On 28 January 2016, the European Commission issued a ‘Fact Sheet’ by way of press release, covering the EU’s response to the OECD ‘Base Erosion and Profit Shifting’ (BEPS) recommendation under it’s 15 ‘Action Points’.

This Fact Sheet included the following table [though, I’ve added the equivalent Australian measures already in place which included the following information [but I’ve added – in square brackets – the equivalent Australian measures already in place].

Action 1:                  Digital Economy

OEDC Response:       The digital economy is the whole economy and ring fenced solutions are not appropriate. OECD BEPS actions in general should address risks posed by digital economy.

EU Response:                        The EU agrees that no special action needed but will monitor the situation to see if general anti-avoidance measures are enough to address digital risks.

[Australian law:         Same – no digital specific measures intended yet.]

Action 2:                  Hybrid Arrangements

OEDC Response:       Specific recommendations to link the tax treatment of an instrument or entity in one country with the tax treatment in another, to prevent mismatches.

EU Response:                        The proposed Anti Tax Avoidance (ATA) Directive includes a provision to address hybrid mismatches.

The Directive proposes that in the event of such a mismatch, the legal characterisation given to a hybrid instrument or entity by the Member State where a payment originates shall be followed by the Member State of destination.

[Australian law:         We don’t have the luxury of being able to require consistent tax treatment in the destination country (but neither does the EU when the destination is outside the EU). Further, we don’t have any specific anti-avoidance measures to tackle ‘mis-matched’ tax treatments in other jurisdictions – only our General Anti-Avoidance Rule in Part IVA, which in turn has no specific mention for cross-boarder avoidance caused by ‘hybrids’.]

Action 3:                  Controlled Foreign Companies (CFCs)

OEDC Response:       Best practice recommendations for implementing CFC rules.

EU Response:                        The ATA Directive includes CFC rules.

The CFC rule will allow the Member State where the parent company is located to tax any profits that the company parks in a no or low tax country. The CFC rule will be triggered if the effective tax rate in the third country is less than 40% of that of the Member State in question. The company will be given a tax credit for any taxes that it did pay abroad. This will ensure that profits are effectively taxed, at the tax rate of the Member State in which they were generated.

[Australian law:         Australia already has CFC measures that are tough and tougher on activity that is not in the small list of comparably taxed countries. There is nothing, however, to define a low tax jurisdiction like this ‘40% of the home tax rate rule. This might be a useful measure for Australian tax law.]

Action 4:                  Interest Limitation

OEDC Response:       Best practice recommendations on limiting a company’s or group’s net interest deductions.

EU Response:                        The ATA Directive includes provisions to limit interest deductions, within the EU and externally.

The Directive proposes to limit the amount of net interest that a company can deduct from its taxable income, based on a fixed ratio of its earnings[4]. This should make it less attractive for companies to artificially shift debt in order to minimise their taxes.

[Australian law:         Australia already has ‘thin capitalisation’ rules that limit deductibility of interest on debt to ‘debt to equity’ ration (now 60:40) but there is no rule based on turnover in our legislation, or intended at present (this might have some conceptual validity and practical advantages, given the interest is an expense deducted against the gross revenue). The current opposition (Labor) party has a proposal for limiting deductible debt levels to the worldwide average.]

Action 5:                  Harmful Tax Practices

OEDC Response:       Tax rulings: Mandatory spontaneous exchange of relevant information.

EU Response:                        Tax rulings: Mandatory automatic exchange of information on all cross-border rulings from 2017.

[Australian law:         We have fresh Country-by Country reporting legislation which will commence soon, which is mandatory, but I don’t think we have mandated exchange of tax information for all cross-border rulings.]

OEDC Response:       Patent Boxes: Agreement on “Nexus Approach” to link tax benefits from preferential regimes for IP to the underlying economic activity.

EU Response:                        Patent Boxes: Member States agreed to ensure that their Patent Boxes are in line with the nexus approach (Code of Conduct Group, 2014).

[Australian law:         Australia does not have any ‘patent box’ type concessions – so there is not the need to control their benefits to underlying economic activity (what ever that means).]

Action 6:                  Treaty Abuse

OEDC Response:       Anti-abuse provisions, including a minimum standard against treaty shopping, to be included in tax treaties.

EU Response:                        The Recommendation on Tax Treaties suggests that Member States introduce a general anti-abuse rule in their treaties in an EU-compliant way.

[Australian law:         Australian Treaties are being systematically populated with this type of protection, as they are renewed.]

Action 7:                  Permanent Establishment

OEDC Response:       Definition of Permanent Establishment (PE) is adapted in Model Tax Convention, to prevent companies from artificially avoiding having a taxable presence. OECD BEPS proposed that countries introduce a general anti-abuse rule in their tax treaties.

EU Response:                        Anti-Tax Avoidance Recommendation encourages Member States to use the amended OECD approach for Permanent Establishment. Recommendation advises Member States on how to introduce a general anti-abuse rule in their tax treaties in a way that is EU-law compliant and without hampering the freedom of establishment in the Single Market.

