EU Anti-avoidance Tax Directive (2016/1164(EU)) - Critical Analysis

This study involves a comprehensive essay on Anti-avoidance Tax Directive (2016/1164(EU) with aim to conduct critical analysis of multiple key aspects of this directive.

International
Taxation

Contents
Contents...........................................................................................................................................2
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
Present foreign tax policy goals highlight the requirement for tax collections in the fields of
income and interest. It is therefore imperative that confidence in taxation structures is restored
and that governments use the fiscal authority efficiently (Cédelle, 2016). This study involves a
comprehensive essay on Anti-avoidance Tax Directive (2016/1164(EU) with aim to conduct
critical analysis of multiple key aspects of this directive.
MAIN BODY
“The EU Anti-avoidance Tax Directive (2016/1164(EU)”
COUNCIL DIRECTIVE (EU) 2016/1164 of 12 Jul, 2016 lays down regulations against the tax-
avoidance practices which specifically affect internal market functionality. On 28 Jan, 2016, as
component of Anti-Tax Avoidance Program, Commission proposed its plan for Anti-Tax
Avoidance Directive. Whereby, Council approved Directive (EU) 2016/1164 on 20th Jun,
2016. Commission submitted its proposals on 25 Oct, 2016 to supplement the current law
concerning hybrid mismatches in attempt to allow for a robust system of anti-abuse initiatives
(Baldvinsson, 2017). The hybrid mismatches law attempts at stopping companies from
leveraging regional mismatches in order to escape taxes. The Commission has also released their
Staff Working Document alongside that proposal. The Anti-Tax-avoidance Directive includes
five legally enforceable anti-abuse measures that should be enforced by all Member countries
toward specific ways of aggressive fiscal planning. With effect from 1 Jan. 2019, Member States
will implement such measures. It provides a minimal level of coverage regarding corporate tax
evasion across the EU, whilst also maintaining an equitable and more secure business climate.
In Anti-Tax Avoidance Directive certain anti-avoidance steps apart from hybrid mismatches
rules are: (1) Controlled foreign company (CFC) rule, (2) Exit taxation, (3) Switchover rule, (4)
General anti-abuse rule and (5) Interest limitation (Van Os, 2016).
Here as per controller foreign company rule, A taxpayer's Member State should classify an
entity, or permanent establishment whose profits or surplus are not taxable or exempted from
taxation in that Member country, like a controlled foreign corporation where prescribed criteria
are fulfilled. Prescribed condition involve; In case of entity, either directly or indirectly, taxpayer
retains greater than 50-percent of entire voting rights or explicitly or implicitly controls greater
than 50-percent of entire capital or is allowed to claim greater than 50% of such an entity's

gains/profits; and Actual corporate taxes paid by entity or permanent organization on its income
is less than difference between corporate tax that entity or permanent organization would've been
paying under relevant corporation tax law in taxpayer's Member country and actual
corporate taxes paid by entity or permanent organization on its income (Weber, 2017).
A switch-over rule is rule incorporated into tax-treaties to allow a resident jurisdiction to turn
from exemption to a form of credit where the income attributed to permanent entity or resulting
from immovable assets are subjected to effective tax rate under the minimal rate (Traversa and
Sabbadini, 2016).
Exit taxation rule is a charge on individuals who ceases to be taxable citizens of a specific
region. The provision generally applies towards unrealized capital-gains by means of the sale of
an estate or a transition of tax payer's domicile or tax residence. The purpose of this rules is to
ensure that corporations escape tax through the sale of assets. As per this rule a taxpayer should
in each of the prescribed cases be liable to tax at sum equal to market value of assets transferred,
at time of departure of such assets, minus its value for taxation purposes, prescribed cases
incudes a taxpayer exchanges assets, to such an extent that the Member State of head office
hasn't had a legal ability to charge transferred assets as just a result of transfer of their assets to a
permanent entity in a Member State or in foreign country; Where taxpayer transfers a asset
from permanent organization in Member State to its headquarters or to any third country,
whereby as permanent establishment Member State no longer has right to tax such assets
transferred owing to transfer; A taxpayer shall move his tax residency to another country or some
other Member nation other than assets that stay effectively linked to permanent organization
in first Member nation; In so far as Member State of permanent organization no more has right to
tax the properties transferred owing to move, a taxpayer moved activity carried out by permanent
organization from Member nation to some other Member nation to another foreign country
(Chen, 2018).
A general anti-abuse rule (GAAR) is usually a generic concept in the fiscal legislation of State,
directed at countering arrangements for tax evasion and targeted primarily at corrupt and fake
arrangements. In tax avoidance schemes, the General Anti-Abuse Rules (GAARs)
handle unethical tax activities not yet governed by explicitly tailored legislation. Consequently,
GAARs have a role to fill holes that do not affect the enforcement of unique anti-abuse laws.
GAARs should apply within the Union for agreements which are not true; otherwise taxpayers

