The proposal for a directive on rules against tax-avoidance practices that directly affect the functioning of the internal market was one of the two legislative proposals of the 'anti-tax-avoidance package' presented by the European Commission on 28 January 2016. It aims at ensuring effective taxation in the EU together with tax treaty recommendations for external aspects.

The proposal targets schemes involving situations whereby corporate taxpayers operating businesses in several countries take advantage of disparities and loopholes to reduce their tax bill. It is linked with the OECD/G20 BEPS (base erosion and profit shifting) action plan. The proposal covers six legally binding anti-abuse measures, which all Member States should apply against tax avoidance practises that directly affect the functioning of the internal market, namely:

• interest limitation rule;
• exit taxation;
• switch-over clause;
• general anti-abuse rule;
• controlled foreign company(CFC) rule;
• rules against hybrid mismatches.

The proposal for a directive requires unanimity in the Council for its adoption, following consultation of the European Parliament (special legislative procedure).

The Parliament adopted its position on 8 June 2016, on the basis of a report by the Committee on Economic and Monetary Affairs (ECON). It calls for actions going further in the fight against tax abuse, in particular regarding:

• deductions for interest payments, and
• a stricter switch-over clause.

The Council adopted the directive on 12 July 2016 based on a political agreement on the text, which removes the switch-over clause and changes the rules on CFC compared to the original proposal. The deadline for implementation is 31 December 2018, with defined derogations. The Commission is to evaluate the directive's implementation within four years of entry into force. The adoption of the proposal was accompanied by two Council statements. The first requests the Commission 'to put forward a proposal by October 2016 on hybrid mismatches involving third countries in order to provide for rules consistent with and no less effective than the rules recommended by the OECD BEPS report on Action 2', with a view to reaching agreement by the end of 2016. The second one is a Council and Commission statement 'in relation to ensuring a level playing field at international level'.

References:

• EP Legislative Observatory, Procedure file on a directive laying down rules against tax avoidance practices that directly affect the functioning of the internal market, 2016/0011(CNS)
• European Commission, Anti-Tax Avoidance Package, website
• European Parliament, Legislative resolution of 8 June 2016 on the proposal for a Council directive laying down rules against tax avoidance practices that directly affect the functioning of the internal market, 2016/0011(CNS)
• Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market
• Council, Council statement on hybrid mismatches, 5 July 2016

Further reading:

• European Parliament, EPRS, Understanding the OECD tax plan to address 'base erosion and profit shifting' – BEPS, Briefing, April 2016
• European Parliament, EPRS, Anti-tax-avoidance directive, Briefing, July 2016

Author: Cécile Remeur, Members' Research Service, legislative-train@europarl.europa.eu