COMMISSION STAFF WORKING DOCUMENT Accompanying the document Communication from the Commission to the European Parliament and the Council – Anti Tax Avoidance Package: Next Steps towards delivering effective taxation and greater tax transparency in the EU
Date: 2016-01-28
Institutions: Directorate-General for Taxation and Customs Union, European Commission
Subjects: European tax cooperation, action programme, corporation tax, exchange of information, single market, tax avoidance, tax evasion, tax law

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 28.1.2016  SWD(2016) 6 final   COMMISSION STAFF WORKING DOCUMENT Accompanying the document Communication from the Commission to the European Parliament and the Council – Anti Tax Avoidance Package: Next Steps towards delivering effective taxation and greater tax transparency in the EU  {COM(2016) 23 final}  
 
 
1. INTRODUCTION ........................................................................................................... 4 

1.1. What is the issue? ................................................................................................. 4 
1.2. Economic evidence of profit shifting and base erosion ....................................... 5 
1.3. Scope of the Anti-Tax Avoidance Package .......................................................... 7 
1.4. Consultation process ............................................................................................ 9 
1.4.1. Anti-Tax Avoidance Directive ................................................................ 9 
1.4.2. Recommendation on Tax Treaty issues................................................. 10 
1.4.3.  Directive 

the  OECD/G20  Country-by-Country 

implementing 

reporting ............................................................................................ 10 
1.4.4. Communication on External Strategy for Effective Taxation ............... 10 
1.4.5. Anti-Tax Avoidance Package ................................................................ 10 
1.5. Complementary existing initiatives .................................................................... 11 
1.5.1. Code of Conduct .................................................................................... 11 
1.5.2. Joint Transfer Pricing Forum ................................................................ 12 
1.5.3.  EU  Platform 

for  Tax  Good  Governance  & 
Recommendations ............................................................................. 12 
1.5.4. Transparency measures ......................................................................... 12 
1.6. Initiatives by the European Parliament .............................................................. 13 

the  2012 

2.  ANALYSIS  OF  KEY  DRIVERS  AND  POSSIBLE  SOLUTIONS  TO  ADDRESS 

TAX AVOIDANCE .................................................................................................. 14 

2.1. The OECD/G20 BEPS Project ........................................................................... 14 

2.1.1. Neutralising the Effects of Hybrid Mismatch Arrangements (Action 

2) ........................................................................................................ 15 
2.1.2. Strengthening CFC Rules (Action 3) .................................................... 15 
2.1.3.  Limiting  Base  Erosion  via  Interest  Deductions  and  Other  Financial 

Payments (Action 4) .......................................................................... 16 
2.1.4. Preventing Treaty abuse (Action 6)....................................................... 17 
2.1.5.  Preventing  the  artificial  avoidance  of  Permanent  Establishment 

Status (Action 7) ................................................................................ 17 
2.1.6. Re-examining Transfer Pricing Documentation (Action 13) ................ 18 
2.1.7. Other OECD/G20 BEPS Actions .......................................................... 19 
2.2. Study on Structures of Aggressive Tax Planning and Indicators ....................... 21 
2.2.1. Tax rules and practices facilitating Aggressive Tax Planning .............. 22 
2.2.2. Third-country jurisdictions .................................................................... 24 

3. OBJECTIVES AND FEATURES OF THE POLICY INITIATIVE ............................ 24 

3.1. General policy objective ..................................................................................... 24 
3.2. Specific policy objectives ................................................................................... 26 
3.2.1. Strengthening Domestic Tax rules ........................................................ 26 
3.2.2. Addressing Tax Treaties issues ............................................................. 29 
3.2.3. Enhancing transparency ........................................................................ 30 
3.2.4. Common EU approach towards third countries .................................... 30 

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REFERENCES .................................................................................................................. 32 

ANNEXES ........................................................................................................................ 35 

A.1. Overview of ATP indicators .............................................................................. 35 
A.2. Structures of Aggressive Tax Planning and relevant indicators per structure .. 36 
A.3. Overview of indicators that render a third country's legislation more prone to 

be used in an ATP structure ............................................................................ 43 

A.4.  "Scoreboard  of  indicators"  to  identify  third  countries  subject  to  further 

evaluation ........................................................................................................ 44 
A.5. OECD BEPS Actions and corresponding EU Actions ...................................... 48 

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A fair and efficient corporate taxation is a cornerstone of a deeper and fairer Single Market 
which is a Commission priority1. Some companies use aggressive tax planning techniques to 
exploit  loopholes  in  tax  systems  and  mismatches  between  national  rules  to  reduce  their  tax 
liabilities.  These  activities  undermine  the  fair  burden  sharing  amongst  taxpayers  and  fair 
competition  between  businesses.  It  also  means  fewer  revenues  available  to  finance  public 
goods  or  investment.  The  economic  crisis  of  recent  years  requires  contributions  to  the 
consolidation  of  public  finances  from  all  taxpayers.  However,  while  many  citizens  face  an 
inescapable  increase  in  taxes,  the  public  perception  is  that  other  economic  actors  and  in 
particular  multinational  enterprises  can  get  around  contributing  their  fair  share  by  their 
capacity for tax optimization, thus artificially lowering their taxable income. 

The Commission has been taking several initiatives to counter corporate tax avoidance, based 
on a central principle:  ensuring that  taxes are paid where profits are generated. The EU has 
enhanced transparency by ensuring automatic exchange of information on tax rulings. It also 
actively contributed to the OECD/G20 work on the Base Erosion and Profit Shifting (BEPS)2 
project. Furthermore, the European Parliament has called for more action and coordination in 
addressing the fight against tax avoidance.3  

This  document first introduces the issue at  stake, the scope of the package,  the consultation 
process and complementary initiatives at the EU level. Secondly, it presents more in depth the 
analysis of the key drivers and possible solutions to address tax avoidance. The third section 
presents  the  objectives  and  features  of  the  proposed  policy  initiative  in  line  with  Member 
States' commitments.  

1. Introduction 

1.1. What is the issue? 

The existing rules for corporate taxation need reform. Corporate tax rules no longer fit the 
current  economic  environment,  which  is  increasingly  globalised,  mobile  and  digital.  The 
increasing complexity of business models and corporate structures has made it easier to shift 
profits and more difficult to define which country is supposed to tax a multinational enterprise 
(MNE)'s  income.  It  is  also  more  difficult  for  Member  States  to  protect  their  tax  base. 
Domestic  rules  cannot  be  fully  effective  given  the  cross-border  dimension  of  many  tax 
planning  structures  and  the  use  of  arrangements  which  artificially  relocate  the  tax  base  to 
another  jurisdiction  within  or  outside  the  Union.  In  addition,  relying  on  unilateral  and 
domestic measures may fragment the Single Market.  

Following  the  crisis  and  the  increased  revenue  needs,  the  OECD,  endorsed  by  the  G20, 
launched the BEPS project that came to completion in October 2015. It proposes a package of 
measures for a comprehensive, coherent and co-ordinated reform of the international tax rules 
against BEPS to reinforce the current international tax rules and stabilize national tax bases. 
The OECD/G20 initiative aims at reforming key areas of the system to ensure that taxes are 
paid  where  economic  activity  takes  place.  To  reach  this  objective,  new  standards  are 
proposed. The EU fully supports the OECD/G20 conclusions as many of the issues addressed 
are of relevance for the EU and are important for the international competiveness  of the EU 

1 http://ec.europa.eu/priorities/internal-market/index_en.htm 
2 http://www.oecd.org/ctp/beps.htm 
3 See European Parliament (2015a) and  European Parliament (2015b) 

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enterprises as well. Also, the EU plays an important role in addressing these questions as it is 
one of the biggest players in the world. 

It  is  essential  for  the  European  Union  that  Member  States  implement  the  OECD/G20 
BEPS outcomes in a coordinated way. This is necessary to ensure that the Single Market is 
not  hampered  by  differing  applications  and  interpretations  of  the  proposed  standards.  For 
Member States, the introduction of unilateral anti-abuse measures might be seen as a valuable 
short term solution for fixing the most pressing issues. However, the EU has to make sure that 
an  increase  in  national  anti-abuse  measures  does  not  undermine  the  Single  Market,  the 
creation  of  a  Capital  Markets  Union  and  the  overall  attractiveness  of  Europe  at  the  global 
level. With its Single Market and a common currency in the Euro area, the EU offers unique 
advantages to citizens and businesses. The economic integration within the EU has increased 
the welfare of citizens by lowering prices, increasing choices and removing borders. Also, it 
has helped businesses to access larger markets, tap new sources of finance and allocate their 
activities  according to  economic determinants  rather than being  limited by national borders. 
This has led to an increased mobility of goods and services and production factors within the 
EU which is most notably the case for capital. This mobility has improved the allocation of 
resources.  Since  the  taxation  of  income  from  activities  across  the  EU  remains  largely  a 
national task, it is important to ensure a smooth and coordinated implementation of the new 
standards to avoid frictions in the Single Market due to tax obstacles. 

EU  action  will  restore  a  level  playing  field  across  companies  active  in  the  Union.  Tax 
avoidance and aggressive tax planning by multinational companies distort price signals in the 
Single  Market  and  thereby  the  allocation  of  resources.  Companies  which  use  tax  avoidance 
strategies  are  more  profitable  and  face  lower  capital  costs  compared  to  purely  domestic 
companies. This issue has to be addressed at the EU level to ensure a level playing field for 
different types of companies. 

Action at the EU level needs to ensure a coordination of Member States' corporate tax 
policies within the Single Market, but also of Member States' approach to external base 
erosion  threats.  Tax  avoidance  is  a  cross-border  and  global  phenomenon.  Tackling  the 
erosion  of  Member  States'  tax  base  and  the  shifting  of  profit  outside  of  the  EU  calls  for  a 
common approach towards third countries. The fight against tax avoidance at EU level is only 
as  strong  as  its  "weakest  link  regarding  interactions  with  low-  or  no-tax  and  secrecy 
jurisdictions"4, as recalled by the European Parliament.   

1.2. Economic evidence of profit shifting and base erosion5 

Company  taxation  has  come  under  scrutiny  by  tax  authorities,  tax  experts  and  the 
general  public  in  recent  years.  More  and  more  evidence  suggests  that  considerable 
amounts  of  corporate  income  can  avoid  taxation  through  the  use  of  cross-border 
structures.  The  business  models  of  multinational  companies  have  become  more  complex, 
intra-group  transactions  have  multiplied  and  multinationals'  integrated  value  chains  make  it 
difficult  to  determine  where  profits  are  created.  Governments  struggle  to  determine,  within 
the current set of international tax rules, which country should be allowed to tax which part of 
a multinational's income. 

Shifting  income  across  borders  can  lead  to  a  loss  of  corporate  income  tax  revenues. 
Many  companies  can  adjust  their  internal  prices  whereby  they  have  a  possibility  to  shift 

4 European Parliament (2015a) 
5 For more details, see European Commission (2015b)  

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profits  to  low  tax  jurisdictions.  Digitalisation  has  made  it  easier  for  companies  to  organise 
their activities through offshore financial centres, and to create sophisticated structures for tax 
planning  purposes.  While  differences  in  the  statutory  corporate  income  rates  are  one 
important driver  of profit  shifting, also the effective  tax rates companies face play a crucial 
role since these rates also reflect preferential regimes and loopholes in national tax bases. 

The  existence  of  profit  shifting  and  base  eroding  practises  is  demonstrated  in  many 
academic  studies.  Although  the  extent  of  these  practices  and  its  impact  on  total  tax 
revenues  is  hard  to  measure,  it  might  be  considerable.  The  OECD/G20  BEPS  report  on 
Action 11 estimates the revenue loss at the global level at 4 to 10 per cent of CIT revenue, i.e. 
USD 100 to 240 billion annually at 2014 levels.6 In a study comprising 51 countries, the IMF 
concludes that "the (unweighted) average revenue loss is about 5 % of current CIT revenue – 
but almost 13 per cent in non-OECD countries"7. Additionally, a recent study commissioned 
by  the  European  Parliamentary  Research  Service  finds  that  the  revenue  loss  from  profit 
shifting within the EU amounts to about EUR 50-70 billion, equivalent to 17-23 per cent of 
corporate income tax (CIT) revenue in 20138. Based on a measure of total corporate profits in 
a given country and average collection rates across countries, the study estimates how much 
revenue  should  have  been  collected  in  the  absence  of  any  profit  shifting.9  It  is  important  to 
note that the method only  captures profit shifting within the EU10, and it therefore does  not 
take into account profit shifting from and to other countries.  

Other studies have not attempted to measure the total revenue loss, but are nonetheless 
indicative of the potential size of the problem. For instance, Lee et al.11 find that 22 per cent 
of  companies  in  their  sample  have  a  large  tax  gap,  meaning  that  the  gap  between  the  taxes 
they would theoretically owe according to where they generate their revenues and the total tax 
they actually pay amounts to at least 10 per cent. Egger et al.12 compare the tax liabilities of 
multinationals with those of domestic firms and find that foreign-owned affiliates in high-tax 
European  countries  pay  32  per  cent  less  tax  than  domestically  owned  companies.  A  similar 
study  by  Finke13  for  Germany  finds  a  gap  of  27  per  cent.  Further,  there  is  evidence  on  the 
sensitivity of affiliates' pre-tax profits to corporate income tax rates. Sullivan14 and Clausing15 
show  that  pre-tax  profits  are  higher  in  low-tax  jurisdictions  than  in  high-tax  jurisdictions;  a 
meta-analysis  conducted  by  Heckemeyer  and  Overesch16  finds  that  an  increase  in  the 
corporate  income  tax  rate  by  1  percentage  point  leads  to  a  lowering  of  affiliates'  pre-tax 
profits by 0.8 per cent.     

These  observations  have  led  to  a  more  general  debate  on  fairness  and  efficiency  in 
taxation  in  the  light  of  fiscal  adjustment  needs.17  Addressing  base  erosion  and  profit 
shifting  has  become  even  more  relevant  in  the  context  of  rising  concerns  on  fiscal 
sustainability  following  the  economic  and  financial  crisis:  public  debt  levels  have  increased 

6 For a review of existing indicators and the associated challenges, see OECD (2015i). 
7 IMF (2014) 
8 Dover et al. (2015)   
9The study develops further a method initially introduced in a study by the IMF (2014).  
10 Excluding Spain, Hungary and Finland 
11 Lee et al. (2015) 
12 Egger, P., W. Eggert and H. Winner (2010)  
13 Finke, K. (2013) 
14 Sullivan, M. (2004)  
15 Clausing, K. A. (2011)  
16 Heckemeyer, J. H. and M. Overesch (2013) 
17 According to Eurobarometer (2012) 88% of Europeans (EU-27) supported tighter rules on tax avoidance and 
tax havens: http://ec.europa.eu/public_opinion/archives/eb/eb78/eb78_cri_en.pdf 

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substantially  in  the  EU  from  around  58%  of  GDP  in  2007  to  a  forecasted  value  of  88%  of 
GDP  in  201518.  As  a  result  of  the  crisis,  many  governments  cut  expenditures  and  increased 
taxes,  notably  on  consumption,  to  consolidate  public  budgets19.  The  use  of  tax  planning 
strategies  by  multinational  corporations  has  created  a  debate  about  their  fair  contribution  to 
government budgets. Another relevant consideration includes the more indirect effect that tax 
avoidance of some companies could have on the tax morale of all taxpayers.20 

While  corporate  income  taxation  and  capital  taxation  more  generally  have  a  growing 
international  dimension  due  to  the  mobility  of  the  tax  base,  tax  policy  and 
administration remain primarily a national responsibility. All decisions on taxation in the 
EU  are  taken  unanimously  by  the  Council.  This  has  in  practice  limited  the  degree  of  co-
ordination and harmonization in this policy field in the EU as a whole as well as in the Euro 
area.  In  a  Union  of  28  Member  States,  unanimity  has  effectively  reduced  the  chances  of 
progress in legislation to safeguard national tax bases while ensuring a smooth functioning of 
the Single Market. 

