Update on EU anti-abuse rules

The resolution on EU-anti-abuse rules in tax matters we reported on recently has already been adopted, see here. Unfortunately, we are not encouraged by its content.

The text on CFC-clauses and thin capitalisation rules shows that the EU Member States are still unable to make an adequate response to the Cadbury-Schweppes decision by the EU-Court of Justice in 2006 which limited the application of CFC-rules to "wholly artificial arrangements". At best, the wording of the passage will usher in a new round of legal disputes in which company lawyers will challenge the interpretation of tax authorities before the European Court of Justice.

Controlled foreign corporation (CFC) rules are features of an income tax system designed to protect the tax base of home countries of TNCs by limiting the artificial booking of paper profits by using foreign low taxed entities. As TJN has repeatedly pointed out, the only effective way to address the fundamental problems of the taxation of integrated MNCs is by taxing them on a consolidated basis. The EU has been attempting to develop this approach through the project of a Common Consolidated Corporate Tax Base (CCCTB) in Europe, but is making slow progress, due to opposition from some states, including the UK.

The inadequacy of the CFC rules is shown by the failure of EU-member states to put pressure on financial secrecy jurisdictions within the European Union in order to make them accept developing countries becoming part of the Savings Tax Directive as well as a substantially extended and revised Directive. So far, the available instruments to bring these changes about appear to be quite limited after the government of Luxembourg silenced its internal critics.

Guest blog by Markus Meinzer