The Directive, which is also known as the Anti-Tax Avoidance Directive 2 (ATAD 2), will amend the existing ATAD 1. The rules are designed to stop companies exploiting the differences between the tax systems of EU member states and non-EU countries to avoid paying tax, or to gain a double tax deduction, known as hybrid mismatches.
Building on the OECD’s recommendations, Edward Scicluna, finance minister of Malta and president of the Council, said the Directive “adds to the rules we adopted last year to tackle the most common forms of tax avoidance”.
Pierre Moscovici, EU commissioner for economic and financial affairs, taxation and customs, added that the adoption of the rules is further proof of what the EU can achieve “when we work together against common challenges”. “It is another victory for fair taxation and another blow against those companies that try to escape paying their fair share," he said.
However, these rules could be bad news for businesses trying to comply with the new measures. Heather Self, partner at Pinsent Masons, told TP Week that although it is positive to see the EU taking a coordinated approach to anti-avoidance rules, this is a “very complex area and will give rise to uncertainty for business during a long implementation period”.
“The EU intends its measures to be ‘consistent with and no less effective’ than the BEPS Action 2 recommendations. However, it is likely that there will be differences in the detailed implementation, both between the EU and OECD recommendations, and between different member states of the EU,” Self said.
She added that there is also a potential disadvantage for member states that choose early adoption, as the UK has done with its own anti-hybrid rules, effective from April 1 2017. “The compliance burdens are particularly heavy where a payment within the scope of the rules is made by a UK entity to an entity in a country which has not yet implemented these measures,” Self said.
Sriram Govind, research and teaching associate at Vienna University of Economics and Business, said the Directive is comprehensive in addressing hybrid arrangements and is a positive development in fighting aggressive tax planning. However, Govind also saw issues with the directive – most importantly whether the Directives, as secondary EU law, are in line with primary law (the fundamental freedoms).
“There are other concerns as well, which include the possibility of double taxation not being considered, especially where there is a lack of sync in third country situations. But these problems are persistent throughout the ATAD 1 for the controlled foreign company rules etc. and will need to be resolved by the Court of Justice of the European Union at some point,” Govind said.
The Directive addresses hybrid transfers, imported mismatches and double deduction outcomes. It was endorsed by EU ministers in February and then by the European Parliament in April. Although ATAD 1 and ATAD 2 will enter into force on January 1 2020 after member states have transposed the law into domestic legislation, certain provisions on hybrid mismatches will apply from January 1 2022.
