In February 2017 an amendment has been made to the EU Anti-Tax Avoidance Directive (through ATAD II) in order to broaden the scope of the anti-avoidance measures. In June 2016 the EU council had already reached agreement on ATAD I in order to come to a coordinated and coherent implementation of the OECD’s recommendations regarding base erosion profit shifting (BEPS). As from January 2019, all EU Member States should have implemented most of the measures in ATAD I & II which will have a significant impact on the effective tax rate of corporate taxpayers in the EU market.
The EU Anti-Tax Avoidance Package
The ATAD is part of the European Commission’s goal for a fairer, simpler and more effective corporation tax in the EU. The ATAD is part of this EU Anti-Tax Avoidance Package and introduces legally-binding anti-abuse measures against aggressive tax planning in the EU.
These measures are based on the measures developed in the OECD’s Base Erosion and Profit Shifting Action Plan to which the EU Member States (forming the majority of the OECD Member States) have committed themselves. In general the ATAD aims to create a minimum level of protection against corporate tax avoidance throughout the EU and is expected to change the EU tax landscape significantly.
ATAD I and ATAD II
The majority of the measures in ATAD I and II need to be implemented as per 1 January 2019, with a few exceptions that will need to be implemented later. The anti-tax avoidance measures in ATAD I and ATAD II are the following:
- Controlled Foreign Company rules (CFC)
Rules with respect to the computation and the amount of the income to be included with respect to passive/low taxed subsidiaries.
- Exit taxation (implemented can be postponed until January 2020)
These rules will prevent companies from avoiding taxation when transferring assets, businesses or tax residence to another state.
- Interest deduction limitation (implementation can be postponed until January 2024)
These rules limit the deduction of net borrowing costs to the higher of (i) 30% of the earnings before interest, taxes, depreciation and amortisation (EBITDA) and (ii) EUR 3 million.
- General anti-abuse rule
This EU wide anti-abuse rule counteracts tax avoiding and aggressive tax planning when other tax avoidance rules do not apply.
- Hybrid mismatches
These rules address situations in which an entity is qualified different by states resulting in double deduction of payments or a deduction/no inclusion. ATAD II extends the scope of the mismatch rules to third countries.
What this means for you
These measures can result in a significant effect on your effective tax rate. To assess what this means for you and to be able to anticipate timely, Baker Tilly is happy to assist you. Do you want to know more about the impact of these new rules on your company? Please contact your Baker Tilly advisor.