The European Commission is working on a proposed directive (ATAD3) which will bring measures to prevent the misuse of shell entities for tax purposes.
The directive is being developed and the European Commission has asked for feedback from countries with regard to the content of the proposed directive. The Irish Tax Institute, which is the representative body of tax advisors, has provided feedback that will hopefully be considered for legislative debate.
Amongst the various concerns that the Irish Tax Institute has brought to the attention of the European Commission are:
- the overlap with existing measures, and;
- the compatibility with fundamental freedoms and general principles of EU law.
The Irish Tax Institute’s position is that recent reforms tackling tax avoidance and evasion have just been incorporated into domestic legislation and countries are not yet certain of the effectiveness of those measures. Several rules have been implemented by countries, such as but not limited to: CFC, exit tax, anti-hybrid, interest limitation and general anti-avoidance.
As an example, we look to CbCR, which has recently been enforced and must be incorporated into domestic legislation by June 2023. Countries are not yet aware of the issues that will arise, if any, in transposing the directive into their domestic legislation or if the introduction of this piece of legislation will suffice to guarantee anti-tax avoidance measures. The Irish Tax Institute believes that time should be afforded to countries to access the outcome of the introduction of such rules before increasing the administrative burden further on taxpayers. It further believes that care should be taken before introducing new measures to tackle the same matters, without knowing if the previous reforms were successful in solving issues or not, especially in circumstances where existing Transfer Pricing and CFC rules approach many of the same issues that ATAD3 intends to cover.
The implementation of the ATAD3 will not prevent member states applying their own anti-tax avoidance rules when the substance of an undertaking is considered. This means that both ATAD3 and domestic rules will be applied to the same facts, which is likely to “amplify tax and legal uncertainty for such business rather than reducing it”, according to the Irish Tax Institute opinion on the matter.
The proposed directive also appears to conflict with principles of European law, particularly in relation to the freedom of movement of capital. ATAD3 requires that an undertaking should have an active EU bank account, further conflicting with the EU principle of fundamental freedom, in that the directive requires that employees should be resident in the member state where the undertaking is being carried out, disregarding scenarios that presented themselves during Covid-19 and which are now being incorporated into normal working patterns of remote working where such duties can be carried out remotely.
These are just two of the issues the Irish Tax Institute brought to the attention of the European Commission in the feedback provided to the EU Commission. There is of course no obligation to take the considerations on board, much less implement them. However, as we understand it the hope of the Irish Taxation Institute was that the feedback would be considered and would result in amendments to the envisaged directive to allow it to align with current working practices, the general principles of European Law and would furthermore not result in the hasty implementation of additional requirements without having yet seen the efficacy of previous measures in the attempts to tackle the ongoing problem of anti-avoidance.
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