1.3. Scope of the Anti-Tax Avoidance Package 

The  EU  has  been  active  to  find  solutions  to  the  issues  of  profit  shifting,  but  more 
remains  to  be  done.  In  the  EU,  the  debate  around  corporate  taxation  began  to  emerge  as 
cross-border  activity  increased  with  economic  and  political  integration.  It  focused  primarily 
on preventing problems which could hamper the development of the Single Market, such as 
double taxation and tax discrimination. The issues and challenges of corporate tax systems in 
an  economic  union  as  well  as  their  role  for  competitiveness  vis-à-vis  third  countries  were 
highlighted in the 1962 Neumark report followed by the 1970 van den Tempel report and the 
1992  Ruding  report.  In  1998  the  Code  of  Conduct  for  business  taxation  was  established  to 
limit harmful tax competition and identify specific tax regimes considered harmful. In 2001, 
the  Commission  presented  a  Communication  identifying  concrete  steps  to  eliminate  tax 
obstacles  to  cross-border  trade  in  the  EU.  This  was  followed  by  10  years  of  technical 
preparation,  culminating  in  the  Commission's  2011  proposal  for  a  Common  Consolidated 
Corporate  Tax  Base  (CCCTB).  In  2012,  the  Commission  adopted  and  Action  Plan  to 
strengthen  the  fight  against  tax  fraud  and  tax  evasion21.  Among  others,  the  plan  led  to  an 
amendment  of  the  Parent-Subsidiary  Directive to  allow  Member  States  the  use  of unilateral 
measures against profit participating loans as well as to the establishment of the Platform for 
Tax Good Governance. The transparency package proposed in March 2015 contains a number 
of proposals to improve transparency and information flows between tax authorities. This has 
led  to  the  adoption  by  the  Council  in  December  2015  of  a  Directive  on  the  automatic 
exchange  of  information  on  advance  cross-border  tax  rulings  and  advance  pricing 
arrangements. In June 2015, the Commission adopted the Action Plan for Fair and Efficient 
Corporate  Taxation  in  the  EU22.  The  Commission  initiatives  take  into  account  the  work 

18 European Commission (2015b) 
19 For example, the average standard VAT rate has increased by 2 percentage points over the period 2007-2014 
in the EU. For a detailed description of tax reforms in Member States, see the Taxation Trends in the European 
Union 2015 and the Report Tax Reforms in EU Member States 2015. 
20 Evidence from behavioural economics shows that fairness (e.g. that the tax administration or the government 
treats  taxpayers  in  a  consistent  and  transparent  way)  is  an  important  determinant  of  tax  morale.  If  anecdotal 
evidence  in  the  public  opinion  suggests  that  some  taxpayers  receive  a  different  treatment  or  can  easily  avoid 
taxes,  this  might  deteriorate  the  willingness  to  contribute  to  public  revenues  via  taxes  in  general.  Alm  and 
Torgler (2006) analyse in an empirical study a number of tax morale determinants. 
21 European Commission (2012a) 
22 European Commission (2015b)  

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carried out by the Expert Group on Taxation of the Digital Economy23, as well as the OECD's 
work  on  the  digitalisation  of  the  economy24.  This  will  be  complemented  by  a  package  of 
initiatives  to  reform  and  modernise  the  EU  VAT  system,  paying  particular  attention  to  the 
interaction with the Digital Single Market25. Finally, the Commission has been investigating 
the tax ruling practices of Member States under State aid rules since 2013 and adopted three 
decisions in October 2015 and January 2016. 

The CCCTB initiative will provide a holistic solution to the problem of tax avoidance in 
Europe, with a fundamental reform of corporate taxation. A common corporate tax base 
would  effectively  mean  that  a  single  set  of  corporate  tax  rules  would  be  available  for 
companies  to  calculate  their  taxable  income,  instead  of  the  current  co-existence  of  28 
corporate tax rules. The consolidation would allow companies to offset losses in one Member 
State against  profits  in another. The CCCTB  would in  general reduce compliance costs and 
complexities for businesses in the Single Market. In addition, it would be highly effective in 
tackling tax avoidance as it would limit the opportunities to manipulate tax rules and exploit 
mismatches between tax systems. The Action Plan for Fair and Efficient Corporate Taxation 
in  the  EU  announced  the  relaunch  of  the  CCCTB.  A  two-step  approach  will  be  followed 
focusing firstly on the common tax base and secondly on the consolidation.     

While  work  on the  relaunch  of  a  CCCTB  is  progressing,  there  is a  need  to  act  now  to 
avoid varying interpretation of the OECD/G20 BEPS measures, which would also create 
administrative  burdens  and  uncertainty  for  businesses.  The  Commission  proposal 
covers elements that have already been discussed extensively and presents a pragmatic 
approach bringing together initiatives to enhance effective taxation and transparency in 
the  Single  market.  The  Action  Plan  laid  the  basis  for  developing  an  EU  approach  to 
implementing  some  international  aspects  of  the  common  base  that  are  linked  to  the  BEPS 
project. This would allow for a coordinated implementation of the new international standards 
agreed in the OECD/G20 BEPS package. The Action Plan states that these elements should be 
agreed  in  the  Council  within  12  months.  Member  States  have  extensively  discussed  anti-
avoidance  rules,  not  only  in  the  context  of  the  BEPS  project,  but  also  in  the  context  of  the 
CCCTB proposal presented by the Commission in 2011. The following rules were discussed: 
interest  limitations,  exit  taxation,  switch-over  rules,  general  anti-abuse  rule  (GAAR), 
controlled  foreign  companies  (CFC)  rules,  hybrid  mismatches  and  definition  of  permanent 
establishment.  

The  Anti-Tax  Avoidance  Package  will  ensure  that  tax  is  paid  where  the  value  is 
generated  and  that  tax  information  is  effectively  accessed.  The  EU  uses  all  tools  at  its 
disposal  securing  a  common  approach:  two  legally  binding  Directives,  a  Commission 
recommendation, as well as a Commission Communication preventing together aggressive tax 
planning within the EU and against external base erosion threats. This package is structured 
around the following 4 initiatives: 

  A proposal for an Anti-Tax Avoidance Directive  
  A Recommendation on Tax Treaty issues 
  A proposal for an amendment to the existing Directive on administrative cooperation 

to implement the OECD agreement on Country-by-Country Reporting    

  A Communication on External Strategy for Effective Taxation 

23 Commission Expert Group on Taxation of the Digital Economy – Report, 2014,  
24 OECD (2015a)  
25 European Commission (2015d)  

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Those  four  initiatives  are  accompanied  by  a  Chapeau  Communication  that  clarifies  the 
context, objectives and overall articulation of the package. 

The proposal aims at setting a common minimum level of protection  against tax avoidance. 
This  coordinated  approach  should  safeguard  the  integrity  of  the  Single  Market,  level  the 
playing field on tax for Member States and limit the distortions in the European Union. The 
policy  proposal  also  ensures  that  rules  and  measures  taken  to  fight  tax  avoidance  are 
compliant with EU law and respect the fundamental freedoms as well as fundamental rights as 
enshrined in the EU Charter of Fundamental Rights.  

1.4. Consultation process 

The  package  builds  on  the  outcomes  of  the  OECD/G20  BEPS  project  as  well  as  on 
discussions on the international aspects of the CCCTB (including Council working parties and 
Council  meetings),  discussions  in  the  Code  of  Conduct  Group  and  in  the  Platform  for  Tax 
Good Governance on the external agenda. The various aspects of the package have therefore 
been subject to extensive consultations, on top of a consultation on the totality of the package.  

1.4.1. Anti-Tax Avoidance Directive 

Measures  in  relation  to  domestic  tax  rules  build  on  the  outcomes  of  the  OECD/G20  BEPS 
project,  as  well  as  on  the  discussions  on  the  international  aspects  of  the  CCCTB  and  the 
discussions in the Code of Conduct Group (in particular with regard to hybrids).  

As detailed in section 2 below, the works on the BEPS project have been very inclusive, with 
public consultations on a majority of actions and the release of discussion draft and working 
documents  for  all  actions.  Most  Member  States  have  been  involved  in  the  technical 
discussions on the actions.  

The  international  aspects  of  the  CCCTB  were  subject  to  technical  discussions  preparing 
Council  meetings,  to  discussions  in  the  High  Level  Working  Party  on  Taxation  and  to 
consultation  with  stakeholders.  The  need  to  align  developments  in  the  CCCTB  and  BEPS 
initiatives emerged in the Council discussions. The 2014 Italian Presidency started promoting 
the  development  of  an  EU/BEPS  work  programme  (EU/BEPS  Roadmap)  and  focusing  the 
discussion  on  international  and  BEPS-related  aspects  of  the  CCCTB  proposal.  The  Italian 
Presidency has  encouraged  the  consistency  with  parallel  OECD  initiatives,  while  respecting 
EU law. The approach has been endorsed by the High Level Working Party on Taxation and 
followed  by  the  subsequent  Presidencies.  European  Council  Conclusions  of  18  December 
2014  called  for  "an  urgent  need  to  advance  efforts  in  the  fight  against  tax  avoidance  and 
aggressive  tax  planning,  both  at  the  global  and  EU  levels"26.  The  discussions  on  the  EU 
BEPS  Roadmap  have  continued  into  2015.  The  aim  has  been  to  feed  the  OECD  discussion 
and pave the way for a smooth implementation of the OECD recommendations, given the EU 
specificities.  

1.4.2. Recommendation on Tax Treaty issues 

Tax  treaties  issues  have  been  extensively  discussed  in  the  context  of  the  OECD/G20  BEPS 
project, in Action 6 (preventing Treaty Abuse) and 7 (Preventing the Artificial Avoidance of 
Permanent Establishment Status). Both Actions have been subject to public consultations, in 
addition to the involvement of most Member States in technical OECD groups.   

26 European Council Conclusions, 18 December 2014, EUCO 237/14, 
http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/146411.pdf. 

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1.4.3. Directive implementing the OECD/G20 Country-by-Country reporting 

The introduction of new transparency requirements for companies was the subject of a public 
consultation  launched  by  the  Commission  in  2015.  The  public  consultation  attracted  much 
interest with more than 400 responses received. It reflected the possibility to implement the 
OECD/G20 BEPS recommendation on non-public Country-by-Country Reporting (action 13) 
and/or the disclosure to the wider public of certain tax information from companies. Action 13 
was itself subject to extensive consultation, within the framework of the BEPS project. 

1.4.4. Communication on External Strategy for Effective Taxation 

The EU Strategy towards third countries has been extensively discussed in the context of the 
Platform for Tax Good Governance. Items such as the criteria used by Member States to list 
third countries for tax purposes, or the need for a common EU approach were discussed in this 
context.  The  publication  of  the  overview  of  third  countries  listed  by  Member  States  for  tax 
purposes,  which  was  a  first  step  towards  an  EU  approach  to  assessing  and  listing  third 
countries  has  generated  lot  of  useful  debate  and  involvement  with  Member  States,  third 
countries  and  stakeholders.  This  topic  has  been  further  discussed  in  High  Level  Working 
Group.  Furthermore,  the  proposed  approach  would  reflect  many  of  the  elements  considered 
essential by the European Parliament with regard to third countries.   

1.4.5. Anti-Tax Avoidance Package 

The  Anti-Tax  Avoidance  Package was  presented  and  discussed  on  30  November  2015  with 
Member  States'  representatives,  business  and  non-governmental  organizations  (NGO)  at  the 
Platform for Tax Good Governance.  

Several  Member  States  shared  the  Commission  analysis  on  the  need  to  have  a  fair  taxation 
framework in the Single Market, on the importance of the external dimension in a globalised 
world and on the fact that a common approach is preferable. Most Member States expressed 
their  interest  in  relying  on  a  Directive  which  is  perceived  as  more  effective  and  providing 
legal  certainty.  Some  Member  States  highlighted  the  importance  of  allowing  for  some 
flexibility.  Among  the  fields  that  should  be  prioritised  for  a  common  EU  approach;  many 
Member States cited hybrids, CFC legislation and interest limitation rules. Exit taxation and 
switch-over rules were also mentioned by a number of MS. A small number of Member States 
mentioned that they did not favour the choice of a Directive as the tool to address issues such 
as  the  definition  of  Permanent  Establishment  or  Treaty  abuse.  According  to  some  Member 
States, the Country-by-Country reporting to tax authorities could be implemented through an 
amendment to the Directive on Administrative Cooperation. On the external strategy, several 
Member States favoured including a good governance clause in trade agreements with third 
countries. Furthermore, various Member States stated being in favour of replacing the present 
compilation of national lists by a common EU list based on common criteria with a coherent 
approach. 

Business and NGOs were similarly consulted on the package. Business groups cited that the 
Single Market was good for job, investment and growth, and asked that these goals be kept in 
mind. Many were supportive of further coordination of anti-avoidance measures and could see 
that this could help minimise administrative burdens for businesses operating throughout the 
EU.  There was an emphasis on ensuring that this did not create additional compliance costs 
which  were  disproportionate  to  the  benefits.  NGOs  were  on  the  whole  supportive  of  the 
proposal.  They  pushed  for  the  inclusion  of  measures  which  would  ensure  profits  were 
effectively  taxed  in  the  EU.  They  asked  that  the  impact  of  these  measures  on  developing 

10 

 
 
countries should be borne in mind.  Finally, they emphasised their position that Country-by-
Country reporting should be made public. 

1.5. Complementary existing initiatives 

The Anti-Tax Avoidance Package complements existing initiatives and forums to ensure 
effective taxation and transparency. For example, the work on introducing a new anti-abuse 
clause in the Interest and Royalties Directives has been progressing, and Ministers of Finance 
have  agreed  to  focus  attention  on  this  aspect  in  the  short-term.  Other  initiatives  and forums 
include  the  Code  of  Conduct,  the  Joint  Transfer  Pricing  Forum,  the  Platform  for  Tax  Good 
Governance  or  measures  to  increase  transparency,  which  are  explained  in  greater  details 
below.  