would be able to select for their trade companies the most fiscal effective framework. In attempt
to assure that their reach and implementation outcomes in national or cross-border circumstances
will not vary, it is also necessary for GAAR to be implemented in a consistent way within EU
and against third nations. The implementation of fines where GAAR is valid will not be stopped
from Member States. Member countries can be able to weigh all the relevant economic factors,
particularly financial practices, when determining whether an agreement can be considered as
non-genuine (Sooms, 2019).
Units of corporations are gradually interested in BEPS by disproportionate interest rates
in order to decrease their international tax responsibility. The interest limitation rules
are important to discourage these activities by restricting the deductions of the additional
borrowing expenses of taxpayer. A tax deductibility percentage that corresponds to the net
earnings before interests, taxation, depreciations and amortisation (EBITDA) should then be
defined. The percentage can be lowered, or the sum of unrelieved-borrowing costs may be
decreased by Member countries, which may be carried forward or returned to guarantee a higher
degree of security. Provided that the goal is to create minimum requirements, Member States will
have the ability to implement an alternate policy that is similar to EBITDA ratio relating to
taxpayers' EBIT. Member countries can also use different laws toward intra-group debt finance,
in specific thin capitalization laws in response to interest limitation regulation provided for in
this Guideline (Snell and Jaakkola, 2016).
Hybrid mismatches is a result of variations in legal characterization and relationship
between legal structures of two countries for transfers (financial instruments) including entities.
The result of mismatches is typically double deduction that is in both countries or a loss of taxes
in one jurisdiction without including it in other's tax base. It is important to create a provision
that one of two qualified entities will refuse deduction of payment contributing with such an
result in order to neutralize the consequences of hybrid malfunctions. In this respect it is worth
stressing that steps to resolve hybrid mismatches in Directive are meant to fix mismatch
problems due to discrepancies in financial instruments or company's legal characteristics and
don't impact the fundamental aspects of any Member Country's tax structure. Although there are
negotiated provisions on taxation of hybrid organizations including permanent hybrid
organizations in EU, in the form of the Company Tax Code of Conduct Community, but also on
tax treatments of hybrid bodies in connections with foreign nations, the implementation of

definitive rules remains a matter for Member nations to decide. Even more work is important in
the field of hybrid discord among Member nations and third nations as well as certain hybrid
discords like permanent establishments (Douma, 2017).
CONCLUSION
From the above report it has been articulated that main aim of this discussed directive,
which cannot adequately be accomplished by individual member countries, is to increase the
protection of the entire domestic market towards cross-border taxation avoidance activities.
Member States can only reproduce the current heterogeneity of the domestic market with direct
fiscal regulations by introducing diverse and separate corporate tax schemes.

REFERENCES
Books and Journals:
Cédelle, A., 2016. The EU anti-tax avoidance directive: A UK perspective.
Baldvinsson, G., 2017. On the boundary between artificiality and reality: The General Anti-Tax
Avoidance Rule in the Anti-Tax Avoidance Directive in light of the European Court´ s
Artificiality Test.
Van Os, P., 2016. Interest limitation under the adopted anti-tax avoidance directive and
proportionality. EC Tax Rev., 25, p.184.
Weber, D. ed., 2017. EU Law and the Building of Global Supranational Tax Law.
Traversa, E. and Sabbadini, P.M., 2016. Anti-avoidance Measures and State Aid in a Post-BEPS
Context: An Attempt at Reconciliation. In State aid Law and Business Taxation (pp. 85-
110). Springer, Berlin, Heidelberg.
Chen, S.C., 2018. Predicting the ‘Unpredictable’General Anti-Avoidance Rule (GAAR) in EU
Tax Law. InterEU law east: journal for the international and european law, economics
and market integrations, 5(1), pp.91-120.
Soom, A., 2019. Double Taxation Resulting from the ATAD: Is There A Relief?.
Snell, J. and Jaakkola, J., 2016. Economic mobility and fiscal federalism: taxation and European
responses in a changing constitutional context. European Law Journal, 22(6), pp.772-
790.
Douma, S., 2017. BEPS and European Union Law. Cahiers de droit fiscal international, 102,
pp.65-95.