1. Tackling Base Erosion and Profit Shifting – General Overview
Based on a G20 mandate as of 2013, the OECD worked on different measures for the purpose of tackling “Base Erosion and Profit Shifting (BEPS)” by multinational enterprises.
In this respect, an Action plan – the so called OECD BEPS Action Plan – was developed, which contains 15 different measures (actions) in order to cope with aggressive tax planning of multinationals.
At the end of 2015, the final reports of all BEPS Actions were published by the OECD and concerned the following aspects:
Address the tax challenges of the digital economy
Neutralise the effects of hybrid mismatch arrangements
Strengthen CFC rules
Limit base erosion via interest deductions and other financial payments
Counter harmful tax practices more effectively, taking into account transparency and substance
Prevent treaty abuse
Prevent the artificial avoidance of PE status
Assure that transfer pricing outcomes are in line with value creation
Establish methodologies to collect and analyse data on BEPS and the actions to address it
Require taxpayers to disclose their aggressive tax planning arrangements
Re-examine transfer pricing documentation
Make dispute resolution mechanisms more effective
Develop a multilateral instrument
The various BEPS Actions had different aims, namely:
- Coordination: Action 2, Action 3, Action 4 and Action 5
- Substance: Action 6, Action 7 and Actions 8-10
- Transparency: Action 11, Action 12, Action 13 and Action 14
- Overall relevance: Action 1 and Action 15
Since the different BEPS Actions only resemble recommendations by an international organisation, there are in fact three different options to make those recommendations applicable in real-life cases:
- Option 1: Direct implementation of the recommendations into the OECD Transfer Pricing Guidelines (eg Actions 8-10).
- Option 2: Implementation of the recommendations to existing bilateral tax treaties via a multilateral instrument (eg Action 6 or Action 7).
- Option 3: Implementation of the recommendations via EU or national legislative actions.
In the following, the most recent developments under Option 3 will be outlined.
2. Implementation of the recommendation via EU or national legislative actions
2.1. Austrian legislative actions during the course of the BEPS project
Already during the course of the OECD BEPS project, Austria started to change the Corporate Income Tax Act with respect to the deductibility of intragroup interest payments and licence fees. Since that, the payment of interests and licensee fees are not tax deductible in Austria if:
- The recipient of the payment is an Austrian corporate entity (or an equivalent foreign corporate entity); and
- The recipient – directly or indirectly – belongs to the same group of companies; and
- The interest or license payments are subject to one of the following aspects at the level of the recipient:
- The recipient of the payments is subject to no taxation due to a subjective or objective tax exemption; or
- The recipient is subject to a tax rate below 10 %; or
- The recipient is subject to a tax reduction, which leads to a tax rate below 10 %; or
- The recipient is subject to a tax refund, which leads to a tax rate below 10 % (also refunds to the shareholders of the recipient have to be taken into account).
Even though, the Austrian changes of the CITA substantially differentiate from the recommendations under BEPS Action 4, a link can be drawn with respect to the intentional notion, which is the aim to tackle base erosion via interest deductions.
2.2. Legislative initiatives on EU level
Also the EU took advantage of the international consensus to tackle Base Erosion and Profit Shifting and established their legislative initiatives. In this respect, the EU set-up an Anti Tax Avoidance Package, which is meant to promote more fair, simple and effective corporate taxation within the EU.
One of the key elements of this Anti-Tax Avoidance Package, is the so-called Anti Tax Avoidance Directive. This directive is also known as ATAD or Anti-BEPS Directive and was issued on 12. July 2016. In general, the directive is meant to establish a minimum level of protection against base eroding tax planning activities of multinationals. In fact, this means that the directive does not preclude the application of domestic or agreement-based provisions aimed at safeguarding a higher level of protection for corporate tax bases.