1.5.1. Code of Conduct  

The  Code  of  Conduct  for  Business  Taxation27  was  set  up  in  1998  to  address  harmful  tax 
competition within the EU. It has assessed a great number of national measures and in around 
100  cases  the  Member  States  concerned  have  agreed  to  abolish  or  modify  ("roll  back")  the 
regimes that have been found harmful under the criteria of the Code of Conduct. 

In 2009, the Code Group started examining anti-abuse issues related to hybrid mismatches. It 
first  concentrated  its  work  on  hybrid  entities  and  hybrid  Permanent  Establishments  (PE). 
Guidance  on  hybrid  entities  mismatches  was  agreed  in  December  2014,  on  the  basis  of  the 
fixed alignment approach. It would compel Member States to change their qualification of the 
hybrid entity from transparent to non-transparent in double deduction situations, or from non-
transparent to transparent in deduction/no inclusion cases. Guidance was agreed in June 2015 
for  hybrid  PEs,  and  in  December  2015  for  hybrid  entities  in  situations  involving  third 
countries (based on a modified fixed alignment approach). 

Recently,  the  Code  Group  has  looked  extensively  into  patent  box  regimes  that  exist  in  10 
Member States. In 2014, it agreed that preferential regimes, such as patent boxes, should be 
aligned  with  the  "modified  nexus  approach",  discussed  in  the  OECD/G20  BEPS  project 
(Action  5  on  Harmful  Tax  Practices).  Under  this  approach,  the tax  benefits  must  be  directly 
linked to the underlying research and development activities. The agreement on the modified 
nexus approach re-establishes the link between taxation and economic activity. 

The Code Group has also entered into dialogues with third states in order to try to ensure that 
tax  regimes  in  those  states  comply  with  the  criteria  of  the  Code  of  Conduct.  So  far  an 
agreement  has  been  reached  with  Switzerland  and  a  dialogue  has  been  initiated  with 
Liechtenstein. The 2015 Work program of the Code Group provides that this exercise should 
be continued and expanded to further third states. 

In  the  Action  Plan  for  Fair  and  Efficient  Corporate  Taxation  in  the  EU,  the  Commission 
recommended  reforming  the  Code  Group  in  order  to  focus  more  on  ensuring  effective 
taxation and react more efficiently to instances of harmful tax competition. 

1.5.2. Joint Transfer Pricing Forum  

The EU Joint Transfer Pricing Forum (JTPF), which was set up in 2002, assists and advises 
the  Commission  on  transfer  pricing  tax  issues.  It  proposes  non-legislative  solutions  to 
practical  problems  posed  by  transfer  pricing  practices  in  the  EU.  It  is  made  up  of 

27 Resolution of the Council 98/C 2/01  

11 

 
 
                                                            
representatives  from  Member  States,  businesses  and  NGOs.  The  work  of  the  forum  centres 
around two areas: 

 

the  Arbitration  Convention,  which  is  a  specific  dispute  resolution  mechanism  for 
transfer pricing cases; and  
  other transfer pricing issues.  

The June Action Plan called on improving the transfer pricing framework in the EU in order 
to better align the transfer pricing outcomes with value creation.  

1.5.3. EU Platform for Tax Good Governance & the 2012 Recommendations  

In  2012,  together  with  the  Action  Plan  to  strengthen  the  fight  against  tax  fraud  and  tax 
evasion28 the Commission  adopted  two recommendations.  The first one,  on Aggressive  Tax 
Planning29,  recommends  the  adoption  by  Member  States  of  a  GAAR  that  would  counter 
aggressive tax planning schemes that fall outside the scope of their specific anti-abuse rules. 
Member States are also encouraged to include in their double tax conventions a provision that 
limits the application of rules intended to avoid double taxation. The second one, on measures 
intended to encourage third countries to apply minimum standards of good governance in tax 
matters,30  provides  criteria  for  identifying  third  countries  that  do  not  meet  those  minimum 
standards. It also lists actions that Member States may take in relation with third countries that 
comply  -  or  not  -  with  those  standards.  The  Platform  for  Tax  Good  Governance,  made  of 
representatives from Member States, businesses and NGOs, was set up in 2013. It was mainly 
tasked to support work on aggressive tax planning and good governance in tax matters. It also 
monitored  the  application  of  the  two  Recommendations.  The  mandate  of  the  Platform  was 
expanded in 2015, following the Action Plan. 

1.5.4. Transparency measures  

In March 2015, the Commission launched a package of measures to boost tax transparency. It 
included  a  proposal  for  an  automatic  exchange  of  information  on  tax  rulings,  which  was 
adopted by the Council in December 2015. All advance cross-border tax rulings and advance 
pricing arrangements will be subject to an automatic exchange of information as from January 
201731. It is in line with work carried out in the context of the OECD/G20 BEPS package on 
harmful tax practices, and goes even beyond.  

Further to the introduction of non-public Country-by-Country reporting, which is covered by 
the  Anti-Tax  Avoidance  Package,  the  possibility  to  disclose  to  the  wider  public  certain  tax 
information of companies is currently being examined by the Commission, following a public 
consultation.  

1.6. Initiatives by the European Parliament 

The  European  Parliament  is  closely  examining  the  issue  of  tax  avoidance,  in  particular 
through  the  Economic  and  Monetary  Affairs  (ECON)  Committee  and  the  Tax  Rulings  and 
Other Measures Similar in Nature or Effect (TAXE) Committee.  

28 European Commission (2012a) 
29 European Commission (2012c) 
30 European Commission (2012b) 
31 However, information will need to be communicated on all advance cross-border rulings and advance pricing 
arrangements issued, amended or renewed since January 2014. Information on advance cross-border rulings and 
advance pricing arrangements issued, amended or renewed in 2012 and 2013 will need to be exchanged if those 
rulings are still valid. 

12 

 
 
                                                            
There  is  a  clear  message  from  the  European  Parliament  that  tax  avoidance  needs  to  be 
addressed.  As  highlighted  in  the  TAXE  committee's  report,  corporate  tax  avoidance  has  a 
direct effect on Member States budgets and the sharing of tax efforts across economic factors. 
It  also  creates  competition  distortions  and  unfair  tax  burden  sharing  among  taxpayers. 
Citizens  and  SMEs  shoulder  a  disproportionate  burden,  compared  to  large  MNEs32.  "[T]his 
situation risks feeding democratic mistrust and affecting overall tax compliance".33 

The lack of joint definition or guidelines in the EU when it comes to  elements such as anti-
abuse rules or notion of permanent establishment34 is identified by the Parliament as an area 
where there would be a need for coherence at EU level. The fight against tax avoidance also 
requires  action  with  regard  to  bilateral  tax  treaties  and  insufficient  anti-abuse  provisions 
therein.35  

The studies and in-depth analyses prepared for the EP shed light on aggressive tax planning 
techniques,  and  possible  solutions.  A  paper  by  Vella  presents  "some  of  the  most  significant 
techniques and mechanisms used by MNEs for base erosion and profit shifting as identified in 
the BEPS project"36, i.e. exploitation of transfer pricing rules, debt shifting, hybrid mismatch 
arrangements, Tax Treaty abuse, artificial avoidance of Permanent Establishment status, and 
tax  rulings.  In  another  paper  on  patent  box  regimes,  Evers  recalls  the  usefulness  of  exit 
taxation on "the full earnings value of the [Intellectual Property] IP"37, although it is not easy, 
she points out, to identify the ‘true value’ of IP. 

The Parliament supports the OECD/G20 BEPS Reports. However, as the OECD approach is 
based on soft law, it should be "complemented by a proper legislative framework at EU level 
to  address  the  needs  of  the  single  market,  e.g.  in  the  form  of  an  anti-BEPS  directive  going 
beyond  the  OECD  BEPS  initiative  in  areas  that  are  not  sufficiently  covered".38  The  
Commission  should  also  envisage  "areas  in  which  the  Union  should  go  further  than  the 
minimum standards which the OECD recommends"39. 

Enhancing transparency is important in order to increase "public accountability of MNCs and 
supporting tax administrations in their investigations."40  

The European Parliament has also looked into great details at the role of third countries in tax 
avoidance. It is committed to tackle the challenge posed by the so-called "tax havens". In its 
report on tax rulings, the Parliament has pointed out how lack of transparency in the global 
tax  system  enables  multinational  companies  to  limit  their  tax  bill  by  shifting  their  profits 
outside the Union. To make progress on this front, the Parliament has invited the Commission 
to continue its work on a common EU approach towards third-country tax jurisdictions. The 
Parliament  "reiterates  that  genuinely  European  lists,  regularly  updated  and  based  on 
comprehensive, transparent, robust, objectively verifiable and commonly accepted indicators, 
would  be  more  effective  as  a  means  of  promoting  good  tax  governance  and  changing  tax 
behaviours  towards  and  within  those  jurisdictions"41.  In  the  same  report,  the  European 

32 See also VVA Consulting and ZEW (2015)  
33 European Parliament (2015a)  
34 European Parliament (2015a) 
35 European Parliament (2015a) 
36 Vella, J. (2015) 
37 Evers, L. K. (2015) 
38 European Parliament (2015a)  
39 European Parliament (2015b)  
40 European Parliament (2015a)  
41 European Parliament (2015a) 

13 

 
 
                                                            
Parliament has also pointed out that the OECD approach to the matter cannot be considered 
sufficient,  as  it  focuses  on  tax  transparency  and  the  exchange  of  information  but  do  not 
sufficiently address the harmfulness of tax practices42.  

2. Analysis of key drivers and possible solutions to address tax avoidance  

This section presents the results of the OECD/G20 BEPS package and the results of a study 
on  aggressive  tax  planning  (ATP)  commissioned  by  the  Commission  services.  This  should 
provide  a  broad  overview  of  the  mechanisms  used  by  MNEs  to  avoid  taxes  and  of  the 
solutions that can be envisaged to defeat such ATP structures.   

2.1. The OECD/G20 BEPS Project 

The OECD report on Addressing Base Erosion and Profit Shifting43 showed that the roots of 
BEPS were not to be found in single rules or provisions, but rather in the interplay of various 
national tax rules. It also showed that the corporate tax rules and international standards had 
not  kept  pace  with  the  changing  environment,  and  identified  a  lack  of information  and  data 
availability.  

In September 2013, the G20 Leaders endorsed the OECD Action Plan on Base Erosion and 
Profit Shifting44, which was made up of 15 actions. This marked the start of a two-year work 
to deliver on the Action Plan. The process allowed for the involvement of a large number of 
countries  and  a  variety  of  stakeholders.  All  OECD  and  G20  countries,  including  a  vast 
majority  of  Member  States,  worked  together.  Even  more  countries45  were  associated  to  the 
process through their direct involvement in technical groups46. Regional structured dialogues 
were also organised which means that in total more than 90 countries have contributed to the 
works  on  the  BEPS  project.  The  European  Commission  was  also  associated.  For  all  15 
actions, discussion drafts and working documents were made public. There have been  more 
than 1,400 submissions from industry, advisers, NGOs and academics. In addition, 11 public 
consultations  were  held  with  stakeholders.  The  BEPS  Final  Reports  were  published  in 
October 2015 and endorsed by G20 leaders in November 2015. Most Member States, in their 
capacity as OECD members, have therefore engaged to implement the outcome of the Final 
Reports. 

The final package proposes to reforming key areas of the system to ensure that taxes are paid 
where  economic  activity  takes  place.  A  first  set  of  measures  focuses  on  improving  the 
coherence of the international tax framework. Examples are the taxation of CFCs, limits on 
interest  deductibility  or  conditions  on  the  application  of  preferential  tax  regimes  for 
intellectual  property  ('patent  boxes').  A  second  set  of  measures  aims  at  enhancing 
transparency, for example by requiring multinationals to provide country breakdowns of key 
items relevant for taxation ('country-by-country reporting') or by exchanging information on a 
range of rulings. The third set of measures aims at strengthening substance requirements for 
example in the area of transfer pricing rules.  

42 European Parliament (2015a) 
43 OECD (2013a) 
44 OECD (2013b)  
45 All EU Member States that are OECD countries, plus Croatia, Latvia and Lithuania. 
46 OECD/G20 BEPS, Explanatory Statement, 2015 Final Reports 

14 

 
 
                                                            
Below, the actions that are most relevant to this policy initiative are presented, followed by an 
overview  of  the  remaining  BEPS  actions  that  are  mostly  catered  for  by  ongoing  or  existing 
initiatives at EU level.   

2.1.1. Neutralising the Effects of Hybrid Mismatch Arrangements (Action 2)47 

Hybrid  mismatch  arrangements  exploit  differences  in  the  tax  treatment  of  an  entity  or  an 
instrument under the laws of two or more jurisdictions to achieve double non-taxation. These 
types of arrangements are widely used by taxpayers and result in the shifting of considerable 
amounts  of  profits  and  the  substantial  erosion  of  countries’  taxable  basis.  Several  OECD 
reports  have  identified  hybrid  mismatch  arrangements  as  playing  a  major  role  in  aggressive 
tax  planning  and  highlighted  the  negative  impact  of  such  arrangements  on  tax  revenues  as 
well as competition, transparency and fairness 

The Final Report focuses on three possible outcomes under a hybrid mismatch arrangement: a 
deduction/no  inclusion  outcome  (D/NI  outcome)48,  a  double  deduction  outcome  (DD 
outcome)49 or an indirect D/NI outcome50.  

The OECD/G20 recommends aligning the tax treatment of an instrument or an entity in one 
jurisdiction with the tax treatment in the counterparty jurisdiction in order to neutralise hybrid 
mismatch arrangements.  The recommended rules are divided into a  primary response and a 
defensive  rule,  in  the  event  that  the  primary  response  is  not  applied  by  the  parent  or  payer 
jurisdiction according to the case.51 

2.1.2. Strengthening CFC Rules (Action 3)52 

CFC rules are designed to prevent taxpayers with a controlling interest in a foreign subsidiary 
from stripping the tax base of their country of residence by shifting income into a CFC. 

However, existing CFC rules are not always adapted to the current business environment and 
do not permit to tackle BEPS effectively. Taxpayers have developed practices that allow them 
to circumvent CFC rules. For example, they may manipulate the definition of CFCs through 
the choice of the legal form of the subsidiary, the fragmentation of the level of control, or the 
splitting of income across multiple subsidiaries. 

The OECD/G20 Final Report puts forward options for the design of CFC rules in the form of 
six building blocks: (i) definition of a CFC, (ii) CFC exemptions and threshold requirements, 
(iii)  definition  of  CFC  income,  (iv)  rules  for  computing  income,  (v)  rules  for  attributing 
income  to  shareholders,  and  (vi)  rules  to  prevent  or  eliminate  double  taxation.  It  aims  at 

47 For more details, refer to OECD (2015b) 
48  Cross-border  payments  that  are  deductible  under  the  laws  of  one  jurisdiction  and  are  not  included  in  the 
ordinary income under the laws of the other jurisdiction where the payment is received. 
49 Payments that produce two deductions in respect of the same payment, through for example deductible hybrid 
payments or deductible payments made by a dual resident 
50 Outcome where payments are deductible under the rules of the payer jurisdiction and are set-off by the payee 
against a deduction under a hybrid mismatch arrangements. 
51 i) For D/NI outcomes: the primary response consists in denying deduction of the income at the level of the 
payer, while the defensive rule would be to include hybrid payments in the ordinary income of the payee. 
ii) For DD outcomes: the primary response is to deny either the parent or the resident company deduction of the 
income. The proposed defensive rule denies the payer deduction of the income in the case of deductible payment 
made by a hybrid. 
iii) For indirect D/NI, the primary response consists in denying the payer deduction of the income (no defensive 
rule is deemed necessary in that case). 
52 For more details, refer to OECD (2015c) 

15 

 
 
                                                            
preventing  the  stripping  of  jurisdictions'  tax  bases,  while  avoiding  excessive  administrative 
and compliance burdens for companies as well as double taxation issues. 

