From BEPS to ATAP – the current state of tax affairs

Door Indra Römgens

Initiatives from the G20 to deal with tax evasion and avoidance have continued to be finalised through the OECD’s Base Erosion and Profit Shifting (BEPS) project.

The European Commission (EC) launched an anti tax avoidance package (ATAP) in order to implement several BEPS agreements. In addition, the EC presented a proposal for country-by-country reporting that would require companies to break down certain financial data (such as tax payments) per country.

Besides such policy developments, the biggest tax-related news is the release of the Panama Papers. The International Consortium of Investigative Journalists (ICIJ) – who were behind other major tax leaks such as #LuxLeaks and #OffshoreLeaks – presented the results of their analysis of 2.6 terabytes of data that expose “a system that enables crime, corruption and wrongdoing, hidden by secretive offshore companies”.

The OECD’s project to deal with tax evasion called Base Erosion and Profit Shifting (BEPS)– initiated by the G20 – was, for a large part, finalised at the end of 2015. Since then, negotiations have continued regarding issues on which the OECD members had not yet reached agreement (see here(opens in new window) ). The G20 Ministers of Finance call in their April 2016 communiqué (para. 7 en 8(opens in new window) ) for a worldwide application of the BEPS standards and asked the Global Forum on Transparency and Exchange of Information for Tax Purposes to make initial proposals by October 2016 how to improve the availability of beneficial ownership information and its international exchange.

European Commission – Anti Tax Avoidance Package

On 28 January 2016, the EC released an Anti Tax Avoidance Package (ATAP)(opens in new window) , which consists of multiple elements. Most importantly, it comprises a proposal for an EU directive “laying down rules against tax avoidance practices that directly affect the functioning of the internal market”(opens in new window) , shortened as the Anti Tax Avoidance Directive (ATAD). The directive has been designed as a European response to the finalisation of the BEPS project, while also meeting demands from the European Parliament, citizens, CSOs and others “for a stronger and more coherent EU approach against corporate tax abuse”.

The draft directive comprises rules to limit interest deduction, since debt shifting is one of the most common strategies used by multinationals to shift profits from high-tax jurisdictions to low-tax jurisdictions, and thus avoid taxes. The EC proposes to cap interest deduction at 30% of a company’s income (measures in this case by earnings before tax, interest, depreciation and amortisation, EBITDA). This means that the amount of interest that a company is allowed to deduct from its taxable income cannot transcend 30% of its EBITDA. The OECD BEPS project recommends a cap of between 10 – 30%. The EC clearly chose the weakest option.

Another important component of the draft directive are the potential Controlled Foreign Company (CFC) rules. These rules would allow tax authorities of the home country (the country where the parent company is located) to tax the income of a foreign subsidiary in cases in which this income is taxed against a low effective tax rate, or not taxed at all. This could decrease the incentive for multinational companies to shift profits toward low-tax jurisdictions. However, the threshold that the EC is proposing is directly linked to the home country’s own tax rate. In cases in which the foreign subsidiary is effectively taxed at less than 40% of the home country’s tax rate, the home country’s tax authority can apply CFC rules. However, tax rates vary across the EU. For example, France’s corporate income tax rate is 33%, while Bulgaria taxes corporate income at 10%. The French tax authority could apply CFC rules in cases in which foreign income is taxed at 13% or less, while Bulgaria can only intervene when foreign income is taxed at 4% or less. Moreover, this proposal might even serve as an incentive for countries to lower their corporate income tax rates to attract foreign investors, which would only fuel an ongoing race to the bottom. For a critical analysis of other parts of the directive, see, for example, the response of Oxfam(opens in new window) and Eurodad(opens in new window) .

The draft ATAP also includes a Commission recommendation on the implementation of measures against tax treaty abuse(opens in new window) , a proposal for revising the automatic exchange of information(opens in new window) and a Communication on an External Strategy for Effective taxation. The latter is another attempt by the EC to identify tax havens – or “third countries that refuse to respect tax good governance standards”. Note that this list would thus not include countries in the European Union. The EC explains in its Communication that the list of such jurisdictions is a work in progress.

