The European Commission released the 2018 European Semester Winter Package, in which economic and social situations are reviewed on a yearly basis. “I want to highlight the fact that for the first time, the Commission is today stressing the issue of aggressive tax planning in seven EU countries: Belgium, Cyprus, Hungary, Ireland, Luxembourg, Malta and The Netherlands”, according to the European Commissioner Pierre Moscovici.
The Belgian Report finds Belgium tax system remains complex, with tax bases eroded by numerous exemptions, deductions and reduced rates. These may entail revenue losses, economic distortions and additional administrative burden.
The Cyprus Report indicates that Cyprus’ CIT rules are used by companies engaged in aggressive tax planning because of the absence of withholding taxes on dividend, interest and royalty payments by Cyprus-based companies. This, together with the corporate tax residency rules and notional interest deduction regimes, may lead to those payments escaping tax if they are also not subject to tax in the recipient jurisdiction.
The Hungary Report points out that Hungary's high tax burden is set to moderate, while the risks for being abused for tax avoidance still exists. The absence of withholding tax on outbound passive income may lead to those payments escaping tax altogether. In addition, the country fails to transpose the provisions of the Anti-Tax Avoidance Directives into national law by the end of 2018 and 2019. In that respect, Hungary modified its rules on controlled foreign companies in 2017 and recently revised its patent box regime.
The Ireland Report suggests that Ireland's corporate tax rules are used in aggressive tax planning structures based on its high level of dividend payments and, in particular, charges for using intellectual property. Exemptions from withholding taxes on outbound dividend payments may lead to those payments escaping tax altogether. Furthermore, the existence of some provisions in bilateral tax treaties between Ireland and some other countries may be used by companies to overrule the new tax residence rule put in place in Ireland in 2015.
The Luxembourg Report reads that the corporate taxation reform sought to boost competitiveness, for instance by lowering tax rates. In addition to lack of withholding tax on interest and royalty payments, there may be an exemption from withholding tax on dividends paid to a company resident in a country that has a bilateral tax treaty with Luxembourg and is fully subject to an income tax comparable to the Luxembourg corporate income tax.
The Malta Report states that Malta’s tax system increasingly relies on corporate income tax and has proposed a measure to address its relatively high corporate debt bias. But the lack of withholding taxes on outbound passive income may facilitate aggressive tax planning. While Malta’s new NID regime will help to reduce the debt equity bias, the current anti-avoidance provisions included in the law are not detailed or strong enough. The existence of some provisions in bilateral tax treaties between Malta and other EU Member States, coupled with the Malta’s tax system, where a company being a resident but not domiciled in Malta is taxed on source and remittance basis, may be used by companies to engage in tax avoidance practices.
The Netherlands' Report noticed the reduction in corporate tax to strengthen the fiscal investment climate for companies, but indicators suggest tax avoidance risks in the system, with A large share of these FDI stocks is held by so-called ‘special purpose entities’. The absence of broad withholding taxes on dividend payments by co- operatives, the possibility for hybrid mismatches by using the limited partnership (CV) and the absence of withholding taxes on royalties and interest payments, combined with the lack of some anti-abuse rules, may facilitate aggressive tax planning.
Most findings in the reports are set based on indicators of FDI, ODI, inbound and outbound passive income payment, despite most member states above have taken some measures on tackling ATP. The Commission has also released a Taxation Paper on Aggressive Tax Planning Indicators, providing economic evidence of the relevance of aggressive tax planning (ATP) structures for all EU Member States. The discussed ATP structures can be grouped into three main channels:
In addition, specific indicators for each of the ATP channels are defined in the Taxation Paper as well.
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