Regarding the definition of  CFC income, it is  worth  noting that  the  Final Report presents a 
non-exhaustive list of approaches to attribute income that raises BEPS concerns: 

i)  a  categorical  approach,  which  consists  in  classifying  income  into  categories,  usually 
according to its legal designation (as dividend, royalty, IP income, etc.), but also according to 
other  criteria,  such  as  the  relatedness  of  parties  or  the  source  of  income.  CFC  rules  would 
apply to those categories of income;  

ii)  a  substance-based  approach,  which  looks  at whether the  attribution of  income  to  a  CFC 
refers to genuine activity, either through a threshold test or a proportionate analysis; 

iii) an excess profit returns test, which targets extraordinary returns on equity (notably, in the 
form of interest or royalties) that would remain with the CFC even after transfer pricing rules 
have been applied. 

States  may  choose  one  of  these  approaches  or  combine  two  of  them.  The  above-described 
approaches can be applied on an entity-by-entity basis53 or on a transactional basis54.  

2.1.3. Limiting Base Erosion via Interest Deductions and Other Financial Payments (Action 4)55 

Jurisdictions usually treat debt and equity differently for tax purposes; interest on debt is often 
treated as a deductible expense for the payer, while dividends are generally not deductible and 
are  subject  to  some  form  of  tax  relief  such  as  exemption.  This  may  lead  to  the  following 
scenarios: 

i) companies may take advantage of this difference in treatment in a cross-border context by 
claiming relief for their interest expense in one jurisdiction while equity returns are taxed on a 
preferential basis in another jurisdiction; 

ii) companies can also place high levels of debt into subsidiaries, thus using excessive interest 
deductions to avoid paying tax on local profits. 

In order to address these problems, many jurisdictions have introduced a wide range of rules 
addressing the use of third party and intragroup interest. However, companies have managed 
to circumvent existing rules on the limitation of interest deductibility because of the fluidity 
of money and the flexibility of financial instruments. This, in turn, has led countries to create 
new rules or amend existing ones, causing considerable complexity in the implementation of 
such rules and undermining the attractiveness of countries for investment. 

The OECD/G20 Final Report sets out  a best  practice recommendation  which provides for a 
general limit to interest deductions, through a fixed ratio rule56, and additionally, gives States 
the option to allow for a higher deductibility of the net interest cost by taking into account the 

53 Under the entity approach, either all or none of the income will be included depending on whether the majority 
of that income falls within the definition of CFC income. 
54 Under the transactional approach, some income can still be included even if the majority does not fall within 
the definition of CFC income, therefore being in general more accurate in the attribution of income. 
55 For more details, refer to OECD (2015d) 
56 The fixed ratio rule limits an entity’s net interest deductions to a fixed percentage of its gross operating profits 
measured  using  earnings  before  interest,  taxes,  depreciation  and  amortisation  (EBITDA).  This  rule,  which  is 
relatively straightforward to apply, ensures that an entity’s interest deductions are directly linked to its economic 
activity. The possible ratio would be in a range of 10%-30%. 

16 

 
 
                                                            
indebtedness  of  a  taxpayer's  entire  accounting  group,  i.e.  group  ratio  rule.  States  are  also 
recommended to complement their regimes through targeted rules. 

According to the Final Report, countries may apply a de minimis threshold, whereby entities 
with  net  interest  expenses  below  that  threshold  would  not  be  caught  by  the  general  interest 
limitation  rule.  Countries  may  also  allow  entities  to  carry-forward  disallowed  or  unused 
interest  expense  for  use  in  future  years.  Countries  may  choose  to  exclude  interest  expense 
incurred on specific third party loans used to fund public-benefit projects, subject to certain 
conditions. Furthermore, the bank and insurance sectors will be subject to specific rules to be 
completed in 2016 by the OECD, given the important role played by interest in the business 
models of such groups. 

2.1.4. Preventing Treaty abuse (Action 6)57 

Action 6 addresses Treaty shopping and other Treaty abuse strategies whereby taxpayers seek 
to obtain the benefits of a Tax Treaty in situations where those benefits were not intended to 
be  granted.  Treaty  shopping  refers  to  arrangements  through  which  a  person  who  is  not  a 
resident of a Contracting State is able to access the benefits granted by a Treaty to a resident 
of that State.  

Recommendations  regarding  treaty  shopping  situations,  which  form  the  bulk  of  the  Final 
Report, are divided in three parts: 

i)  introduction  of  a  clear  statement  that  Tax  Treaties  seeks  to  eliminate  double  taxation 
without creating opportunities for tax evasion and avoidance ; 

ii) adoption of a specific anti-abuse rule similar to the limitation-on-benefits (LOB). This rule 
targets treaty shopping cases that can be identified on the basis of pre-defined criteria, such as 
the  legal  nature  of  certain  entities,  the  level  of  ownership  or  the  general  activities  of  these 
entities ; 

iii) inclusion in Tax Treaties of a more general anti-abuse rule based on the principal purposes 
of transactions (the principal purposes test or "PPT" rule).  

The Report however recognises that the combination of an LOB rule and a PPT test may not 
be  appropriate  or  necessary  for  all  jurisdictions  and  allows  some  flexibility  in  their 
application. Furthermore, the Report includes targeted rules to address other forms of treaty 
abuse.   

The OECD/G20 Final Report also refers to the interaction between tax treaties and domestic 
anti-abuse rules, with some treaty abuse strategies that need to be dealt with through domestic 
anti-abuse  provisions.  The  Report  acknowledges  for  example  that  nothing  prevents  the 
application of exit taxes, but suggests ways to resolve possible double taxation issues.  

2.1.5. Preventing the artificial avoidance of Permanent Establishment Status (Action 7)58 

The definition of permanent establishment (PE) comprised in Article 5 of the OECD Model 
Tax Convention provides that the business profits of an enterprise are taxable in a State only 
to  the  extent  that  the  enterprise  has  in  that  State  a  PE.  Action  7  deals  with  tax  avoidance 
techniques aimed at circumventing this definition. In particular, 

  Use of commissionaire arrangements and similar strategies 

57 For more details, refer to OECD (2015f)  
58 For more details, refer to OECD (2015g) 

17 

 
 
                                                            
Commissionaire  arrangements  are  arrangements  through  which  a  person  sells  products  in  a 
State in its own name but on behalf of a foreign enterprise that is the owner of these products. 
Through  this  type  of  arrangement,  a  company  is  able  to  sell  its  products  in  a  State  without 
having a PE to which the profits generated by the sales would have been attributed and thus to 
avoid  corporate  income  tax  on  those  profits.  This  results  in  a  shifting  of  profits  out  of  the 
country  where  the  sales  take  place.  Similar  results  can  be  achieved  through  similar 
arrangements where contracts that are substantially negotiated in a State are not concluded in 
that State because they are finalised or authorised abroad, or where the person who concludes 
contracts is an "independent agent" to whom the exception of Article 5(6) is applicable. 

  Exploitation of the specific activity exemptions 

Article  5(4)  includes  a  list  of  exceptions  (the  "specific  activity  exemptions")  according  to 
which  a  PE  is  deemed  not  to  exist  where  a  place  of  business  is  only  used  to  carry  out  the 
activities that are listed in that paragraph. However, given the changes in business conditions, 
including the digitalisation of the economy, activities that were previously considered to have 
a  preparatory  or  auxiliary  character  may  now  correspond  to  core  business  activities.  Also, 
strategies based on a "fragmentation of activities" where used by companies to benefit from 
the exception of Article 5(4).   

  Splitting-up of contracts 

The splitting-up of contracts between closely related parties in order to avoid the application 
of Article 5(3) which applies to construction sites.  

The OECD/G20 Final Report on Action 7 proposes an updated version of the definition of PE 
which should make it more resilient against artificial structures to circumvent its application, 
in the light of the above-mentioned concerns. 

2.1.6. Re-examining Transfer Pricing Documentation (Action 13)59 

Tax authorities lack information for identifying whether companies have engaged in transfer 
pricing  and  other  practices  that  may  result  in  the  artificial  shifting  of  profit.  In  order  to 
enhance 
three-tiered 
standardised approach to transfer pricing documentation. It consists in: 

the  OECD/G20  developed  a 

transparency  for 

tax  authorities, 

  a  "master  file"  that  will  be  available  to  all  relevant  tax  administrations,  and  will 
provide  high-level  information  on  an  MNE's  global  business  operations  and  transfer 
pricing policies; 

  a  “local  file”  that  is  specific  to  each  country  and  will  provide  detailed  transactional 

transfer pricing documentation; 

  a  "Country-by-Country  Report"  that  will  provide  on  an  annual  basis  and  for  each 
jurisdiction where the MNE operates the amount of revenue, profit before income tax 
and  income  tax  paid  and  accrued.  It  will  also  include  information  on  the  number  of 
employees, stated capital, retained earnings and tangible assets in each tax jurisdiction. 
Finally, it will identify per jurisdiction all active entities and their business activities. 
The  country-by-country  report  would  only  be  required  from  MNEs  with  annual 
consolidated group revenue equal to or exceeding EUR 750 million.  

It is foreseen that the master file and the local file would be transmitted by the MNEs to local 
tax authorities. Country-by-Country reports should be communicated to the jurisdiction of tax 

59 For more details, refer to OECD (2015k) 

18 

 
 
                                                            
residence  of  the  parent  company.  The  Country-by-Country  reports  would  subsequently  be 
shared between jurisdictions through automatic exchange of information. 

The  proposed  approach  should  induce  taxpayers  to  give  consideration  to  transfer  pricing, 
while  providing  tax  authorities  with  relevant  information  for  audit  and  risk  assessment 
purposes. 

It is worth noting that the Joint Transfer Pricing Forum developed in 2006 the EU Transfer 
Pricing Documentation ("EU-TPD"), which is broadly in line with the "master file" and "local 
file"  approach  developed  under  this  action.  The  EU-TPD  will  be  reviewed  to  take  the 
conclusions of BEPS Project into account. 60 

2.1.7. Other OECD/G20 BEPS Actions  

Action 1: Addressing the Tax Challenges of the Digital Economy61 

The report concludes that the digital economy does not create specific issues with regard to 
BEPS,  but  might  exacerbate  some.  This  was  taken  into  account  in  the  work  done  on  the 
remaining actions, for example in Action 3 on CFC (with a modification of the definition of 
CFC  income  to  subject  income  related  to  the  digital  economy  to  taxation),  in  Action  8-10 
(with transfer pricing  guidance revised to address  risks raised by the digital  economy) or in 
Action  7  on  the  definition  of  Permanent  Establishment  (to  prevent  taxpayers  from 
circumventing the actual standard through the use of new business models).   

Action 5: Countering Harmful Tax Practices More Effectively, Taking into Account 
Transparency and Substance62 

The  Final  Report  primarily  addresses  preferential  regimes  used  by  taxpayers  to  artificially 
shift profits and the lack of transparency attached to certain tax rulings. The "nexus approach" 
was  selected  as  the  appropriate  methodology  to  define  the  substantial  activity  requirement 
with a view to realigning taxation of profits with the substantial activities that generate them. 
As  regards  transparency,  it  was  agreed  that  certain  types  of  rulings,  that  could  give  rise  to 
BEPS concerns, would be subject to a compulsory spontaneous exchange.   

This  work  is  in  line  with  actions  taken  at  the  EU  level.  In  particular,  the  Code  of  Conduct 
agreed  that  preferential  regimes,  such  as  patent  boxes,  should  be  aligned  with  the  nexus 
approach.  The  Directive  on  the  automatic  exchange  of  tax  rulings,  recently  agreed  in  the 
Council, goes even beyond Action 563.     

Actions 8-10: Assuring that Transfer Pricing Outcomes are in line with Value Creation64 

The BEPS Action Plan asked for the arm’s length principle to be clarified and strengthened in 
relation  to  transfer  pricing.  The  arm's  length  principle,  which  requires  that  transactions 
between associated enterprises be priced as if the enterprises were independent, operating at 
"arm’s  length",  and  which  is  used  by  many  countries,  has  indeed  proven  vulnerable  to 

Joint  Transfer  Pricing  Forum, 

JTPF  Program  of  Work  2015 

60  EU 
http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/transfer_pricing/forum/jtpf005
2015programmeofwork.pdf 
61 For more details, refer to OECD (2015a) 
62 For more details, refer to OECD (2015e) 
63 For example, the type of rulings exchanged is broader and the exchange is foreseen with all Member States. 
64 For more details, refer to OECD (2015h) 

(section  3.2.2), 

-2019 

19 

 
 
                                                            
manipulation by taxpayers. This has resulted in outcomes in which the allocation of profits is 
not aligned with the economic activity that produced the profits. 

The  Report on  Actions  8  to  10  contains  revised  transfer  pricing  guidance  which  tackles  the 
following  issues:  a)  transfer  pricing  issues  related  to  transactions  involving  intangibles,  b) 
contractual  allocation  of  risks  and  the  resulting  allocation  of  profits  to  those  risks,  and  c) 
certain  other  high-risk  areas.  The  revised  guidance  aims  at  ensuring  that  operational  profits 
are allocated to the economic activities which generate them.  

At  the  EU  level,  transfer  pricing  issues  are  dealt  with  in  a  comprehensive  manner  with  the 
assistance of the Joint Transfer Pricing Forum. The Commission will monitor Member States' 
implementation  of  the  new  rules  and  will  consider  whether  stronger  rules  are  required  to 
prevent manipulation. 

Action 11: Measuring and Monitoring BEPS65 

The  Report  focuses  on  measuring  the  scale  of  BEPS  and  its  economic  impact,  as  well  the 
effectiveness  of  BEPS-countermeasures.  It  estimates  the  revenue  loss  at  the  global  level,  as 
mentioned  in  section  1.1  above.  Analyses  of  BEPS  are  however  constrained  by  the  lack  of 
data and the complexity of disentangling effects of tax avoidance from real economic factors. 
The  report  identified  six  indicators  that  would  allow  monitoring  BEPS,  but  highlighted  the 
need for new data in order to refine the measurement of the scale and impact of BEPS. In that 
respect,  the  Country-by-Country  reporting,  foreseen  under  Action  13,  should  prove  useful. 
The OECD, in cooperation with OECD members and BEPS associates aims at (i) publishing 
new corporate tax statistics, (ii) reporting periodically on estimated revenue impact of BEPS 
countermeasures and (iii) further producing and refining analytical tools and BEPS indicators. 
A  second  set  of  recommendations  consists  in  (i)  improving  public  reporting  of  business  tax 
revenue  statistics,  (ii)  improving  non  tax  data  that  are  relevant  to  BEPS  (such  as  Foreign 
Direct Investments associated with resident special purpose entities); and (iii) looking at best 
practices and encouraging more research on BEPS to better understand BEPS and disentangle 
BEPS from real economic effects and non-BEPS tax preferences.   

