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European Commission tightens corporate tax rules

European Commission tightens corporate tax rules
28 Nov 2013

The European Commission (EC) hopes to "significantly reduce tax avoidance in Europe" through proposed amendments to EU corporate tax legislation which would shut down loopholes in the Parent-Subsidiary Directive.

The EC is seeking to limit the methods available to companies to escape taxation, and wants to insert an anti-abuse provision (essentially a general anti-abuse rule or GAAR) into the directive so that companies "will no longer be able to exploit differences in the way intra-group payments are taxed across the EU to avoid paying any tax at all."

Marc Sanders, Taxand Netherlands, believes the move from the EC to strengthen EU corporate tax rules was inevitable.

"This is a logical step as a result of the media and political storm on this subject this year. The EU has, however, not been very effective in agreeing on such measures in the past - for example the CCCTB (Common Consolidated Corporate Tax Base). It can be questioned whether member states can agree to implement this."

Marc warns that the proposed amendments could do more harm than good. The uncertainty the changes could create may mean a spike in cases at the tax courts.

"Especially the proposed GAAR in the Parent-Subsidiary Directive may create a lot of uncertainty for companies and we expect that a lot of court cases will be necessary to provide sufficient guidance on what qualifies, for example, as an artificial arrangement."

He puts much of this down to the vague definitions contained in the proposed anti-abuse provision. He lists reasonable business conduct, legal subsnatce and economic reality as examples of key, yet poorly defined concepts in the proposed amendment.

Another issue Marc raises is the scope of the directive in the context of what these amendments are trying to achieve.

"The proposed measures only deal with situations within the EU and will not impact structures with non-EU entities. The famous Google and Starbucks structures will therefore hardly be affected by these proposed measures"

First published in the International Tax Review, 26 November 2013

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Taxand's Take

EU member states are expected to implement the amended Parent-Subsidiary Directive by 31 December 2014.

Taxand's Take Author

Marc Sanders
Taxand Board member