[Australian law:         For the time being, Australia has sought to deal with artificially avoiding ‘permanent establishments’ in Australia (and the protection this gives them, typically, under double tax agreements) by a new provision in our General Anti-Avoidance Rules (in Part IVA of the ITAA36) as these GAAR provisions are carved out from the restricting operation of our Double Tax Treaties. Australian could start introducing the tougher provisions in its treaty network, but there may be a quicker fix if signatory countries adopt the proposed proposed ‘multi-lateral instrument’ to amend tax treaties.]

Action 8:                  Transfer Pricing

OEDC Response:       Arm’s Length Principle and Comparability Analysis confirmed as pillars of Transfer Pricing. More robust framework for implementing this standard.

EU Response:                        Joint Transfer Pricing Forum (JTPF) working on EU approach to review and update transfer pricing. Work includes looking at more economic analysis in TP, better use of companies’ internal systems, and improving TP administration.

[Australian law:         Australia had ‘transfer pricing’ legislation, for a long time, that was based on ‘arm’s length’ principles, for individual income and expense items (Div 13). We have, recently however, replaced them with rules capable of acting on profit levels (not just ‘arm’s length’ principles on an item by item basis) and can use OECD commentaries and guidelines. We appear to be ‘ahead of the game’ here.]

Action 9:                  Intangibles

OEDC Response:       –

EU Response:                        –

[Australian law:         –

Action 10:                Risk and Capital High Risk Transactions

OEDC Response:       –

EU Response:                        –

[Australian law:         –

Action 11:                Data

OEDC Response:       The OECD aims to publish statistics on corporate taxation and its impact.

EU Response:                        EU study underway on the impact of some types of aggressive tax planning on Member States’ effective tax rates.

[Australian law:         I don’t think we have any equivalent of this.]

Action 12:                Disclosure of Aggressive Tax Planning

OEDC Response:       Recommendation to introduce rules requiring mandatory disclosure of aggressive or abusive transactions, structures or arrangements.

EU Response:                        The Commission will keep the issue under review, as part of its tax transparency agenda.

[Australian law:         Australia has implemented a compulsory publication of three key tax related figures for multi-national companies and Australian companies with more than a certain turnover. There is not any proposal at present for mandatory ‘naming and shaming’ of those involved in ‘abusive’ or ‘aggressive’ transactions, structures or arrangements (probably because it is difficult to define what ‘abusive’ and ‘aggressive’ means).]

Action 13:                Country-by-Country Reporting

OEDC Response:       Country-by-Country reporting (CbCR) between tax administrations on key financial data from multinationals. Information for tax authorities only – not public CbCR.

EU Response:                        ATA Package proposes legally binding requirement for Member States to implement CbCR between tax authorities. Work ongoing on feasibility of public CbCR in the EU.

[Australian law:         Australia already has these laws and will begin sharing information in 2017.]

Action 14:                Dispute Resolution

OEDC Response:       G20/OECD countries agreed to measures to reduce uncertainty and unintended double taxation for businesses, along with a timely and effective resolution of disputes in this area. A number of countries have committed to a mandatory binding arbitration process.

EU Response:                        In 2016, the Commission will propose measures to improve dispute resolution within the EU.

[Australian law:         I think Australia’s obligation to bi-lateral dispute resolution is patchwork, only through the double tax treaties that are sufficiently modern. This might become universal amongst OECD signatories, if the proposed ‘multi-lateral instrument’ is adopted and used to cover this.]

Action 15:                Multilateral Instrument to modify tax treaties

OEDC Response:       Interested countries have agreed to use a multilateral instrument to amend their tax treaties, in order to integrate BEPS related measures where necessary.

EU Response:                        ATA Recommendation sets out the Commission’s views on Treaty related issues, which MSs should consider in negotiations on the Multilateral Instrument.

[Australian law:         I think Australia is interested in an expedited way to change a wide range of its double tax treaties, to incorporate some of these changes, but there is obviously a ‘sovereignty issue’ in remaining in control of what gets included.]

There were some other measures included in the EU fact sheet. The most interesting is the following.

SWITCHOVER RULE: To prevent double non-taxation of certain income

Dividends, capital gains and profits from permanent establishment, which enter the EU from third – or non-EU – countries, are often exempt from tax to prevent double taxation. Some companies exploit this exemption to enjoy double non-taxation on this income – in other words, they avoid being taxed at all.

The Directive proposes a switchover rule, whereby companies would have to tell the EU tax authority that it had received a dividend and whether or not it had paid tax on it elsewhere. Tax authorities would then be able to deny the company tax exemptions if the income had been taxed at a very low or no rate in the third country. If the Member State determined that the dividend had indeed been properly taxed in the third country, it could give the company a credit for the tax it had paid.

[European Commission website] [LTN 18, 29/12/16]