Action  11  examines  not  only  the  significant  revenue  losses  caused  by  BEPS  but  also  its 
adverse  economic  effects,  "including  tilting  the  playing  field  in  favour  of  tax-aggressive 
MNEs,  exacerbating  the  corporate  debt  bias,  misdirecting  foreign  direct  investment,  and 
reducing the financing of needed public infrastructure."66 Finally strong anti-avoidance rules 
are found to reduce profit shifting in countries that have implemented them. 

Action 12: Requiring Taxpayers to Disclose their Aggressive Tax Planning Arrangements67  

Mandatory disclosure regimes would oblige taxpayers to provide the tax authorities with early 
information  regarding  potentially  aggressive  or  abusive  tax planning  schemes  and  permit  to 
identify  the  promoters  and  users  of  those  schemes.  Such  rules  increase  transparency  and 
address countries' need for more information, while taking into account the compliance costs 
to taxpayers.   

The Code of Conduct should work on proposing EU guidance for implementing this Action, 
as suggested by the Council in December 2015.   

65 For more details, refer to OECD (2015i) 
66 For more details, refer to OECD (2015n) 
67 For more details, refer to OECD (2015j) 

20 

 
 
                                                            
Action 14: Making Dispute Resolution Mechanisms More Effective68 

Improving dispute resolution mechanisms should allow solving double taxation disputes more 
efficiently.  The  measures  developed  aim  at  ensuring  the  effective  and  timely  resolution  of 
treaty-related  disputes  through  the  mutual  agreement  procedure.  A  certain  number  of 
countries have also agreed to introduce mandatory arbitration in their bilateral tax treaties.  

The  June  Action  Plan  called  for  further  improving  the  dispute  resolution  mechanism.  The 
Commission is currently exploring various options for a coordinated EU approach to improve 
the current situation which is foreseen to be proposed by summer 2016. 

Action 15: Developing a Multilateral Instrument69 

The development of a multilateral instrument would enable countries to implement measures 
developed  in  the  course  of  the  work  on  BEPS  and  amend  bilateral  tax  treaties  accordingly. 
The BEPS Report analyses tax and public law-related issues raised by this approach, which is 
unprecedented  with  respect  to  double  tax  conventions.  Such  an  approach  would  allow 
bilateral tax treaties to reflect the rapidly evolving nature of the global economy. 

2.2. Study on Structures of Aggressive Tax Planning and Indicators 

The  study  on  Structures  of  Aggressive  Tax  Planning  and  Indicators70  (hereafter  the  "ATP 
Study"), whose results were published in January 2016, provides a useful basis for identifying 
areas for action in the fight against tax avoidance. It identifies factors that are critical to set up 
ATP structures and the prevalence of such factors across Member States71. 

The  study  focuses  on  national  tax  rules  and  practices,  and  not  on  treaty-related  issues  or 
international principles of allocation of taxing right. All conclusions that can be drawn from 
this study are therefore bound by its scope, and should not be interpreted as meaning that no 
action  is  necessary  outside  this  scope.  The  study  focuses  on  aggressive  tax  planning  as 
defined in the Commission Recommendation72. 

In order to find out which factors ("indicators") are critical to the set-up of ATP structures, the 
study  identifies  seven  structures  that  are  most  commonly  used  by  MNEs  that  engage  in 
aggressive  tax  planning.  From  these  ATP  structures,  the  study  extracts  a  set  of  indicators73. 
Below is an overview of the seven model structures: 

Type of ATP structure 
1.  Offshore 
structure 

loan  ATP 

2. Hybrid loan ATP structure  
(based  on  a  model  identified 

Brief description74  
The  structure  takes  advantage  of  situations  where  interest  can  be  fully 
deducted in one MS whereas only a small interest spread is being taxed in 
another MS, with this other MS not imposing withholding tax on the interest 
paid to an offshore (low taxed) entity.  
The  structure  takes  advantage  of  the  hybrid  mismatch  in  qualification  of  a 
financing instrument. It benefits from a deduction of the payment in one MS 

68 For more details, refer to OECD (2015l) 
69 For more details, refer to OECD (2015m) 
70 Ramboll Management Consulting and Corit Advisory (2016) 
71 Tax rules and practices of Member States were examined as of June 2015. 
72 Aggressive Tax Planning is defined as “taking advantage of the technicalities of a tax system or of mismatches 
between  two  or  more  tax  systems  for  the  purpose  of  reducing  tax  liability.  It  may result in  double  deductions 
(e.g. the same cost is deducted both in the state of source and residence) and double non-taxation (e.g. income 
which is not taxed in the source state is exempt in the state of residence)". 
73 For a complete overview of all indicators identified by the ATP Study, refer to Annex A1. 
74 Based on the description provided in pp. 25-50 of the ATP Study  

21 

 
 
                                                            
in an OECD report75) 

3.  Hybrid 
entity  ATP 
structure  (based  on  a  model 
identified  in  an  OECD  BEPS 
report 76) 

4.  Interest-free 
structure 

loan  ATP 

5. Patent box ATP structure 

6.  Two-tiered 
IP  ATP 
structure  (based  on  a  model 
identified 
an  OECD 
report77) 

in 

cost 

7. ATP structure based on IP 
contribution 
and 
agreement  (based  on  a  model 
identified 
an  OECD 
report78 ) 

in 

(e.g. as interest) in combination with no inclusion in another MS (e.g. as tax-
free  dividend).  By  inserting  an  intermediate  company  resident  in  a  third 
country, this structure still allows to benefit from a hybrid mismatch.  
The  structure  relies  on  allocating  interest  costs  to  a  company  which  is 
considered a taxable entity in the state of incorporation and as a transparent 
entity  for  tax  purposes  in  the  state  of  the  participants.  The  structure  takes 
advantage of the hybrid mismatch in qualification of an entity. It results in a 
tax deduction for interest in one MS without any inclusion of the payment in 
the other MS. 
The structure takes advantage of a situation where on the one hand deemed 
interest  costs  on  an  interest-free  debt  can  be  deducted  while  there  is  no 
income pick-up on the other hand. 
The  structure  benefits  from  the  favourable  tax  treatment  of  IP  income 
according to a patent box or other specific tax regime in one MS, while at 
the same time another MS allows a deduction of royalty payments and does 
not levy any withholding tax on the outbound royalty payment. 
The ATP structure takes advantage of mismatches in rules on tax residence 
of  a  company  incorporated  in  a  MS.  Based  on  such  mismatch,  the  ATP 
structure  benefits  from  deduction  for  royalty  payments  under  license-  and 
sub-license-arrangements  without  any  inclusion  of  the  received  royalty 
income (given that the IP has been transferred to a subsidiary incorporated 
in a MS but tax resident outside of that MS and tax exempt). 
The  structure  takes  advantage  of  allocating  all  (or  most)  of  the  royalty 
payments  to  a  company  located  in  a  low  or  no  tax  jurisdiction,  while 
benefitting from R&D tax credit and deduction of royalties paid in (high tax) 
MS.  This 
transfer  of 
is  achieved  following  a  reorganisation  and 
manufacturing, sales operation and supporting intangibles (IP). 

Annex  A2  provides  an  overview  of  all  structures  and  relevant  indicators  per  structure.  It 
should be noted that some ATP indicators concern tax rules that may pursue valid tax policy 
objectives. 

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 

75 OECD (2013a) 
76 OECD (2014) 
77 OECD (2013a)  
78 OECD (2013a)  

22 

 
 
                                                            
SAAR79.  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 payment80. 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. 

79 In other words, the ATP study identified that 26 Member States do not score on indicator 32 (No general or 
specific anti-avoidance rules to counter the model ATP structures). 
80 Furthermore, if a MS has a withholding tax on interest but exempts or refunds it under certain circumstances, 
the  Member  State  would  be  more  exposed  to  being  used  in  an  ATP  structure  if  the  exemption  or  refund  is 
granted without any beneficial owner test.   
81  In  general,  it  is  important  to  recall  that  the  main  cause  for  hybrid  mismatches  is  that  the  tax  classification 
largely depends on different criteria and case law in each Member State. This makes it therefore difficult to say 
precisely which Member States should score on an indicator. Both sides are equally important and this certainly 
calls for a coordinated approach. A choice had however to be made in the study on how to define the indicators 
in order to allow for a review per Member State.  

23 

 
 
                                                            
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. 

2.2.2. Third-country jurisdictions 

The study also highlights the fact that third countries' tax rules may be used to facilitate tax 
avoidance and the shifting of profits outside the EU. Out of the seven model ATP structures 
identified  by  the  study,  third  countries  may  be  involved  in  six  of  them82.  It  also  identifies 
which tax rules and practices make a third country more prone to be used in an ATP structure 
(see Annex A3). Next to the low level of taxation, the existence of preferential treatment for 
IP or the lack of anti-abuse rules are factors that may prompt the use of third countries in a tax 
avoidance structure.  

The  study  discusses  Overseas  Countries  and  Territories  or  Outermost  Regions  of  some 
Member States. Those territories enjoy a special status within or outside the European Union. 
They may have different tax arrangements or full tax autonomy vis-à-vis their Member State. 
Those  territories  may  be  considered  as  third-country  jurisdictions  depending  on  their 
interaction with EU law, which differs according to TFEU provisions. 

3. Objectives and features of the policy initiative 

3.1. General policy objective 

The objective of the Anti-Tax Avoidance Package is to enhance the smooth functioning of the 
Single  Market  and  thereby  support  the  ability  of  the  Single  Market  to  secure  sustainable 
growth,  employment  and  competitiveness.  A  fair,  efficient  and  growth-friendly  corporate 
taxation is a key element of a strong Single Market. It should be based on the principle that 
taxes  are  paid  in  the  country  where  profits  are  generated.  Today,  some  multinational 
companies take advantage of mismatches between national tax systems and exploit loopholes 
in order to reduce the taxes that they owe. They also exploit the fact that corporate tax rules 
are no longer well suited to our globalised and digital economy. This means fewer revenues to 
finance public goods, such as education, infrastructure, etc. or to reduce taxes in other areas. It 
also affects the level playing field as companies that do pay their fair share of taxes are at a 
competitive  disadvantage.  Finally,  it  threatens  the  social  contract  at  large.  Honest  taxpayers 
(individuals  and  companies),  who  shoulder  a  disproportionate  amount  of  the  tax  burden, 
might become less inclined to abide by the rules.   

82 Annex 5 of the ATP Study 

24 

 
 
                                                            
Faced with this issue of tax avoidance, some Member States have intensified their efforts to 
attract  MNEs  to  their  own  territories,  which  may  create  further  incentives  for  companies  to 
shift profits. Others have taken unilateral action to protect their tax bases. While national rules 
might seem a valuable short term solution for fixing the most pressing issues, the EU has to 
ensure that an increase in national anti-abuse measures does not undermine the Single Market. 
The  interaction  of  28  national  corporate  tax  systems  offers,  by  their  very  heterogeneity, 
opportunities for aggressive tax planners to exploit mismatches and loopholes.  

The best option is a coordinated approach at EU level. This is necessary in order to safeguard 
and  strengthen  the  Single  Market,  in  full  respect  of  the  fundamental  freedoms.  The  lack  of 
coordination  would  fragment  the  Single  Market  and  affect  the  overall  attractiveness  and 
competitiveness of the EU. Furthermore, the absence of such coordination might discourage 
some Member States to act against tax avoidance in fear of giving a competitive advantage to 
other Member States. Diverging rules to address tax avoidance, or the absence of such rules in 
some countries, would indeed affect the level playing field between companies in the EU and 
the effectiveness of the fight against tax avoidance. Measures taken to address tax avoidance 
need to be coherent not only within the EU but also in relation to third countries in order to 
prevent profits from being shifted outside the EU.   

Acting now is timely. Member States have called for an EU approach to address corporate tax 
avoidance.  The  EP  also  expects  that  the  Commission  takes  the  lead  in  developing  an  EU 
approach. More broadly, companies, citizens, NGOs expect the issue of tax avoidance to be 
better  addressed,  sooner  rather  than  later,  to  restore  fairness  and  a  level  playing  field.  In 
addition, Member States are reflecting on whether and how to implement the agreed outcome 
of the BEPS project in their national legislation. The coordination at EU level therefore needs 
to be shaped as soon as possible. 

3.2. Specific policy objectives 

Many Member States face problems when determining the taxable profits which derive from 
economic  activity  carried  out  by  international  companies  in  their  territory.  While  this 
development has been especially relevant in the EU due to its unique characteristics such as a 

25 

 
 
 
 
 
single currency area and a  Single Market with 28 different tax systems, the overall trend of 
increased capital mobility and tax competition can also be observed at the global level.  

In order to ensure that taxes are paid where the economic activity takes place, and to eliminate 
profit  shifting,  it  is  important  to  act  on  various  aspects:  strengthening  domestic  tax  rules, 
addressing  Tax  Treaty  issues,  enhancing  transparency  and  building  a  common  approach 
towards third countries.   

3.2.1. Strengthening Domestic Tax rules 

In order to effectively counter tax avoidance, our proposal puts forward tax rules that ensure 
that an income cannot go untaxed (or taxed at very low level). While the CCCTB will offer a 
holistic approach to the problem of tax avoidance, it is important to ensure that in the shorter 
term, the 28 national corporate rules are coordinated in order to effectively address aggressive 
tax planning.  If there is one weaker link within the EU, it could be exploited by MNEs that 
seek to avoid taxes. This calls for putting forward rules that would set a common minimum 
level  of  protection  against  tax  avoidance  in  the  Single  Market.  Such  rules  would  address 
issues that similarly feature in the CCCTB Proposal.  The proposed rules should also ensure 
that  the  BEPS  outcomes  are  implemented  in  full  compliance  with  EU  law,  including  the 
fundamental  freedoms  as  well  as  fundamental  rights  as  enshrined  in  the  EU  Charter  of 
Fundamental  Rights.  Finally,  a  Directive  will  allow  for  the  necessary  coordination  of  all 
Member States' tax system thereby safeguarding the integrity of the Single Market, limiting 
distortions and providing legal certainty.     

The  following  tools  are  being  used:  deductibility  of  interest;  exit  taxation;  a  switch-over 
clause; a GAAR; CFC rules; and a framework to tackle hybrid mismatches. 

