Tax planning is a practice used by many corporations in order to minimise their tax paid while being able to maximise their profits.
One common way to undertake such conduct is by increasing the negative components of the tax base computation, for example, the interest expense deductibility. This practice is deemed harmful by many lawmakers, as it will imperil its tax legislation. Hence, to tackle this behaviour, the European Union has adopted an Anti-Tax Avoidance Directive in 2016, where the rules on interest expense as a tax planning tool are addressed in Article 4.
The Directive is to be transposed into the Member States’ tax laws. Nevertheless, there are some concerns on the comparability between the national rules implementing this Directive and the existing fundamental freedoms that are the cornerstone of the European Union. This thesis examines the possible infringements of the Directive’s transposition to the fundamental freedoms enshrined in the Treaty of the Functioning of the European Union. Some recommendations with regard to ameliorating the identified incompatibilities are also given by using comparative legal research.
Table of Contents
1. Introduction
2. Relevance of the EU fundamental freedoms to interest barrier measures
2.1. Free movement of capital
2.1.1. Concepts of capital
2.1.2. Restrictions and justifications on freedom of capital
2.2. Freedom to provide services and freedom of establishment
2.2.1. Corporation establishment and freedom of establishment limitation
2.2.2. Concepts of services and restriction of freedom to provide services
2.3. State aid in the context of direct taxation and interest limitation
2.3.1. Definition
2.3.2. Determination of unlawful state aid
3. Interest barrier measure as means to combat aggressive tax planning
3.1. A brief introduction to tax planning
3.2. Interest payments and equivalent instruments as a tax planning tool
3.3. The BEPS Action Plan 4 – Countermeasures against tax planning by using interest payments
3.3.1. Minimum threshold rule
3.3.2. Fixed ratio rule
3.3.3. Group ratio rule
3.3.4. Time-based rule
3.3.5. Targeted rules to reinforce the general limitation barrier
3.3.6. Special rules for banking and insurance sectors
4. Interest limitation measure of Anti-Tax Avoidance Directive
4.1. Definitions and scope of application
4.2. Details of the statute
4.2.1. Fixed ratio rule
4.2.2. De minimis threshold, financial undertakings, and other exemptions
4.2.3. Group rule
4.2.4. Time-based rule
4.3. Current implementation at the national level
4.4. Comparison between OECD BEPS Action Plan 4 and Article 4 ATAD
5. Incompatibilities of the ATAD Article 4 implementation with the EU freedoms and solutions
5.1. Methodologies and their delimitations
5.2. Ambiguity of legal definitions due to the de minimis requirements
5.2.1. Minimum level of protection at the level of Member State
5.2.2. Possible solutions
5.3. Undefined accounting standard problems
5.3.1. Measuring EBITDA and tax bases
5.3.2. Determination of group membership
5.3.3. Financial institution is a part of a group
5.3.4. Time-based rule in the national law
5.3.5. Possible solutions
5.4. Economic inappropriateness of Art. 4’s implementation
5.4.1. Justification vis-à-vis principle of payability
5.4.2. Arbitrariness of quantitative restrictions
5.4.3. Possible solutions
5.5. Synopsis
6. Conclusion
Research Objectives and Themes
This thesis examines the compatibility of interest limitation measures introduced by the European Union’s Anti-Tax Avoidance Directive (ATAD) with the fundamental freedoms enshrined in the Treaty on the Functioning of the European Union (TFEU), seeking to identify potential legal conflicts and propose solutions for the implementation of these rules.
- The intersection of EU fundamental freedoms (capital, services, establishment) and tax law.
- Mechanisms of interest limitation as a defense against aggressive tax planning.
- Critical analysis of the implementation of ATAD Article 4 at the national level.
- Evaluation of accounting ambiguities (EBITDA, group definition) and their impact on tax legislation.
- Assessment of the economic suitability and proportionality of interest limitation rules.
Excerpt from the Book
3.1. A brief introduction to tax planning
The rationale of tax planning can be briefly explained by an adjudication from the United Kingdom. On the basis of the homo economicus, Lord Tomlin has stated in Inland Revenue Commissioners v. Duke of Westminster that:
Every man is entitled, if he can, to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.
Tax planning can be thereby defined as a practice to minimise the tax under the legal confinement to the extent that the economic outcome of one’s activities remains unchanged, or at least the adverse effects on the economic results are overcompensated by the restrictions in the tax burden. In other words, tax planning is, in fact, legal.
Tax planning is, however, not to be confused with tax mitigation, tax avoidance, or tax evasion. While these nomenclatures seem to be resembling each other, there is a spectrum of differences in terms of legality as well as the scope of the law with regards thereto. Tax mitigation, so-called “the good,” is a scenario where a reduction of tax is expressly allowed or even encouraged by the law. For example, if an income is already taxed at the corporate level, it will be then either credited or exempted as the level or recipient of such, i.e., dividends. Another example would be the usage of a double tax agreement to avoid taxation levied by the concerned jurisdictions. These measures are designed to alleviate burdens on the taxpayer deemed unnecessary by the states. On the other hand, tax evasion, “the ugly,” is an illegal act to blatantly avoid or lower taxes via means forbidden by law.
Summary of Chapters
1. Introduction: This chapter contextualizes the challenges of modern tax planning in a globalized economy and outlines the thesis's objective to analyze the compatibility of ATAD interest limitations with EU fundamental freedoms.
2. Relevance of the EU fundamental freedoms to interest barrier measures: This section explores how free movement of capital, freedom to provide services, and freedom of establishment interact with national tax measures and the concept of state aid.
3. Interest barrier measure as means to combat aggressive tax planning: This chapter introduces tax planning concepts and examines the OECD BEPS Action Plan 4 as a technical blueprint for limiting excessive interest deductions.
4. Interest limitation measure of Anti-Tax Avoidance Directive: The chapter details the implementation of ATAD Article 4, comparing its provisions with OECD recommendations and analyzing its current transposition across Member States.
5. Incompatibilities of the ATAD Article 4 implementation with the EU freedoms and solutions: This core analytical chapter discusses legal and economic tensions arising from ATAD implementation, focusing on accounting ambiguities, proportionality, and suitability, while suggesting future improvements.
6. Conclusion: The final chapter synthesizes the main findings, reiterating the potential for conflict between ATAD rules and fundamental freedoms, and underscores the need for more cohesive EU-wide solutions.
Keywords
EU, ATAD, fundamental freedoms, BEPS, interest, tax planning, interest limitation, EBITDA, corporate taxation, state aid, internal market, tax avoidance, cross-border, fiscal policy, proportionality
Frequently Asked Questions
What is the core focus of this research?
The research focuses on the intersection of European Union tax law, specifically the Anti-Tax Avoidance Directive (ATAD), and the fundamental freedoms guaranteed by the TFEU, analyzing potential conflicts arising from national interest limitation rules.
Which central themes are discussed?
Key themes include aggressive tax planning, the application of BEPS Action Plan 4, the interpretation of accounting standards like EBITDA, and the legal constraints placed on Member States regarding direct taxation.
What is the primary objective of the work?
The primary objective is to evaluate whether the implementation of interest limitation rules under ATAD violates fundamental freedoms and to offer viable solutions to resolve these legal incompatibilities.
Which scientific methodology is employed?
The author employs comparative legal research based on a doctrinal approach, utilizing teleological interpretation to analyze the interaction between EU primary law and the secondary legislation of the ATAD.
What topics does the main body cover?
The main body covers the theoretical framework of EU freedoms, the mechanics of interest limitation, a comparative analysis between OECD and EU rules, and an in-depth critique of current implementation gaps.
Which keywords best characterize this thesis?
The work is defined by terms such as EU, ATAD, fundamental freedoms, BEPS, interest, tax planning, and corporate taxation.
How does the author view the "Fixed Ratio Rule"?
The author highlights that the fixed ratio rule is a central component of ATAD but points out that the lack of harmonized definitions for accounting items like EBITDA can lead to significant distortions and potential infringements of EU freedoms.
Why is the "de minimis" threshold a point of concern?
The author notes that the discretion granted to Member States in setting or applying de minimis rules leads to fragmented implementation, creating an uneven playing field that may hinder the cross-border establishment of businesses.
What is the significance of the CCCTB in the author's proposed solutions?
The author argues that accelerating the Common Consolidated Corporate Tax Base (CCCTB) could provide the necessary common ground and legislative homogeneity to avoid the legal uncertainties currently plaguing the implementation of ATAD.
- Quote paper
- The Duy Anh Nguyen (Author), 2022, Interest limitation for tax legislation in the European Union. An obstruction of fundamental freedoms?, Munich, GRIN Verlag, https://www.grin.com/document/1369184