In general, the ATAD has to be implemented by the member states by 31. December 2018 (there are a few exemptions for specific articles). In this respect, the following provisions resemble the core measures of the ATAD and may be from special importance for various multinationals:
- Interest Limitation Rule (Article 4)
- Exit Taxation (Article 5)
- General Anti-Abuse Rule (Art 6)
- Controlled Foreign Company Rule (Art 7)
- Hybrid Mismatches (Art 9)
3. Upcoming steps: What does Austria have to do?
In order to implement the provision of the ATAD, the following country specific aspects have to be considered:
3.1. Interest Limitation Rule (Article 4 ATAD)
In a nutshell, the proposed Interest Limitation Rule by the EU disallows interest deductions under certain conditions. In this respect, exceeding borrowing costs shall be deductible in the tax period in which they are incurred only up to 30 % of the taxpayer’s EBITDA. Accordingly, if the interest costs of a tax payer sum up to 35 % of the EBITDA, only 30 % would be tax deductible, whereas the remaining 5 % increase the corporate income tax base. The not tax deductible part of the interest can be carried forward as loss and can be offset against future tax base, if the interest limitation rule is met in the respective year.
The goals of this provision are twofold:
- First, an incentive for the allocation of interest expenses in accordance with the entities’ individual contribution to the intragroup value creation should be promoted; and
- Second; the tax planning potential of multinationals should be lowered.
From an Austrian point of view, the proposed notion of “interest” by the EU, goes beyond the current understanding of “interest” according to the Austrian Tax Authorities’ view. Accordingly, under the proposed understanding, for example, also costs for
- financial leasing,
- fictitious interests with respect to derivatives or hedging-agreements or
- guarantee fees for finance agreements,
may be subject to the limited “interest” deductibility. Especially Austrian corporations might be heavily affected by this measure, since they tend to have high debt ratios in comparison to corporations in other EU member states.
For purposes of implementation, it has to be pointed out, that the currently existing provision with respect to the non-deductibility of interest payments and license fees at the Austrian Corporate Income Tax Act (see section 2.1.), does not fulfil the requirements of Art 4 ATAD. This means that Austria has to take legislative actions in order to implement the provision to national law.
3.2. Exit Taxation (Article 5 ATAD)
The proposed exit taxation under Article 5 ATAD knows four different cross-border scenarios under which hidden reserves could be subject to tax:
- A tax payer transfer assets from a head office to a permanent establishment; or
- A tax payer transfer assets from a permanent establishment to a head office; or
- A tax payer transfers its tax residence to another state; or
- A tax payer transfers the business carried on by a permanent establishment to another state.
As mentioned, the legal consequence of the application of Art 5 is an uncovering of hidden reserves. However, the ATAD norms a possibility for an instalment payment – of the taxes resulting from the uncovering of hidden reserves – throughout a period of five years.
From an Austrian point of view, exit taxation is not new. The concept is already included at the Income Tax Act for. At the moment Austria also applies a similar system, with a possibility of instalment payments throughout a period of seven years (for fixed assets) and two years (for current assets). However, since the ATAD provisions have to be understood as minimum standards, it may be necessary for Austria to align the timing issues of the instalment payment system with the ATAD provision.
3.3. General Anti-Abuse Rule (Article 6 ATAD)
The recommended General Anti-Abuse Rule (GAAR) is kind of new from an EU secondary law perspective, since it was used the first time in the revised parent-subsidiary directive in 2015 and in a very similar way in the ATAD.
In this respect, the GAAR norms that “for the purposes of calculating the corporate tax liability, a Member State shall ignore an arrangement or a series of arrangement 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 and purpose of the applicable tax law, are not genuine having regard to all relevant facts and circumstances. An arrangement may comprise more than one step or part.” According to that, the newly introduced GAAR mostly resembles the criteria established by the ECJ. This means that the detection of tax abuse is a twofold procedure:
- First, an objective criterion has to be fulfilled (“a genuine arrangement or series of arrangements”); and
- Second, a subjective criterion has to be fulfilled (“for the main purpose (…) of obtaining a tax advantage”).
From an Austrian point of view, there is already an existing national GAAR in place. This application of this national provision is highly disputed in academic literature. Nevertheless, the Austrian Supreme Administrative Court usually applies the national GAAR in a similar manner as the ECJ, seeking for an objective and a subjective criterion.
Since the Austrian GAAR is applied similarly to the GAAR laid down in the ATAD, it may be argued, that Austria already has adopted this provision of the directive; thus meaning that no further implementation steps are required.
3.4. Controlled Foreign Company Rule (Article 7 ATAD)
Article 7 ATAD provides for a provision, which leads to the attribution of the income of a foreign company to its parent if certain conditions are met. Such an attribution means that certain types of foreign income (passive income) will be taxable in the state of the parent entity if the subsidiary (or the permanent establishment) is not subject to tax or exempt from tax in the other state.
