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European Union: EC plans to attack double taxation and double non-taxation in 2012

On November 11 2011, the European Commission (EC) outlined its 2012 strategy for combating double taxation and double non-taxation in the EU.

Regarding double taxation, the EC proposes to strengthen existing EU tax policy instruments such as the EU’s interest and royalties (I&R) directive and the arbitration convention on transfer pricing, and implement an EU-wide common consolidated corporate tax base (CCCTB). It also wants to extend the coverage and the scope of double tax conventions (DTC), ensure more consistent interpretation and application of DTC provisions, and beef up and accelerate dispute resolution within the EU. It proposes to strengthen the I&R directive by:

  • Extending the list of companies covered;

  • Reducing the shareholding requirements to be met for companies to qualify as associated (from 25% to 10%);

  • Requiring the recipient of a tax exemption to be subject to CIT in the member state of his establishment on the income derived from the interest or royalty payment; and

  • Avoiding that payments made by a permanent establishment (PE) and deriving from its activities are denied a tax exemption on the grounds that they do not constitute a tax deductible expense.

Probably of greater importance to multinational businesses, however, is that the EC has also announced that it will launch a public consultation on situations of double non-taxation in the EU. The EC wants to analyse the full scale of this issue, which according to the Commission causes considerable losses to public revenues in Europe, and then, based on this preliminary analysis, propose appropriate and effective measures to the EU’s Council (the 27 member state governments) for preventing double non-taxation in 2012.

The EU’s code of conduct group on business taxation (which is an EU Council working group for discussions between national government representatives and the EC in a peer pressure, non-legally binding setting) has been discussing the issue of profit participating loans and hybrid entities for a number of years now. On October 20 2011, the code of conduct group reached broad consensus that this issue reflects inefficiency in Europe’s internal market, and invited the EC to come forward with a legislative proposal in 2012. The group will, however, still need to agree on whether they want the EC to table a hard law or soft law EU proposal on double non-taxation. The EC’s announcement of the public consultation must therefore be seen as a first step. The Commission’s Working Party 4 will discuss this issue in January 2012 and the public consultation is expected to be launched in the first quarter of 2012.

The above developments are closely connected to the international debate on aggressive tax planning. Algirdas Šemeta, the EU’s commissioner for taxation, and many MEPs, has said that aggressive tax planning in the EU is perhaps not illegal but definitely undesirable in the current climate.

The public consultation on double non-taxation was actually first suggested to the EC in March 2011 by Sharon Bowles, MEP, chairwoman of the EU Parliament’s powerful Economic and Monetary Affairs Committee (ECON). Bowles kept open the possibility of anonymous submissions to “allow active members of industry to contribute”. Pressure is also on the code of conduct group to agree to follow through on tackling double taxation. This development shows again the clout the European Parliament, and leading individual MEPs, has on direct tax policymaking in the EU, since the entry into force of the EU’s Lisbon Treaty in December 2009.

Bob van der Made (bob.van.der.made@nl.pwc.com), Brussels and Amsterdam

PwC

Tel: +31 88 792 3696

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