European Union: European Commission Seeks To Extend Its Oversight Of National Tax Systems

The draft Anti-Tax Avoidance Directive ("ATAD") issued by the European Commission (the "Commission") on 28 January 2016 has been progressing rapidly through the EU legislative process. On 17 June 2016, the finance ministers of EU Member States are expected to vote on the adoption of the ATAD. It seems increasingly possible that the ATAD will be adopted in some form at that meeting.

The ATAD is further evidence of the greater role the Commission is seeking to play in the area of direct taxation (about which we recently wrote). According to the European Treaties, direct tax remains a matter of national competence for EU Member States. Pierre Moscovici, European Commissioner for Taxation, recently restated that "we respect tax sovereignty". However, the ATAD would be a surrender in part of national competence in direct tax matters. It is not clear whether Member States are fully prepared for the consequences of this surrender and the legal effect it will have on the operation of the national tax system of each Member State. Once any concession is made in this area, it is difficult to imagine a reallocation of competence back to Member States.

The ATAD includes six separate proposals, one of which is a general anti-abuse rule ("GAAR") designed to counter aggressive tax planning structures. For the purpose of this update, we focus only on the GAAR, however, many of the points outlined below would apply equally to other aspects of the ATAD.

Many EU Member States (including Ireland) already have domestic GAARs in their existing legislation. On that basis, the GAAR proposal might appear at first glance to be of limited significance. However, in practical terms, the introduction of an EU GAAR could fundamentally impact the operation of the tax systems of EU Member States.

What does the EU GAAR say?

The ATAD requires Member States to ignore "an arrangement or series of arrangements which having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the otherwise applicable tax provisions, are not genuine". An arrangement is treated as "non-genuine" to the extent that it is "not put in place for valid commercial reasons which reflect economic reality." Where the GAAR applies, the ATAD requires the arrangements to be ignored and for tax to be calculated "in accordance with national law."

European Directives do not apply in the same way as European Regulations and domestic legislation. Directives set out results that all EU Member States must achieve but each EU Member State determines how the Directive should be implemented domestically to meet the prescribed result. As a result, the language of European Directives tends to be vague. This is certainly true of the draft GAAR. Save for the brief explanation of "non-genuine arrangements", none of the terminology used ("arrangements", "tax advantage", "tax", "valid commercial reasons", "economic reality") is defined.

The terminology used in the draft GAAR appears to be derived from decisions of the Court of Justice of the European Union ("CJEU"), notably, the Halifax decision on VAT, Cadbury Schweppes and CFC GLO on the application of CFC rules, and Lankhorst-Hohorst which considered the application of German thin capitalisation rules. It is unclear whether Member States are expected to have regard to those decisions when implementing and applying the EU GAAR.

Applying the EU GAAR in practice

Given that each EU Member State has the freedom to implement the EU GAAR in the way it considers appropriate, different forms of the rule will be adopted by different Member States. Some Member States may seek to define some of the terminology used (whether those definitions are based on existing domestic law, the previous decisions of the CJEU or otherwise) and others may not. This will result in a varied range of EU GAARs with some EU tax authorities granted a wider discretion than others. The application of the EU GAAR is similarly likely to give rise to different approaches from one tax authority to the other.

It is inevitable that, following implementation by Member States, questions on the application of the EU GAAR will ultimately be referred to the CJEU.  This prospect raises a number of novel issues:

  • first, although the EU GAAR is an EU law construct, its application will require consideration of the purpose of domestic tax provisions by those seeking to apply it (including the CJEU as ultimate arbiter) – the EU GAAR can only apply where the purpose or object of domestic tax provisions is defeated. Depending on the CJEU to determine the object or purpose of a domestic tax provision quite obviously erodes the notion of EU Member States retaining sovereignty on direct tax matters.
  • second, although the decisions of the CJEU are binding only on the parties to each case, any decisions on the EU GAAR will have to be considered by every EU tax authority. This, of itself, raises a number of difficult questions. Can the decisions of the CJEU on the EU GAAR be relied on by every EU taxpayer and every EU tax authority even where implemented differently in different Member States? If the CJEU decides that the object of a German tax provision was defeated by a taxpayer's planning and invokes the EU GAAR, can the French tax authority rely on that decision when invoking the EU GAAR against a French taxpayer? Or, is it only relevant to taxpayers seeking to defeat the object of the German taxing provision that was considered in the case? Or can it apply in respect of a French tax provision drafted in similar terms?
  • finally, under an EU GAAR the direct tax system of every EU Member State is open to ultimate review by the CJEU and the Commission. Quite apart from the implications this has for Member States' tax sovereignty, it adds an additional layer of unnecessary complexity and uncertainty for all taxpayers operating in the EU (and for every national tax authority). The Commission may take infringement proceedings against Member States who fail to implement and apply the EU GAAR correctly. It also seems possible that if the Commission considers that the EU GAAR was applied (or, more likely, not applied) to taxpayers on a selective basis, it could bring retrospective State aid type actions against that Member State and seek recovery of the tax forgone. The ability of the Commission, not only to influence the design of the tax rules to be applied but also to oversee implementation and enforcement brings an entirely new dimension to the tax system of every Member State. Given recent involvement by the Commission in the tax affairs of multinationals, this oversight may be viewed as creating even more uncertainty for taxpayers.

Comment

Although many Member States already have domestic GAARs, the proposal to introduce an EU GAAR has much broader consequences for the tax systems of all EU Member States.  It opens the direct tax systems of all Member States to review by the CJEU and extends the Commission's reach into domestic tax systems.  In some cases, the EU GAAR will permit the CJEU to determine the object or purpose of domestic tax provisions.  Despite concerns about tax sovereignty, politically, it can be difficult for any Member State to be seen to oppose the introduction of an anti-abuse provision in the current environment (or indeed to stand in the way of the successful adoption of the ATAD which has gathered significant political momentum over the past few months).

The other proposals in the ATAD are the introduction of EU-wide restrictions on the deductibility of interest, the imposition of an exit tax on the transfer of a business from a Member State (whether to another Member State or otherwise), a so-called 'switch-over' clause which would prevent the application of participation exemptions where the underlying income is taxed below a particular rate, controlled foreign company rules and anti-hybrid provisions.  Many of the observations above on the EU GAAR (in particular the incremental ceding of tax sovereignty) would be equally relevant to those proposals.  The operation of the EU GAAR in practical terms and, more broadly, the impact of the ATAD on the legal framework of each Member State's national tax system (and tax sovereignty) should merit thorough consideration by every Member State before it is adopted.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions