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
- Abstract
- List of Abbreviations
- List of Tables
- List of Figures
- List of Equations
- 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
- 2.1. Free movement of capital
- 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
- Bibliography
- Annexe A - ATAD I and II Implementation Overview, 2021, PwC Netherlands
Objective & Thematic Focus
This thesis examines the potential infringements of the Anti-Tax Avoidance Directive's (ATAD) transposition into national law on the fundamental freedoms enshrined in the Treaty of the Functioning of the European Union (TFEU), particularly focusing on interest limitation measures. It seeks to identify the extent of these violations and propose plausible solutions to address the judicial contradictions and incompatibilities.
- Analysis of the EU Anti-Tax Avoidance Directive (ATAD) and its interest limitation rules.
- Examination of the fundamental freedoms under the Treaty of the Functioning of the European Union (TFEU), including free movement of capital, freedom of establishment, and freedom to provide services.
- Investigation into aggressive tax planning and Base Erosion and Profit Shifting (BEPS) practices.
- Comparative legal research methodology applied to EU primary and secondary law, and rulings from the Court of Justice of the European Union (CJEU).
- Identification of incompatibilities in ATAD's implementation regarding legal definitions, accounting standards, and economic suitability.
- Proposal of solutions, including the acceleration of the Common Consolidated Corporate Tax Base (CCCTB) and enhanced proportionality tests.
Excerpt from the Book
3.2. Interest payments and equivalent instruments as a tax planning tool
Corporate tax is levied on the profit earnt by a legal entity within a certain period, where the profit is calculated by the revenue reduced by expenses. One of the most straightforward strategies to minimise such tax liability while still maximising the net income is to fabricate the costs insofar as these costs safeguard the final profit from the tax effect. Therefore, it is plausible to utilise the debt financing method to attain excessive interest deductions, which generally constitute deductible costs when determining the tax base. This interest is strategically created to ensure that the final profit is intact, especially in a corporate group.
This method proves to be an even more pertinent and pressing issue in the current economic context, which mainly concerns international corporate groups' investments. For instance, a parent company could abuse such a rule by giving out a loan in a high tax jurisdiction. This country, however, has a double tax agreement with another low-tax country, where the high tax state forfeits its rights to tax this loan income of the mother company; thus, the tax is effectively due only in the low tax country. The subsidiary in this low tax jurisdiction, on the other hand, as it is financed through intragroup debt instruments, can, in turn, offset this interest payment to the parent company against the taxable income rendered. Altogether, these practices synergise and yield an undoubted advantage for MNEs in comparison to their domestic counterparts.
As a result, interest deduction as a tax planning tool has been acknowledged to be a paramount concern for the global tax system. The solution to this is rather simple: A jurisdiction could set a maximum level of interest deductibility on a taxpayer, where anything above the limit is deemed as harmful tax behaviour; hence, the excessive interest amount cannot be deducted against the tax base. This can be observed in Figure 3 below. Nonetheless, to set such a limit without violating the neutrality as well as equality of taxation, the law-making process must take into account a wide array of variables. The details of such variables will be further elaborated in the following subchapter in the recommendations of the BEPS Action Plan 4. Moreover, the recommendation thereof is widely considered a blueprint for designing the EU's ATAD Article 4, which will be illustrated in Subchapter 3.4.
Summary of Chapters
1. Introduction: This chapter introduces the problem of tax planning by multinational enterprises (MNEs) within the EU, highlights recent tax scandals, and presents the Anti-Tax Avoidance Directive (ATAD) as the EU's response to combat aggressive tax planning, outlining the thesis's research questions.
2. Relevance of the EU fundamental freedoms to interest barrier measures: This section details the fundamental freedoms of the EU, specifically free movement of capital, freedom to provide services, and freedom of establishment, and discusses their relevance and potential conflicts with interest limitation measures and state aid rules.
3. Interest barrier measure as means to combat aggressive tax planning: This chapter explains the concept of tax planning, distinguishing it from tax mitigation and evasion, and elaborates on how interest payments are used as a tax planning tool, before introducing the OECD's BEPS Action Plan 4 recommendations to counter such practices.