Interest deductibility 

Interest costs are deductible for tax purposes in all Member States. Some MNEs have engaged 
in  debt  shifting  whereby  they  obtain  tax  relief  for  excessive  financing  costs  in  high  tax 
jurisdictions, while the interest income is shifted towards low or no tax jurisdictions. Interest 
limitation rules aim at discouraging such practices. By limiting the amount of interest that can 
be deducted, it aims at reducing the incentive to shift profits out of the State of origin to low 
or  no  tax  jurisdictions.  The  ATP  Study  shows  that  four  out  of  seven  model  ATP  structures 
could be restricted by applying to rules that limit the deductibility of interest.    

The interest deductibility rule proposed in the Directive is covered by the OECD/G20 BEPS 
outcome on action 4. In particular, the Directive foresees a fixed ratio expressed in terms of a 
taxpayer’s earnings before interest tax depreciation and amortisation (EBITDA), above which 
net interest expenses cannot be deducted. This is complemented by a group ratio rule. Finally, 
a safe-harbour provision ensures that companies that have limited net interest expenses are not 
caught by the rules as these companies are less likely to engage in debt shifting.  

It should be noted that the asymmetric tax treatment of debt and equity fuels international debt 
shifting. Most tax systems give incentives to companies to take on more debt by allowing the 
deductibility of interest payments while not granting similar treatment to equity. Addressing 
this  tax  bias  would  encourage  more  equity  investments  and  create  a  stronger  equity base  in 
companies.  This  view  was  shared  by  many  respondents  to  the  stakeholders'  consultation  on 
the Commission's Green Paper on Building a Capital Market Union.83 It needs to be ensured 

83 European Commission (2015a)  

26 

 
 
                                                            
that  it  does  not  open  up  new  tax  avoidance  strategies.  The  Commission  will  examine  the 
possibilities to address debt-equity bias in a new proposal on the CCCTB.  

Exit taxation 

Tax base erosion in the State of origin may occur when assets which have an underlying but 
unrealised economic value are moved, without a change of ownership, out of that State. The 
ATP study identifies that the lack of capital gains tax upon transfer of IP plays a role in three 
model  ATP  structures,  as  it  allows  the  transfer  of  IP  to  low  or  no  tax  jurisdictions,  while 
paying  little  or  no  tax  in  the  country  from  which  the  IPs  are  moved  away.  While  the  ATP 
study focuses on transfers between independent legal entitities, a similar risk could arise in the 
case of a transfer within a single legal entity where this results in the departure Member State 
losing its taxing rights over the transferred assets. In such a case, exit taxation would also be 
relevant. 

Exit taxes aim at ensuring that States are in a position to tax the economic value of any capital 
gain created in their territory even though this gain has not yet been realised at the time of the 
exit.  The  OECD/G20  BEPS  package  did  not  focus  any  of  its  Actions  on  exit  taxation. 
However, it is worth noting that the Report on Action 6 (Preventing Treaty Abuse) finds that 
exit taxes are legitimate in the light of what a tax treaty is meant to regulate. The provision of 
the Directive reflects the Presidency's compromise proposal in the context of discussions on 
the international aspects of the CCCTB. 

The  proposed  rule  on  exit  taxation  would  allow  taxpayers  either  to  immediately  pay  the 
amount  of  exit  tax  assessed  or  defer  payment  of  the  amount  of  tax.  The  design  of  the  rule 
the  freedom  of 
ensures  compliance  with 
establishment as  well as fundamental rights as enshrined in the EU Charter of Fundamental 
Rights. 

the  fundamental  freedoms, 

in  particular 

Switch-over clause  

Taxpayers  may  take  advantage  of  the  fact  that  foreign  income  is  tax  exempt  in  the  state  of 
residence to shift profit. Such exemptions may be provided given the inherent difficulties in 
giving  credit  relief  for  taxes  paid  abroad.  However,  they may  have  the  unintended  negative 
effect of facilitating profit shifting.   

The ATP study identifies the tax exemption of dividends received as a factor facilitating ATP, 
especially when this is too generously applied and does not make any reservation for other tax 
avoidance factors. In several model ATP structures, the ATP study identifies the generous tax 
exemption  of  dividends  as  a  factor  allowing  ATP.  Switch-over  clauses  are  commonly  used 
preventing or reducing such practices.  

Switch-over rules were not the subject of an OECD/G20 BEPS Action. However, it is noted 
that  they  are  complementary  to  CFC  rules  (discussed  under  Action  3  of  the  BEPS)  as  they 
serve a similar purpose. In the CCCTB, there were discussions around denying the exemption 
method  in  cases  where  economic  double  taxation  would  not  arise  or  would  be  very  limited 
due to the low level of taxation in the third country. The proposed rules in the Directive build 
upon discussions on the CCCTB in technical working groups in Council.   

The  proposed  switch-over  rules  target  profit  distributions,  proceeds  from  the  disposal  of 
shares  and  permanent  establisment  profits  which  are  otherwise  tax  exempt  in  the  EU  and 
originate in third countries. This income will become taxable in the EU, if it has been taxed 
below a certain level in the third country. A credit is given for the tax paid abroad. 

27 

 
 
GAAR  

The GAAR complements specific anti-abuse rules. It ensures that tax avoidance strategies that 
were not envisaged by the legislator can be addressed, by granting the authorities the power to 
deny taxpayers the benefit of ATP arrangements. It was identified in the ATP study as one of 
the tax rules that could be useful to counter the ATP structures.  

While  there  is  no  action  dedicated  to  a  GAAR  in  the  OECD/G20  BEPS  package,  it  is 
noteworthy that action 6 (Preventing Treaty abuses) proposes the introduction of a principal 
purpose  test  that  acts  as  general  anti-abuse  rule  with  respect  to  tax  treaties.  The  proposed 
GAAR in the Directive is based on the one presented in the Commission Recommendation on 
aggressive tax planning84.  

The  proposed  GAAR  provides  for  the  artificiality  tests  present  in  the  case  law.  The 
fundamental  freedoms  can  be  legitimately  restricted  on  grounds  of  tax  abuse  only  to  the 
extent  that  the  taxpayer’s  arrangements  are  ‘wholly  artificial’  (non-genuine).  The  proposed 
GAAR would apply domestically, intra-EU and internationally.   

CFC rules 

MNEs  with  subsidiaries  in  low-tax  jurisdictions  may  engage  in  tax  planning  practices 
whereby profit is shifted out of the parent company towards those subsidiaries. The effect is 
to  reduce  the  overall  tax  liability  of  the  group.  CFC  rules  allow  the  reattribution  of  this 
income  of  a  (low-taxed)  controlled  subsidiary  to  its  parent  company  for  tax  purposes  in 
certain  situations.  CFC  rules  therefore  can  ensure  that  profits  parked  in  low  or  no  tax 
countries are effectively taxed. The ATP study considers that CFC rules, if well designed and 
effective,  are  critical  anti-abuse  rules  as  they  could  defeat  most  model  ATP  structures 
identified in the study.  

CFC  rules  were  discussed  in  the  context  of  the  CCCTB.  The  proposed  CFC  rules  in  the 
Directive  are  generally  in  line85  with  the  outcome  of  Action  3  of  the  OECD/G20  BEPS 
project. The proposed  Directive covers both  intra-EU and extra-EU situations.  For intra-EU 
situations, the rules have to be designed to ensure EU law compliance, and in particular the 
respect  of  the  fundamental  freedoms  as  well  as  fundamental  rights  as  enshrined  in  the  EU 
Charter of Fundamental Rights.  

Hybrid mismatches   

Hybrid mismatches arise from differences in the legal characterisation of payments (financial 
instruments)  or  entities  in  different  jurisdictions.  The  ATP  study  identifies  two  model 
structures that could be defeated thanks to anti-abuse provisions in this area.  

Hybrid  mismatches  were  covered  by  Action  2  of  the  OECD/G20  BEPS  project.  They  have 
also  been  extensively  discussed  in  the  Code  of  Conduct  Group  where  guidance  on  hybrid 
entities and hybrid Permanent Establishments was agreed. Finally, it was also discussed in the 
context of the CCCTB. The proposed directive includes rules to address hybrid mismatches, 
which should close the doors to exploiting such mismatches both for entities and transactions.   

84 European Commission (2012c) 
85 For simplicity reasons, the Directive foresees that all the income of the subsidiary (i.e. the CFC) will be taken 
into  account  when  the  conditions  are  met.  This  differs  from  the  OECD/G20  BEPS  outcome  which  allows 
countries to distinguish between types of incomes.   

28 

 
 
                                                            
3.2.2. Addressing Tax Treaties issues 

Tax treaties play a very important role in the international framework by encouraging cross-
border trade and investment. They allocate taxing rights between the Contracting  States and 
thereby  eliminate,  or  at  least  alleviate,  double  taxation.  The  objective  of  tax  treaties  is  not 
however  to  open  avenues  for  aggressive  tax  planning  or  to  create  opportunities  for  tax 
avoidance.  Without  adequate  safeguards  they  can  be  exposed  and  vulnerable  to  treaty 
shopping  and  other  abusive  strategies.  The  objective  of  tax  treaties  is  frustrated  (at  the 
expense  of  public  finances)  if  taxpayers  are  allowed  to  claim  treaty  benefits  in  situations 
where  those  benefits  were  not  intended  to  be  accessible to  them.  This  is  also  the  case  if  no 
measures  were  taken  to  counter  strategies  to  artificially  avoid  the  permanent  establishment 
status which is an essential concept for allocation taxing rights.  

The OECD/G20 examined these issues under Actions 6 and 7. The final report on Action 6 
proposes an approach based on different types of safeguards against treaty shopping; the two 
principal  options  being  (a)  a  specific  "limitation-on-benefits"  (LOB)  rule  and  (b)  a  more 
general "principal purpose test" (PPT) based anti-abuse rule. While the two may in principle 
be used simultaneously, in practice they are considered as mutually exclusive alternatives to 
each other.  

It  is  vital  for  the  good  functioning  of  the  Single  Market  that  Member  States  can  operate 
efficient  tax  systems  and  prevent  their  tax  bases  from  being  unduly  eroded  because  of 
inadvertent non-taxation and abuse. At the same time, it is equally important to strike a proper 
balance  between  the  public  interest  of  combating  abuse  and  the  need  to  ensure  that  the 
solutions to protect tax bases create no undue mismatches and market distortions.  
In  this  regard,  the  Commission  considers  LOB  clauses86  to  be  detrimental  to  the  Single 
Market  and,  in  particular,  Capital  Markets  Union.  The  more  general  anti-avoidance  rules 
based on the PPT, if adopted by Member States, should be adapted to meet the requirements 
of a Single Market in order for them to be EU law compliant. The principle of equal treatment 
requires that companies owned by shareholders resident elsewhere in the EU/EEA can benefit 
from the same advantages derived from the Treaty as those available to companies owned by 
domestic shareholders.  

The final report on BEPS Action 7 aims at making the definition of PE more resilient against 
the construction of artificial structures to circumvent their application. This definition needs to 
keep up with developments in an increasingly globalised and digitalised economy.  

The conclusion of tax treaties falls within the competence of Member States despite the fact 
that  in  the  exercise  of  those  competencies,  for  instance  when  implementing  the  minimum 
standards agreed in the framework of the BEPS Project, they must observe their obligations 
under  EU  law.  These  matters  do  not  lend  themselves  easily  to  be  addressed  in  a  legally 
binding instrument such as a Directive, which is why they are included in a Recommendation.  

3.2.3. Enhancing transparency 

Tax  authorities  sometimes  lack  the  information  that  would  allow  them  to  better  detect  tax 
avoidance  strategies  of  MNEs  and  act  on  it.  Increasing  transparency  should  strengthen  the 

86  LOB  rules  are  designed  to  curb  treaty  shopping  essentially  by  denying  access  to  the  benefits  (e.g.  reduced 
withholding tax rates for dividends, interest and/or royalties) of a tax treaty (between country A and country B), 
in situations where the beneficial owners (e.g. shareholders) of the recipient of the income (e.g. corporate entity) 
are not residents in the same country as the recipient of the income (i.e. A or B). They are therefore by definition 
not easy to reconcile with the objectives of a Single Market. 

29 

 
 
                                                            
ability  of  tax  authorities  to  act  against  aggressive  tax  planning.  Coupled  with  the 
strengthening  of  the  legal  framework,  this  should  discourage  companies  from  engaging  in 
such practices.     

It  is  therefore  proposed  to  amend  the  Directive  on  administrative  cooperation  to  implement 
the  outcome  of  the  OECD/G20  BEPS  Action  13,  regarding  non  public  Country-by-Country 
reporting.   

MNEs  (with  a  total  consolidated  turnover  above  EUR  750  million)  should  file  country-by-
country reports with their tax administration. It will provide an overview of all the constituent 
entities  of  the  MNE  group  per  tax  jurisdiction,  as  well  as  an  overview  of  the  allocation  of 
income,  taxes  and  business  activities  by tax jurisdiction.  It  also  includes  information  on  the 
number  of  employees,  stated  capital,  retained  earnings  and  tangible  assets  in  each  tax 
jurisdiction. The MNEs should submit information to the tax authorities of their jurisdiction 
of residence. The information would be subsequently shared between tax authorities, on the 
basis  of  the  existing  arrangements  on  Administrative  Cooperation  in  the  field  of  taxation87, 
and  in  respect  for  the  fundamental  rights  as  enshrined  in  the  EU  Charter  of  Fundamental 
Rights and in particular the right to protection of personal data, and in line with the applicable 
data protection laws.  

3.2.4. Common EU approach towards third countries 

The  new  External  Strategy  aims  at  making  the  EU  approach  towards  the  outside  world 
stronger  and  more coherent.  The European Parliament highlighted the importance of an EU 
approach  to  third  countries  in  the  fight  against  tax  avoidance.  The  ATP  study  shows  very 
clearly  that  third  countries'  tax  rules  may  play  an  important  role  in  the  structuring  of 
aggressive  tax  planning  schemes.  There  have  also  been  several  examples  of  multinational 
companies shifting their profits towards third countries jurisdictions that offer very low level 
of taxation. It is therefore important for Member States to act in a coherent way against such 
practices. This needs to be done in a coordinated manner as the fight against tax avoidance is 
only as strong as the weakest link. On the other hand, the EU is also aware that third countries 
may themselves be victims of base erosion and profit shifting. This was stressed at the Third 
Conference on Financing for Development in July 201588 and was at the heart of the debates 
linked  to  the  adoption  of  the  Addis  Ababa  Action  Agenda89  and  the  2030  Agenda  for 
Sustainable Development90. The EU is therefore committed to support them in strengthening 
their good governance standards for tax purposes. 

The external strategy includes the following aspects:  

1.  re-examining EU good governance criteria; 
2.  improving tax good governance through agreements with third countries; 
3.  supporting developing countries in meeting tax good governance standards91; 

87 Council Directive 2011/16/EU of 15 February 2011 on administrative cooperation in the field of taxation and 
repealing Directive 77/799/EEC (OJ L 64, 11.3.2011, p. 1). 
88 https://ec.europa.eu/europeaid/sites/devco/files/com_collectmore-spendbetter_20150713_en.pdf 
89http://www.un.org/esa/ffd/ffd3/wp-content/uploads/sites/2/2015/07/Addis-Ababa-Action-Agenda-Draft-
Outcome-Document-7-July-2015.pdf 
90 https://sustainabledevelopment.un.org/post2015/transformingourworld 
91 
strategy 
frame 
(https://ec.europa.eu/europeaid/sites/devco/files/com_collectmore-spendbetter_20150713_en.pdf)  and  the  Addis 
tax initiative (http://www.addistaxinitiative.net/). 