Lastly, a very interesting Study on Aggressive Tax Planning(opens in new window) was published along with the ATAP. It allows the reader to compare the tax policies of EU member states and the ways in which they facilitate aggressive tax planning (or tax avoidance) by multinational companies. Based on 33 aggressive tax planning indicators identified by the researchers, the Netherlands (17), Belgium (16) and Cyprus (15) are the countries that “meet” the most indicators. Luxembourg, Latvia and Hungary all “score” on 13 indicators. A study by UNCTAD about investment flows through offshore financial hubs worldwide(opens in new window) also identified the Netherlands as the country with the highest income booked by affiliates of foreign direct investors.

European Commission NOT presenting full country-by-country reporting

Although not officially part of the Anti Tax Avoidance Package, fiscal transparency is a major part of the EU’s (and the global) fight against tax avoidance and evasion. On 12 April 2016, the EC presented a proposal for country-by-country reporting(opens in new window) for all business sectors. In March, an earlier version was leaked to the media(opens in new window) . The biggest weakness of this proposal was that companies would only have to deliver such reporting for the EU countries in which they are active. This does not reflect genuine country-by-country reporting(opens in new window) , which requires companies to report financial data for all countries in which they have operations, whether inside or outside the EU. In other words, vital countries, such as tax havens and developing countries, would be left out of the picture.

The publication of the articles related to the Panama Papers (see below) changed the initial (leaked) EC proposal in such a way that the proposal now refers to a list of tax jurisdictions that should be included in the country-by-country reporting of multinational companies. The Communication on an External Strategy for Effective Taxation should serve as the base for such a list. Therefore, it is not yet clear for which countries multinational corporations will have to report certain financial data. A much simpler option would be full country-by-country reporting. The rules only apply to companies with annual revenues above € 750 million. For a CSO response, see here(opens in new window) .

Panama Papers

After other leaks from tax dodging countries, such as the Luxembourg Leaks and SwissLeaks, the International Consortium of Investigative Journalists (ICIJ) released their next major tax-related project on 3 April 2016, referred to as the Panama Papers. Hundreds of journalists all over the world collaboratively analysed the 2.6 terabytes of data that make up the leak. ICIJ notes: “The trove of documents is likely the biggest leak of inside information in history. It includes nearly 40 years of data from a little-known but powerful law firm based in Panama. That firm, Mossack Fonseca, has offices in more than 35 locations around the globe, and is one of the world’s top creators of shell companies, corporate structures that can be used to hide ownership of assets.” The documents show links between many people – such as criminals, (the friends and family of) politicians – and tax havens. The leak exposes an offshore system that consists of jurisdictions offering tax benefits and secrecy (tax havens), as well as corporate service providers such as Mossack Fonseca. It shows in detail how this offshore system helps rich and powerful individuals and companies avoid taxes and regulation, as well as seek anonymity to hide their identity and bank accounts. Going offshore might help these rich individuals or companies, but it also has many victims, as is powerfully explained in this video by ICIJ(opens in new window) .

The Panama Papers have had (and are still having) a major political impact. As was described above, the release of the papers changed an EC directive proposal. On 9 May 2016, ICIJ released sections of the data that were leaked to them by “John Doe”. These include information on more than 200,000 offshore entities that were part of the investigation. The source of the leak has issued a statement which can be read here(opens in new window) .

The Panama Papers have once again emphasised the importance of transparency regarding the ownership of shell companies. CSOs have been asking for the public registries of “beneficial owners” for a long time. Some countries(opens in new window) have announced plans for such public registries in the wake of the Panama Papers, while the EU is only making the reports accessible to persons with “legitimate interests”. The Anti-Corruption Summit on 12 May 2016 (London)(opens in new window) is another opportunity for countries to take action and create more transparency through public registries of beneficial owners (see also G20 above).

With the enormous and continuing impact of the Panama Papers and many political developments, it seems that tax avoidance and evasion will remain high on the political agenda for the foreseeable future.