In order to be classified as a controlled foreign company (CFC) under the ATAD rule, the following criteria have to be met:
- The parent has to hold more than 50 % of the voting rights or capital or is entitled to more than 50 % of the profits of the foreign entity; and
- The foreign corporate tax paid, is lower than the difference between the tax rates of the state of the parent and the state of the subsidiary (Example: State A – Tax Rate 25 %; State B – Tax Rate 10 %. The difference between the tax rates is 15 %. Since the tax rate in State B [10 %] is lower than the difference [15 %], the criterion is fulfilled).
If an entity of permanent establishment is classified as a CFC, the following non-distributed types of income (for example) are attributed to the parent company:
- Income from financial leasing,
- Income from insurance, banking or other financial activities.
However, such an attribution of the foreign income should not apply, if the foreign entity of permanent establishment carries on a substantive economic activity supported by staff, equipment, assets and premises, as evidenced by relevant facts and circumstances. However, in terms of non-genuine arrangements, which have been put in place for the essential purpose of obtaining a tax advantage, the substance requirement cannot hinder the attribution of the income of the CFC to its parent.
From an Austrian point of view, there is no explicit CFC rule in place. However, the Austrian GAAR (see also section 3.3.) is applied similar to a CFC by the Austrian Supreme Administrative Court and the Austrian Tax Offices.
However, the ATAD provision is more precise in terms of qualifying a foreign company as a CFC. Accordingly the Austrian GAAR provision can be seen as a basis for the implementation of the ATAD CFC Rule, but – most probably – has to be amended in order to properly account for the criteria laid down in the ATAD (especially concerning the instructions on how to compute the income of a CFC, laid down in Article 8 ATAD).
3.5. Hybrid Mismatches (Article 9 ATAD)
Finally yet importantly, the last ATAD provision, which could be from special importance for multinationals, is Article 9 concerning hybrid mismatches. A hybrid mismatch deals with qualification issues, for example if a certain instrument is treated as equity in State A and as debt in State B. This qualification would lead to a deduction in State B (eg qualified as interest payment) and a tax exemption in State A (eg as a dividend).
Article 9 ATAD is meant to tackle such situations as it lays down that:
- First, hybrid mismatches resulting in double deduction, should only lead to a deduction in the source state of the payment.
- Second, hybrid mismatches resulting in a deduction without inclusion (= exactly the example, which was given above) should only lead to a deduction. Accordingly the payments must not be exempted from tax anymore.
From an Austrian point of view, the Corporate Income Tax Act already provides for two provisions which are meant to tackle such hybrid mismatches situation. Concerning the first example of a hybrid mismatch in the ATAD (double deductibility), the previously described Austrian provision on the non-deductibility of intragroup interest payments and licence fees (see section 2.1.), materially covers those situations.
For purposes of the second hybrid mismatch tackled by Article 9 ATAD (deduction + exemption), the CITA also already contains a provision, which materially covers such situations. In this respect, it is laid down in the CITA, that income, which is deductible in a foreign country, must not be subject to the Austrian participation exemption.
Based on that, it may be argued, that there is no further need for Austria to change the national tax law in order to properly implement the provision of the ATAD.
Finally it can be argued that the “cards are – at least to some extend – reshuffled” due to BEPS and ATAD.
Whereas some of the BEPS Actions strongly influenced the understanding of corporate taxation, most of the provisions of the ATAD are not new from an Austrian point of view. Concerning the implementation of the ATAD rules to Austrian law, one has to raise the question, whether those rules should be (i) implemented very formally, meaning that they have a similar wording than the ATAD rules or (ii) rather materially, which would mean that Austria already has adopted most of the ATAD provisions.
If one would choose the materiality-driven implementation approach, the Austrian legislator would mostly have to slightly modify the existing national rules in order to properly implement the ATAD.
We would be pleased to assist you, if you have any questions regarding BEPS or the ATAD and the respective effects on your business.
Mag. Werner Leiter | Partner | Certified auditor and tax advisor
T (direct) + 43 1 26262 14
Raphael Holzinger, MSc, LL.M., LL.M. | Assistant
T (direct) +43 1 26262 869