4. Interest limitation measure of Anti-Tax Avoidance Directive: This section outlines the specific provisions of Article 4 of the ATAD concerning interest limitation, detailing its definitions, scope, fixed ratio rule, de minimis thresholds, group rules, and time-based rules, and compares them with the OECD's recommendations.
5. Incompatibilities of the ATAD Article 4 implementation with the EU freedoms and solutions: This chapter analyzes how the ATAD's implementation may infringe upon EU fundamental freedoms due to ambiguous legal definitions, inconsistent accounting standards, and disregard for economic contexts, proposing solutions like the CCCTB and enhanced proportionality tests.
6. Conclusion: This final chapter summarizes the thesis's findings regarding the ATAD's potential infringements on EU fundamental freedoms, the identified problems of implementation, and reiterates the proposed solutions for improving the effectiveness and compatibility of interest limitation measures.
Keywords
EU, ATAD, fundamental freedoms, BEPS, interest, tax planning, European Union, Anti-Tax Avoidance Directive, Base Erosion and Profit Shifting, interest limitation, tax avoidance, free movement of capital, freedom of establishment, freedom to provide services, state aid, corporate tax, proportionality test, CCCTB.
Frequently Asked Questions
What is the main topic of this work?
This work fundamentally addresses the implementation of the EU Anti-Tax Avoidance Directive (ATAD), specifically its interest limitation measures, and their compatibility with the fundamental freedoms enshrined in the Treaty of the Functioning of the European Union (TFEU).
What are the central thematic areas?
The central thematic areas include aggressive tax planning, Base Erosion and Profit Shifting (BEPS), the EU's ATAD, the free movement of capital, freedom of establishment, freedom to provide services, and issues of state aid in direct taxation.
What is the primary objective or research question?
The primary objective is to examine the extent to which the implementation of ATAD's interest limitation measures at the national level violates fundamental freedoms and to propose plausible solutions for any identified infringements.
Which scientific method is used?
The thesis employs comparative legal research based on a doctrinal approach to analyze the interaction between primary EU law (TFEU fundamental freedoms) and secondary law (ATAD), supplemented by rulings from the CJEU.
What is covered in the main part?
The main part of the thesis covers the legal basis of EU fundamental freedoms, how interest barrier measures combat aggressive tax planning (including OECD BEPS Action Plan 4), the specific provisions of ATAD's interest limitation measures, and a detailed analysis of the incompatibilities between ATAD Article 4 implementation and EU freedoms, along with proposed solutions.
Which keywords characterize this work?
Key terms characterizing this work are EU, ATAD, fundamental freedoms, BEPS, interest, tax planning, European Union, Anti-Tax Avoidance Directive, Base Erosion and Profit Shifting, interest limitation, tax avoidance, free movement of capital, freedom of establishment, freedom to provide services, state aid, corporate tax, proportionality test, and CCCTB.
How does the ATAD relate to the OECD's BEPS Action Plan 4?
The ATAD's interest limitation measures are largely based on the recommendations set forth in the OECD's BEPS Action Plan 4, sharing many similarities in their approach to combat tax avoidance, but with some notable differences in implementation details and mandatory application within the EU.
What are the main issues identified regarding the implementation of ATAD's Article 4?
The thesis identifies three main issues: ambiguous legal definitions due to minimum requirements, lack of cohesion in applied accounting standards (e.g., EBITDA calculation), and the disregard for taxpayers' specific economic backgrounds and broader macroeconomic factors, leading to potential infringements of fundamental freedoms.
What solutions are proposed to address these issues?
Proposed solutions include emphasizing the proportionality test in national implementation, highlighting the Commission's oversight role, accelerating and adjusting the implementation of the Common Consolidated Corporate Tax Base (CCCTB), and redesigning ATAD rules to be more comprehensive, inclusive, and based on sound economic and political contexts rather than arbitrary numerical values.
Why are financial undertakings often treated differently under interest limitation rules?
Financial undertakings are often granted special rules or exemptions because their business model inherently relies on financial assets and liabilities, and they are subject to heavy capital structure regulations (e.g., Basel III, Solvency II), making rigid interest limitation rules counterproductive for this sector.
- Citar trabajo
- The Duy Anh Nguyen (Autor), 2022, Interest limitation for tax legislation in the European Union. An obstruction of fundamental freedoms?, Múnich, GRIN Verlag, https://www.grin.com/document/1369184
