2.2.1. Tax rules and practices facilitating Aggressive Tax Planning
The crucial role of anti-abuse rules in restricting tax avoidance schemes has been confirmed by the study. The need for action in this area is further supported by the results at Member States level.
CFC rules
The study identifies CFC rules as being critical anti-abuse rules. According to the study, the majority of the model ATP structures would most likely be countered if the Member State in which the parent company is located, applied effective CFC rules. However, half of the Member States do not have CFC rules. The study also states that among the countries that have CFC rules, their scope and application varies.
GAAR
The study examines the absence of a GAAR or of specific anti-abuse rule (SAAR) that would counter the model ATP structures. Almost all Member States (twenty-six) have a GAAR or SAAR 79 . However, the scope of those rules is not such as to counter all identified ATP structures. Rather, existing rules would be able to counter some parts of the structures (i.e. it would make it impossible for a company to play a certain role in the structures if it resident in one the twenty-six Member States). Having an effective GAAR could be relevant for all ATP structures.
Interest limitation rules
The study underlines the scope for tightening anti-abuse rules to counter base erosion by means of financing costs. Twenty-four Member States offer a deductibility of intra-group interest costs, while it is not conditional on the creditor being taxed on the interest income and/or without interest limitation rules (or thin capitalisation rules) or withholding taxes on interest payment 80 . The study considers that rules that limit the deductibility of interest would be capable of undoing or restricting ATP via financing structures (i.e. the first four structures identified by the study).
Hybrid mismatches
The lack of anti-abuse rules is striking in the area of hybrid entities. Twenty-five Member States have been identified as having no rule to counter mismatch in the qualification of a local partnership or company by another state. In eighteen Member States, the tax qualification of a foreign partnership does not follow the qualification of the other state. The lack of anti-abuse rules to counter mismatches in hybrid financial instruments is also identified by the study as an important factor in the ability of MNEs to set up ATP structures. More countries have rules in place to counter mismatches in hybrid financial instruments than in hybrid entities. 81 Rules that counter hybrid mismatches would allow defeating two of the ATP structures identified by the study, i.e. the hybrid loan and hybrid entity ATP structures.
Switch-over rules
Rules that are designed to avoid double taxation are under certain circumstances abused to escape taxation. For example, the tax exemption of dividends received could play a role in an ATP structure, when it is too generously applied and is not accompanied by reservations for other tax avoidance factors. This factor is relevant for the Member State of the parent company in several ATP structures identified by the study. With 15 countries that allow for a generous tax exemption of dividends received, it raises a clear question as to whether those dividends have been taxed in the first place. Switchover rules would usually address such issues.
Exit and Capital gains tax rules
The study indicates that the absence of taxation on capital gains upon transfer of IP plays a role in three of the model ATP structures. In case such transfer takes place between two legally distinct entities located in two jurisdictions (as is the case in the three model ATP structures), CFC rules could, among others, be relevant to counter such structures. If however the transfer takes place within a single legal entity (for example a subsidiary and a permanent establishment located in a different jurisdiction) and has the effect of depriving the departure State from its taxing rights over the assets, exit rules would be relevant to address the risk of ATP.
In conclusion, the study shows that there is scope and need for action. There are considerable differences between Member States. The heterogeneity of corporate tax rules across Member States allows companies to exploit mismatches and pay less tax than they ought.