"Collect  more 

Particularly 

the  EU 

better" 

Spend 

the 

of 

in 

- 

30 

 
 
                                                            
4.  developing a common EU approach to listing and evaluating third countries for tax 

purposes; 

5.  and ensuring the use of EU funds supports tax good governance. 

With  regard  to  the  development  of  a  common  EU  list  of  third  countries,  the  Commission 
envisages a three-step approach. In a first step, the Commission would identify jurisdictions 
that  need  to  be  prioritized  for  screening  at  EU  level.  Prioritization  would  be  based  on  a 
scoreboard  of  indicators92.  It  aims  to  identify  a  sub-set  of  countries  which  score  highly  on 
indicators often associated with ATP and which have strong economic ties with the EU. Being 
in this subset does not necessarily mean that the country is involved in BEPS-driven activities, 
but  rather provides a starting point for a more detailed assessment. In  a second step, on the 
basis of the outcome of the scoreboard, Member States should decide which jurisdictions are 
to be assessed against the updated good governance criteria. The assessment will be carried 
out by the Commission and the Code of Conduct for Business Taxation and it will incorporate 
a dialogue with the third countries concerned. In a third and last step, Member States should 
agree  on  an  EU  list  of  problematic  tax  jurisdictions,  based  on  a  recommendation  from  the 
Commission.  

92 In annex A4, the "scoreboard of indicators" approach is explained in greater details. 

31 

 
 
   
 
 
                                                            
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34 

 
 
 
 
 
Annexes 

A.1. Overview of ATP indicators93  

93 Ramboll Management Consulting and Corit Advisory (2016) 

35 

ThemeNo.SubjectCategoryDividends received1Too generous tax-exemption of dividends received Passive2No withholding tax on dividends paid (absent under domestic law)Passive3No withholding tax on dividend equivalents (e.g. buy-back of shares)Passive4No beneficial-owner test for reduction of withholding tax on dividendsLack of anti-abuse5Tax deduction for dividends paidActive6Income from certain hybrid instruments non-taxableLack of anti-abuse7No deemed income from interest-free loan (non-arm's-length transactions)Active8Tax deduction for intra-group interest costsPassive9Tax deduction does not depend on the tax treatment in the creditor's stateLack of anti-abuse10Tax deduction allowed for deemed interest costs on interest-free debtActive11No taxation of benefit from interest-free debtLack of anti-abuse12No thin-capitalization rulesLack of anti-abuse13No interest-limitation rulesLack of anti-abuse14No withholding tax on interest payments (absent under domestic law)Passive15No beneficial-owner test for reduction of withholding tax on interestLack of anti-abuseAllowance for equity capital16Notional interest deduction for share capitalActive17Patent box or other preferential tax treatment of income from IPActive 18No taxation of capital gain (fair market value) upon transfer of IPPassive19Tax deduction for intra-group royalty costsPassive20No withholding tax on royalty payments (absent according to domestic law)Passive21No beneficial-owner test for reduction of withholding tax on royaltyLack of anti-abuse22R&D tax incentive obtainable also for costs that are reimbursed PassiveGroup taxation23Group taxation with acquisition holding company allowedPassiveCFC rules24No CFC rulesLack of anti-abuse25Tax qualification of foreign partnership does not follow that of the foreign statePassive 26No rule to counter a mismatch in tax qualification of a domestic partnership between own state and a foreign stateLack of anti-abuse27No rule to counter a mismatch in tax qualification of a domestic company between own state and a foreign stateLack of anti-abuse28Nil corporate tax rateActive29Locally incorporated company not tax-resident if management/control is in another stateActive30Unilateral ruling on e.g. interest spread or royalty spread can be obtainedPassive31Excess profits rulingsActiveGAAR / SAAR32No general or specific anti-avoidance rules to counter the model ATP structuresLack of anti-abuseOther themes (residual)33Any other significant ATP indicator to be identified by national tax expertsForeign legal entitiesTax-free companyRuling practicesInterest costsInterest incomeRoyalty or other IP costsRoyalty or other IP incomeDividends paid 
 
 
 
                                                            
A.2. Structures of Aggressive Tax Planning and relevant indicators per 
structure94  

The ATP Study identifies  seven model ATP Structures.  For each of them, the study further 
identifies  a  series  of  indicators  (critical  tax  rules  and  practices)  per  country  involved  in  the 
Structure.  This  annex  presents  the  seven  model  ATP  structure  and  indicators  that  are 
potentially relevant for Member States95. 

Structure 1: Offshore loan ATP structure  

94 Ramboll Management Consulting and Corit Advisory (2016). 
95 The indicators relative to countries that are necessarily outside of the EU are not presented per structure. 

36 

Relevant indicatorsRelevant indicatorsRelevant indicators1Too generous tax-exemption of dividends received.8Tax deduction for interest costs.8Tax deduction for interest costs.24No CFC Rules.9Tax deduction does not depend on the tax treatment in the creditor's state.9Tax deduction does not depend on the tax treatment in the creditor's state.12&13No interest-limitation rules and no thin-capitalization rules.12&13No interest-limitation rules and no thin-capitalization rules.14No withholding tax on interest payments.14No withholding tax on interest payments.OROR15No beneficial-owner test for reduction of withholding tax.15No beneficial-owner test for reduction of withholding tax.30Unilateral ruling on interest spread.23Group taxation with acquisition holding company allowed.32No general or specific anti-avoidance rules to counter the model ATP structures.32No general or specific anti-avoidance rules to counter the model ATP structures.State AState BState C 
 
 
 
 
 
 
 
                                                            
Structure 2: Hybrid loan ATP structure  

37 

Relevant indicatorsRelevant indicators1Too generous tax-exemption of dividends received.8Tax deduction for interest costs.24No CFC Rules.9Tax deduction does not depend on the tax treatment in the creditor's state.12&13No interest-limitation rules and no thin-capitalization rules.14No withholding tax on interest payments.OR15No beneficial-owner test for reduction of withholding tax.23Group taxation with acquisition holding company allowed.32No general or specific anti-avoidance rules to counter the model ATP structures.State AState C 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Structure 3 - Hybrid entity ATP structure 

38 

Relevant indicatorsRelevant indicators25Tax qualification of the foreign entity does not follow that of the foreign state.8Tax deduction for interest costs.32No general or specific anti-avoidance rules to counter the model ATP structures.9Tax deduction does not depend on the tax treatment in the creditor's state.12&13No interest-limitation rules and no thin-capitalization rules.14No withholding tax on interest payments.23Group taxation with acquisition holding company allowed.27No rule to counter a qualification mismatch of a local company.32No general or specific anti-avoidance rules to counter the model ATP structures.State AState B 
 
 
 
 
 
 
 
 
 
 
 
 
 
Structure 4 - Interest-free loan ATP structure 

39 

Relevant indicatorsRelevant indicatorsRelevant indicatorsRelevant indicators1Too generous tax-exemption of dividends received.7No deemed income from interest-free loan (non-arm's-length transactions).8Tax deduction for interest costs.2No withholding tax on dividends paid.24No CFC Rules.12&13No interest-limitation rules and no thin-capitalization rules.8Tax deduction for interest costs.14No withholding tax on interest payments.10Interest deduction allowed for deemed interest costs on interest-free debt.15No beneficial-owner test for reduction of withholding tax on interest.11No taxation of benefit from interest-free debt.32No general or specific anti-avoidance rules to counter the model ATP structures.12&13No interest-limitation rules and no thin-capitalization rules.32No general or specific anti-avoidance rules to counter the model ATP structures.State DState AState BState C 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
Structure 5 - Patent box ATP structure 

40 

Relevant indicatorsRelevant indicatorsRelevant indicators1Too generous tax-exemption of dividends received.2No withholding tax on dividends paid.19Tax deduction for royalty costs.18No taxation of capital gain (fair market value) upon disposal of IP.17Patent box or other preferential tax treatment of income from IP.20No withholding tax on royalty payments.24No CFC Rules.21No beneficial-owner test for reduction of withholding tax.32No general or specific anti-avoidance rules to counter the model ATP structures.State AState BState C 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Structure 6 - Two-tiered IP ATP structure 

41 

Relevant indicatorsRelevant indicatorsRelevant indicatorsRelevant indicators1Too generous tax-exemption of dividends received.2No withholding tax on dividends paid.19Tax deduction for royalty costs.19Tax deduction for royalty costs.18No taxation of capital gain (fair market value) upon disposal of IP.19Tax deduction for royalty costs.20No withholding tax on royalty payments.20No withholding tax on royalty payments.24No CFC Rules.20No withholding tax on royalty payments.21No beneficial-owner test for reduction of withholding tax.21No beneficial-owner test for reduction of withholding tax.21No beneficial-owner test for reduction of withholding tax.32No general or specific anti-avoidance rules to counter the model ATP structures.32No general or specific anti-avoidance rules to counter the model ATP structures.29Locally incorporated company not tax-resident if management/control is situated in another state.32No general or specific anti-avoidance rules to counter the model ATP structures.State DState AState BState C 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Structure 7: ATP structure based on IP and cost-contribution agreements  

42 

Relevant indicatorsRelevant indicators1Too generous tax-exemption of dividends received.19Tax deduction for royalty costs.18No taxation of capital gain (fair market value) upon disposal of IP.20No withholding tax on royalty payments.22R&D tax incentive obtainable also for costs that are reimbursed.30Unilateral ruling on earnings spread.24No CFC Rules.32No general or specific anti-avoidance rules to counter the model ATP structures.State AState C 
 
 
 
 
 
 
 
 
 
A.3. Overview of indicators that render a third country's legislation more prone 
to be used in an ATP structure96  

96 Ramboll Management Consulting and Corit Advisory (2016) 

43 

No.SubjectCategoryReceived1Too generous tax-exemption of dividends received Passive2No withholding tax on dividends paid (absent under domestic law)Passive3No withholding tax on dividend equivalents (e.g. buy-back of shares)Passive6Income from certain hybrid instruments non-taxableLack of anti-abuse7No deemed income from interest-free loan (non-arm's-length transactions)Active8Tax deduction for intra-group interest costsPassive9Tax deduction does not depend on the tax treatment in the creditor's stateLack of anti-abuse14No withholding tax on interest payments (absent under domestic law)Passive17Patent box or other preferential tax treatment of income from IPActive 19Tax deduction for intra-group royalty costsPassive20No withholding tax on royalty payments (absent according to domestic law)Passive24No CFC rulesLack of anti-abuse25Tax qualification of foreign partnership does not follow that of the foreign statePassive 26No rule to counter a mismatch in tax qualification of a domestic partnership between own state and a foreign stateLack of anti-abuse27No rule to counter a mismatch in tax qualification of a domestic company between own state and a foreign stateLack of anti-abuse28Nil corporate tax rateActive29Locally incorporated company not tax-resident if management/control is in another stateActive32No general or specific anti-avoidance rules to counter the model ATP structuresLack of anti-abuseRoyalty or other IP incomeCFC rulesForeign legal entitiesTax-free companyGAAR / SAARThemePaidCostIncomeInterest Dividends Royalty or other IP costs 
 
 
 
 
                                                            
A.4. "Scoreboard of indicators" to identify third countries subject to further 
evaluation  

 A.4.1. General approach  

Tax  avoidance  can  occur  through  three  main  channels  (debt  shifting,  transfer  pricing  and 
location of intangible assets) and often involves specific financial constructions, often located 
offshore. Third countries may be used in some type of aggressive tax planning structures but 
not  in  others97.  Furthermore,  tax  avoidance  is  a  complex  and  multi-faceted  phenomenon, 
which needs to be looked at from various angles. It is therefore important to rely on a range of 
indicators that are able to reflect various types of structures. 

It is proposed to consider three dimensions:  

  Financial  importance:  Third-country  jurisdictions  that  are  used  in  ATP  structures  should 
record  (abnormally)  high  financial  flows  (such  as  interest  income  or  royalty  income  that 
allow artificially shifting profit, or through the establishment of  numerous foreign-owned 
subsidiaries  for  tax  purposes).  They  are  also  likely  to  be  specialised  in  trade  in  financial 
services to non-residents.98 This category of indicators will therefore focus on the financial 
"symptoms" associated to ATP, both in absolute terms (the biggest financial centres), but 
also relative to the size of real economic activity.   

  Importance  of  economic  ties  with  the  EU:  This  category  of  indicators  aims  to  focus 

attention on those jurisdictions with which the EU has strong economic links.  

  Institutional and legal factors: This category of indicators will reflect factors that facilitate 
or  are  necessary  for  engaging  in  ATP.  The  economic  literature  identifies  as  a  main  and 
obvious  characteristic  of  a  tax  haven  its  very  low  rate  of  business  taxes.  Other  findings 
relate  to  good  governance  and  structure  of  the  tax  systems.99  The  ATP  Study  identifies 
additional  indicators  such  as  the  absence  of  withholding  taxes  on  interest,  royalties  or 
dividends.  It  also  identifies  which  tax  rules  and/or  practices  those  offshore  jurisdictions 
would need to have in order to facilitate the setup of an aggressive tax planning structure.  

It  is  important  to  stress  that  each  potential  single  indicator  cannot  in  itself  suffice  to  draw 
conclusions  on  whether  a  country  should  be  prioritised  for  screening.  For  example,  most 
indicators relative to the "financial importance" of a jurisdiction do not allow  to disentangle 
BEPS-driven  activities  from  real  economic  activities.  Similarly,  it  should  be  stressed  that 
some  indicators,  for  example  in  the  category  of  "institutional  and  legal  factors",  may  very 
well  serve  a  positive  function  in  the  organisation  of  the  country  but  are  "abused"  by 
aggressive tax planners. This is also true for the other categories of indicators. Therefore one 
needs to look at a range of indicators before reaching any conclusion. 

Finally,  the  preselection  of  a  third  country  does  not  rest  on  the  requirement  to  have  all 
indicators "in the red". On the contrary it is only necessary for a minimum of warning signals 
to be on. The aim of the information gathering exercise in the scoreboard is to enable a pre-
selection.  Therefore  the  adverse  consequences  of  forgetting  a  potential  jurisdiction  that 
should  be  screened  ("false  negative")  are  much  more  important  than  the  ones  linked  to  the 
preselection  of  jurisdictions  that  only  stand  out  for  perfectly  legitimate  reasons  ("false 

97 For instance, the ATP study identifies how offshore jurisdictions's tax rules could be used in various structures 
of aggressive tax planning (see above section 2.2.1).  
98 Zoromé, 2007 
99 Dharmapala and Hines (2009); Konrad and Stolper (2015). 

44 

 
 
                                                            
positive"),  as  there  will  be  further  checks  and  assessments  carried  out  in  the  rest  of  the 
process.  

