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

This essay discusses the EU Anti-avoidance Tax Directive (2016/1164(EU) and its impact on tax avoidance practices in the EU. It explores the measures and rules laid down to prevent companies from avoiding tax on relocations. The concept of exit taxation and its effects on the internal market are also discussed. The essay further delves into the calculation of hidden reserves and the possibility of deferment. The implementation and enforcement of the directive are also examined.

TAXATION

TABLE OF CONTENTS
TABLE OF CONTENTS................................................................................................................2
ESSAY.............................................................................................................................................1
EU Anti- avoidance Tax Directive (2016/1164(EU)...................................................................1
Conclusions..................................................................................................................................3
REFERENCES................................................................................................................................4

ESSAY
EU Anti- avoidance Tax Directive (2016/1164(EU)
EU Anti tax avoidance directives were given to prevent the companies to avoid tax on
relocations. The rules were laid down for anti tax avoidance practices directly affecting
functioning of internal market. Anti Tax avoidance Directives contain five legally binding anti
abuse measures that all member states are required to apply in the aggressive tax planning. It is
aimed to create minimum protection against the corporate tax avoidance throughout EU.
According five legally binding measures were given by the EU which was required to be applied
by the EU members.
Although it is considered that tax competition is natural and healthy economic process
driving the economies (ATAD, 2019). European Council has seen the tax harmonisation as the
essential factor for functioning of single market.
Out of the five measures one was about the exit taxation for preventing the companies to
avoid tax during the relocation of assets. Rules over exit taxation were intended of preventing the
tax payers to avoid tax by transferring the assets, permanent establishment or moving the tax
residence out of the taxing jurisdiction of the member state. It is done by applying taxes in excess
of market value of transferred assets over tax value (Liu, 2018). In simple words it prevents the
companies to shift their tax residence to lower tax jurisdiction by the entities. Exit taxation
affects working of internal market and is therefore subject of decision by Court of Justice of
European Union. For instance A Oy, CJEU puts Finnish measure which is comparable to the exit
taxation to proportionality test, findings that measure was legitimate in itself, provisions for
making the tax immediately payable and not on the realization is disproportionate, as it gave the
preference to an equivalent intra national transaction.
Considering this Article 5of ATAD states tax payer would be subject to the payment of
on unrealized appreciation of the asses that are calculated as subtractions between market value
of transferred assets & value for the tax purposes when they are moved either though the transfer
of residency or business assets, whereby member state will be losing the ability of taxing those
asset indefinitely. In such way these assets will be wholly in the control of original owner
(Überbacher and Scherer, 2019.
Premature payment of the tax is prohibited and taxpayers have right of paying exit tax
either on the completion of transactions or deferring payments in instalments in a period of 5
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years. Such deferment is possible only when business, asset or residency is transferred by
transferor either to EU’s member state or party to Agreement on European Economic Area
(EEA). Deferments is overturned immediately if transferred business assets or residency are
disposed, transferred to the third country or if taxpayer files bankruptcy or us unable to act on
instalment of deferred payments.
On implementation exit taxation would encompass same type of transactions and same
possibility of the deferred payments as seen by ATAD at same time for defining the assets,
defining calculation formula for the unrealised appreciations of asset. Also to determine the
procedural steps for achieving the deferred payments (Ja Langenmayr and Liu, 2020). The only
transaction of transfers are considered where the UK will be losing its ability of taxing
transferred assets and where actual or economic ownership of the assets transferred stays same.
Some of examples where transactions of transfer would be subject to the exit taxation & where
transferor is obliged of revealing the hidden reserves. Taxpayer is transferring assets from the
UK to the self owned permanent establishment over other country. Taxpayer has transferred the
assets from UK permanent establishments to the own permanent establishments or the other
business place in other country.
Also where the taxpayer has transferred the residency to other country and this brings taxable
asset along with it and where the business is transferred to other country.
Calculating hidden reserves and Taxation
The CITA stipulates hidden reserves will be calculates as the subtraction between actual
market values of transferred asset and value for the tax purposes. Difference between two figures
is the amount which is not identified from the accounting books of entity as it represent only
market values not yet realised. Value of hidden reserves is added to the annual tax base of the
company. This means it is not separately taxed per se. It is required to be understood that no
distinction is there between for the tax purposes on whether difference tax value or market value
of the tax assets is zero or negative (Emmerson, 2016). In both the cases CITA presumes
irrevocable it to be zero. It is meant that negative value of the hidden reserves will not be used by
companies for reducing the annual tax burden of the company.
Tax payer is required to consider that all the assets of company are relevant for exit taxation.
Under proposed CITA noncurrent or long term assets are relevant on calculation of tax burden
which means that the current assets are irrelevant for this regard. Further it has been stated that
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assets which be brought back to UK within 12 months will be exempt if the assets are related
with financing securities or assets are given by company as an assurance payment or the transfer
has taken place for meeting the prudential capital requirement for liquidity management.
Deferment
As stated above it is possible only when the assets of company are transferred to member
state of EU or party to EEA. Deferment period could not be more than five years where number
of instalment, payment amount of instalments and longevity of payments plan are decided
considering the request of taxpayer (Brassey and Burns, 2019). First instalment should always be
due within 30 days after the tax return has been submitted by the taxpayers and next is due after
a year when payment is made has expired. Interest over deferred payments is added at 2 percent
from deferred payments up to day the individual instalments are paid.
Rules laid by EU are followed by all the companies of EU and the tax authorities are keeping
strict view over the companies who are relocating their assets.
Conclusions
Finnish transposition of ATAD exit tax measures did not exceeded the minimum protection
levels. However these rules were implemented for the guarantees and interests under domestic
tax laws. Transposing ATAD exit rules, application and legislative issues related with exit tax
are derived from Merger Directives were resolved by amendment of existing rules. Previous to
the implementation of exit taxation rules companies were making high profits by relocation of
their assets from the countries with high taxation to the states with lower taxation. This did not
allowed the countries to charge tax and to suffer losses on transfers of assets. This gave birth to
number of hybrid mismatch arrangements using which companies were transferring good from
one country to other assets and profits were send to the country. The practice made the EU to
establish rules for elimination of tax avoidance by the companies. EU is still required to make
some changes in its existing policies where the companies are not able to avoid taxes.
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REFERENCES
Books and Journals
Liu, M.L., 2018. Where does multinational investment go with territorial taxation? Evidence
from the UK. International Monetary Fund.
Überbacher, F. and Scherer, A.G., 2019. A Performative Perspective on Institutional Disruption:
Investigating Regulatory De-Capturing in the UK Corporate Taxation Field. Available at
SSRN 3434681.
Ja Langenmayr, D. and Liu, L., 2020. Where Does Multinational Profit Go with Territorial
Taxation? Evidence from the UK.mes, S.R., 2016. Accounting and Taxation: UK. Wolters
Kluwer.
Emmerson, C., 2016. Taxation of Private Pensions in the UK. CESifo DICE Report, 14(1),
pp.10-13.
Brassey, J. and Burns, R., 2019. The constantly changing taxation of UK real estate—where are
we now?. Trusts & Trustees.25(6).pp.639-642.
Online
ATAD. 2019. [Online]. Available through :
<https://ec.europa.eu/taxation_customs/business/company-tax/anti-tax-avoidance-package/anti-
tax-avoidance-directive_en>.
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