of a general anti-abuse rule, based on a principal purpose test, in EU tax treaties; and (2) the adoption of revisions to the definition of permanent establishment in line with the recommendations of the Organisation for Economic Cooperation and Development (OECD). Finally, the package contains a Communication on an External Strategy for Effective Taxation, which proposes a common approach to tax good governance for other countries.

Comparing the EC's Package to the OECD's Recommendations

Many of the measures included in the package generally are consistent with the OECD's BEPS recommendations, and, in fact, one of the package's goals is to ensure implementation of those recommendations within the EU in a consistent and coordinated manner. However, as the EC acknowledged, the package goes much further in certain areas than the OECD's recommendations, in both its approach and its breadth. This item describes certain significant areas of divergence.

Hybrid mismatches: While the OECD recommends rules that would neutralize the tax advantage of hybrid mismatches, the EC's proposal would require EU member states to follow the source state's legal characterization of hybrid entities or instruments, provided that the source state is also an EU member state. It is unclear how the EC's proposal would interact with the OECD's recommended rules in cases in which an EU member state also implements the OECD rules. It is also unclear how the rule would work when a hybrid entity makes a payment and both jurisdictions would be the source country of that payment according to domestic law.

CFC rules: Unlike the OECD's recommended flexible approach to the controlled foreign corporation (CFC) rules, the EU's package proposes a framework under which income of a CFC is included in the parent's income if the generally applicable effective corporate tax rate is less than 40%...