A.4.2. Data selection and limitations 

An  indicative  list  of  indicators  which  might  be  among  those  considered  for  the  first  step 
screening can be found in the table below. 

Category 

Examples of proposed indicators and potential data sources 

Financial 
importance 

Measuring financial importance, and comparing it to economic 
activity: 

Economic  ties  with 
the EU 

Institutional 
legal factors 

and 

- International investment position (IIP)  
- IIP expressed as a percentage of GDP and other economic variables 
- Foreign direct investment (FDI) flows - inwards and outward 
-  FDI  flows  expressed  as  a  percentage  of  GDP  and  other  economic 
variables 

Sources:  UNCTAD  database, 
(coordinated  direct 
investment  survey  (CDIS),  coordinated  portfolio  indicators 
(CPIS)), BIS 

IMF 

-  Trade,  trade  in  (financial)  services  from  and  to  EU-28  from  all 
partner countries 
-  FDI,  FDI  income  and  FDI  position  from  and  to  EU-28  from  all 
partner countries. 
- Number and characteristics of foreign affiliates 

Sources: Eurostat Balance of Payment data, Eurostat FATS 

indicators100  (source:  World  Governance 

-  Good  governance 
Indicators) 
- Information about tax revenues (source: ICTD, Information Centre 
on development and taxation, OECD) 
-  Specific  features  of  tax  systems,    like  the  absence  of  withholding 
taxes on interest royalties or dividends, low corporate income tax rate 
-  Transparency  indicators:  including  information  exchange,  possible 
anti-money  laundering  [if  data  are  available],  compliance  ratings  on 
access to tax information (OECD Tax transparency Forum).  
- Information, rankings and indices compiled by other sources: Illicit 
Financial Flows (IFF)101, Financial Secrecy Index (FSI)102 … 
… 

The  preliminary  choice  of  the  indicators  has  been  guided  by  their  relevance  in  identifying 
jurisdictions that merit further screening, and was focussed on elements for which information 
is available in a comprehensive and comparable manner. The chosen economic indicators are 

100 Some of the World Governance Indicators could be used, which include voice and accountability, political 
stability, government effectiveness, regulatory quality, rule of law and control of corruption. 
101 Kar D. and J. Spanjers (2014)  
102  The  recently  released  financial  secrecy  index  (FSI)  identified  15  qualitative  indicators  that  indicate  non-
transparency  and  can  be  considered  as  pre-conditions  for  facilitating  tax  evasion  (but  also  possibly  other 
activities 
2015, 
http://www.financialsecrecyindex.com/index.php/introduction 

laundering). 

Network, 

Justice 

money 

such 

Tax 

See 

as 

45 

 
 
                                                            
all  based  on  macro-data  for  which  the  coverage  was  found  to  be  more  comprehensive  and 
comparable than that for micro data (i.e. at company level or from tax receipts)103.  

Coverage  may  differ  per  country  and  per  indicator,  with  some  risk  of  sampling  bias,  if  the 
analysis  would  be  limited  to  countries  for  which  the  dataset  is  complete.  The  use  of  a 
scoreboard  with  possible  missing  values  already  alleviates  that  risk  in  comparison  with  the 
use  of  a  single  number  or  formula.  Furthermore,  as  missing  data  can  occur  for  spurious 
reasons, but may also be an indication of secrecy (or of insufficient administrative capacity), 
jurisdictions for which some or most of the indicators are missing cannot simply be ignored 
from the analysis. On the contrary, those jurisdictions will be specifically indicated for further 
consideration.  

With respect to the choice of which data vintage to use, there is a trade-off between using the 
most  up-to-date  indicators,  and  being  misled  by  one  particular  data  point  corresponding  to 
specific circumstances, in particular for very volatile data. Using averages of recent years is 
an alternative – this would also reflect more structural characteristics of countries.104  

A.4.3 Use of the scoreboard for setting priorities for further assessment  

At the level of each indicator taken separately, ranking countries per indicator is obviously the 
best way to allow for later prioritisation. (105). This will be done for each indicator and for all 
jurisdictions, but jurisdictions with missing values will be marked separately. 

In a second step, when aggregating or selecting among closely related indicators, recourse is 
made to the general guiding principle explained above: "false negatives" - third countries not 
being preselected while they would deserve to be further scrutinised - should be avoided. To 
avoid this risk of "false negatives", it is therefore suggested to take only the "worst" indicator 
(and not the average indicator for instance). In other words, the indicator reflecting the highest 
risk  to  be  used  for  ATP  purposes  would  be  retained.  To  give  an  example  related  to  the 
selection of the relevant time period:  One indicator, such as the relative importance of FDI 
flows,  will  be  ranked  independently  over  several  different  time  periods,  corresponding  to 
several different variations of the data: one for each of the last years and also the average of 
recent (10) years. Out of those rankings, the scoreboard will only reflect, for each jurisdiction, 
the  one  ranking  based  on  the  most  suspicious  outcome  (in  this  case  the  highest  of  the 
rankings,  which  will  be  the  one  based  on  the  time  period,  or  on  the  average,  for  which  the 
relative importance of FDI flows was the highest compared to other jurisdictions).    

Finally,  and  for  reasons  linked  to  the  phenomenon  we  try  to  apprehend,  but  also  given  the 
possible  data  limitations  of  which  the  most  important  is  incomplete  coverage,  no  rigid 

103 In the framework of the OECD/G20 BEPS Action 11 (OECD (2015i)), many different indicators (based both 
on micro- and macro-data) were reviewed to identify the scale and economic impact of BEPS, to track changes 
in  BEPS  over  time  and  to  monitor  the  effectiveness  of  measures  implemented  to  reduce  BEPS.  Existing  data 
sources were also examined. In this context, it is noted that, while firm-level data are needed for a better analysis 
of BEPS, current sources suffer among others of a sampling bias (e.g. too Eurocentric, weak coverage of low-
income countries).  
104 It should be recalled that economic indicators tend to be released with a time-lag and this is even more the 
case  for  "softer"  indicators  gathered  through  surveys  or  by  combining  several  strands  of  data.  In  addition  it 
should  be  emphasized  that  the  indicators  would  inevitably  reflect  reforms  undertaken  by  countries  to  address 
ATP with a delay because of inertia both in economic structures and in perception.  
105 More refined indicators like implicit percentiles could also be used, as they would also allow reflecting the 
distance between countries. A simple ranking would indeed not show if countries ranked for instance first and 
second have nearly the same values, or if they differ by a full order of magnitude (while estimated percentiles 
would  give  such  an  indication).  However,  given  that  the  main  purpose  of  the  scoreboard  is  preselection,  this 
additional information was not deemed essential at this stage. 

46 

 
 
                                                            
combination of the potential strands of indicators into a single composite indicator is currently 
foreseen.  In  addition  to  the  necessity  of  perfect  data  coverage,  this  kind  of  methodology 
obviously  entails  numerous  choices  and  selections,  some  of  which  are  unavoidably  of  an 
arbitrary  nature,  and  therefore  predictably  open  to  criticism.  Rather,  the  exercise  is  one  of 
gathering multi-faceted information along the three dimensions outlined above. This comes in 
contrast to the approach taken elsewhere, for instance by the Tax justice network in the recent 
release  of  its  "financial  secrecy  index"  which  builds  numerous  indicators  into  a  single 
number, allowing for a single listing of a total of around 100 jurisdictions but for a different 
objective, and a slightly narrower scope.106 107  

Finally, the scoreboard is seen as a tool for priority setting and therefore does not formally set 
a limit on the number of jurisdictions subject to further scrutiny.  

106 http://www.financialsecrecyindex.com/introduction/fsi-2015-results  
107  Tax  justice  network,  2015,  Financial  secrecy  index  2015  Methodology,  101p,  version  dated  16.10.2015.  
Up to 204 criteria covering information on the legal, administrative, regulatory, and tax structures of the chosen 
jurisdictions have been surveyed.  About 46 of the 204 criteria employed are then used to construct 15 different 
key  secrecy  indicators  (KFSIs).  The  15  indicators  cover  4  areas:  (a)  knowledge  of  beneficial  ownership,  (b) 
corporate  transparency,  (c)  efficiency  of  tax  and  financial  regulations,  and  (d)  international  standards  and 
cooperation.  Missing  information  is  considered  an  indication  of  secrecy.  The  15  key  qualitative  indicators  are 
themselves aggregated into a single one and then finally weighted through the use of the country's absolute share 
in the world total trade of financial services; this gives a single ranking, which is subject to the choices  made 
regarding indicator selection, aggregation and weighing.  

47 

 
 
 
 
                                                            
 
A.5. OECD BEPS Actions and corresponding EU Actions 

OECD BEPS 

EU ACTION 

Action 1: Digital Economy 

Direct  Tax:  The 
digital 
economy is the whole economy, 
so  ring  fenced  solutions  are  not 
appropriate.  

OECD  BEPS  actions  in  general 
should  address  risks  posed  by 
digital economy.  

VAT:  VAT  should  be  paid  in 
country  of  consumer  and  States 
should 
simplified 
systems for businesses to pay it. 

provide 

Action  2:  Hybrid  Mismatch 
Arrangements 

recommendations 

Specific 
to 
link  the  tax  treatment  of  an 
in  one 
instrument  or  entity 
country with the tax treatment in 
another, to prevent mismatches.  

Direct  Tax:  EU  agrees  with 
OECD 
that  no 
assessment 
special action needed.  

Situation  will  be  monitored  to 
see  if  general  anti-avoidance 
to 
measures 
address digital risks.  

sufficient 

are 

VAT: VAT is paid in country of 
consumer for e-commerce sales. 
Simplified  payment  system  in 
place for certain digital services 
the 
since 
Commission  will  propose 
to 
extend to tangible goods in 2016 
(MOSS).  

which 

2015, 

ATA  Directive 
provision 
mismatches.  

includes 

a 
to  address  hybrid 

Action  3:  Controlled  Foreign 
Companies (CFCs)  

Best  practice  recommendations 
for implementing CFC rules.  

Directive 

ATA 
includes 
provisions  on  CFC  rules,  for 
within the EU and externally.  

Directive 
to 

ATA 
includes 
interest 
provisions 
deductions, for situations within 
the EU and externally. 

limit 

Action 4: Interest Limitation 

Best  practice  recommendations 
limiting  a  company's  or 
on 
group's net interest deductions.  

48 

 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
Action 
Practices 

5:  Harmful  Tax 

rulings: 

Tax 
spontaneous 
relevant information. 

Mandatory 
of 

exchange 

rulings: 

Tax 
Mandatory 
of 
automatic 
information  on  all  cross-border 
rulings and APAs from 2017.  

exchange 

Action 
Practices 

5:  Harmful  Tax 

Patent  Boxes:  Agreement  on 
"Nexus  Approach"  to  link  tax 
preferential 
benefits 
regimes for IP to the underlying 
economic activity.  

from 

to  ensure 

Patent  Boxes:  Member  States 
agreed 
their 
Patent Boxes are in line with the 
of 
nexus 
Conduct Group, 2014).  

approach 

(Code 

that 

Action 6: Treaty Abuse 

Anti-abuse provisions, including 
a  minimum  standard  against 
treaty  shopping,  to  be  included 
in tax treaties.  

ATA  Recommendation  on  Tax 
Treaties  encourages  Member 
States  to  use  an  EU-compatible 
PPT approach.   

Choice  of  either  Limitation  of 
Benefits  (LOB)  or  Principle 
Purpose  Test 
(PPT)  or  a 
combination of both.  

LOB  clauses  are  less  easily 
adapted  to  the  needs  of  the 
Single Market.  

Action 
7: 
Establishment 

Permanent 

Definition 
Permanent 
of 
Establishment (PE) is adapted in 
to 
Model  Tax  Convention, 
prevent 
from 
artificially  avoiding  having  a 
taxable presence.   

companies 

Recommendation 
ATA 
encourages  MSs 
the 
to  use 
amended OECD approach.  

Actions 
Pricing 

8 

-10:  Transfer 

Intangibles  

Arm's  Length  Principle  and 
Comparability 
Analysis 
confirmed  as  pillars  of  Transfer 
Pricing.  

Risk and Capital 

High Risk Transaction 

robust 

framework 
More 
implementing this standard.  

for 

Joint  Transfer  Pricing  Forum 
(JTPF)  working 
EU 
implementing 
approach 
BEPS conclusions.  

on 

to 

Work  includes  looking  at  more 
economic  analysis  in  TP,  better 
internal 
use  of 
companies' 
systems,  and 
improving  TP 
administration.  

Action  11:  Measuring  and 
monitoring BEPS 

The OECD aims to publish new 
statistics  on  corporate  taxation 
and 
the  scope  and  revenue 
impact of BEPS. 

some 

the 
EU  study  underway  on 
types  of 
impact  of 
aggressive 
tax  planning  on 
Member  States'  effective  tax 
rates. The tax rates are based on 

49 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
representative 
a 
by 
calculated 
neoclassical investment model. 

firm 
using 

and 
a 

Action  12:  Disclosure  of 
Aggressive Tax Planning  

Recommendation  to  introduce 
requiring  mandatory 
rules 
disclosure  of  aggressive  or 
abusive  transactions,  structures 
or arrangements.  

To  be  discussed  in  the  Code  of 
Conduct.  The  Commission  will 
keep  the  issue  under  review,  as 
part  of 
transparency 
tax 
agenda.  

its 

Action  13:  Transfer  Pricing 
documentation  and  Country-
by-Country Reporting 

MNEs required to file an annual 
Country-by-Country 
report 
(CbCR)  to  tax  administrations 
on key financial data, as well as 
a master file and local file.  

requirement 

ATA  Package  proposes  legally 
binding 
for 
Member States to implement the 
OECD  CbCR  provisions.  EU-
TPD,  broadly  in  line  with  the 
master file and the local file, but 
to  be  reviewed  to  take  into 
account  the  conclusions  of  the 
BEPS project. 

Information  for  tax  authorities 
only – not public CbCR.  

Work  ongoing  on  feasibility  of 
public CbCR in the EU.  

Action 14: Dispute Resolution  G20/OECD  countries  agreed  to 
measures  to  reduce  uncertainty 
and  unintended  double  taxation 
for  businesses,  along  with  a 
timely  and  effective  resolution 
of disputes in this area.  

In  2016,  the  Commission  will 
propose  measures  to  improve 
dispute  resolution  within 
the 
EU,  as  foreseen  in  the  June 
2015 Action Plan.  

Action 
Instrument 
treaties 

15:  Multilateral 
tax 

to  modify 

A  number  of  countries  have 
to  a  mandatory 
committed 
binding arbitration process.  

Interested countries have agreed 
to  use  a  multilateral  instrument 
to  amend  their  tax  treaties,  in 
order  to  integrate  BEPS  related 
measures where necessary 

50 

ATA  Recommendation  sets  out 
the  Commission's  views  on 
Treaty  related  issues  and  their 
law, 
compatibility  with  EU 
which  MSs  should  consider  in 
their 
the 
Multilateral Instrument.  

negotiations 

on