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Limitations on interest deductions: does BEPS action 4 presume tax avoidance?

Omri, Latifa LU (2016) HARN60 20161
Department of Business Law
Abstract
Debt and equity are in most countries treated differently for taxing purposes. The asymmetry between the financing forms are being taken advantage of by MNEs, allowing them to plan their cross-border activities in a way that lowers the taxable burden for the whole group. To prevent the increasing problem of base erosion and profit shifting, Member States have implemented different rules limiting interest deductions, one of these sets of rules being thin cap rules. The existing ones are, according to BEPS action 4, not sufficient to counteract the harmful activities of MNEs. Hence, OECD and the G-20 countries have in action 4 developed the suggested best approach which contains the fixed ratio rule and the group ratio rule.

The aim of... (More)
Debt and equity are in most countries treated differently for taxing purposes. The asymmetry between the financing forms are being taken advantage of by MNEs, allowing them to plan their cross-border activities in a way that lowers the taxable burden for the whole group. To prevent the increasing problem of base erosion and profit shifting, Member States have implemented different rules limiting interest deductions, one of these sets of rules being thin cap rules. The existing ones are, according to BEPS action 4, not sufficient to counteract the harmful activities of MNEs. Hence, OECD and the G-20 countries have in action 4 developed the suggested best approach which contains the fixed ratio rule and the group ratio rule.

The aim of this paper is to find out if the best suggested approach assumes tax avoidance and hence is precluded by EU law. By applying the legal dogmatic method, the paper shows that interest limitation rules fall under the freedom of establishment and the free movement of capital. The application of the method also shows that the suggested best approach does not comply with EU law since the proposal does not provide for an objective measure which would allow the taxpayer to prove that a cross- border activity is genuine and commercially justified. The approach applies in a general manner, which is contrary to what is allowed according to CJEU case law, but does have a specific anti-abuse purpose. Applying a fixed ratio could also be precluded by EU law since CJEU case law show that a general limitation will lead to genuine cross-border transactions being affected.

The paper discusses whether thin cap rules are an effective measure to combat base erosion. The opinions of scholars are split but the paper agrees with the fact that base erosion and profit shifting does not address the underlying problem, which is the asymmetry between debt and equity. Without properly addressing this difference, problems with base erosion and profit shifting might always exist. Action 4 and the ATA Directive could, at least within the EU, mitigate the problem because of the coordinated rules. (Less)
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author
Omri, Latifa LU
supervisor
organization
course
HARN60 20161
year
type
H1 - Master's Degree (One Year)
subject
keywords
Interest, limitations, deductions, BEPS, action 4, tax avoidance, presumption, international tax law, EU law, CJEU, thin capitalization, thin cap rules, anti-tax avoidance, fixed ratio rule, group ratio rule, the best practice approach, fundamental freedoms, case law.
language
English
id
8878755
date added to LUP
2016-06-14 15:27:17
date last changed
2016-06-14 15:27:17
@misc{8878755,
  abstract     = {Debt and equity are in most countries treated differently for taxing purposes. The asymmetry between the financing forms are being taken advantage of by MNEs, allowing them to plan their cross-border activities in a way that lowers the taxable burden for the whole group. To prevent the increasing problem of base erosion and profit shifting, Member States have implemented different rules limiting interest deductions, one of these sets of rules being thin cap rules. The existing ones are, according to BEPS action 4, not sufficient to counteract the harmful activities of MNEs. Hence, OECD and the G-20 countries have in action 4 developed the suggested best approach which contains the fixed ratio rule and the group ratio rule.

The aim of this paper is to find out if the best suggested approach assumes tax avoidance and hence is precluded by EU law. By applying the legal dogmatic method, the paper shows that interest limitation rules fall under the freedom of establishment and the free movement of capital. The application of the method also shows that the suggested best approach does not comply with EU law since the proposal does not provide for an objective measure which would allow the taxpayer to prove that a cross- border activity is genuine and commercially justified. The approach applies in a general manner, which is contrary to what is allowed according to CJEU case law, but does have a specific anti-abuse purpose. Applying a fixed ratio could also be precluded by EU law since CJEU case law show that a general limitation will lead to genuine cross-border transactions being affected.

The paper discusses whether thin cap rules are an effective measure to combat base erosion. The opinions of scholars are split but the paper agrees with the fact that base erosion and profit shifting does not address the underlying problem, which is the asymmetry between debt and equity. Without properly addressing this difference, problems with base erosion and profit shifting might always exist. Action 4 and the ATA Directive could, at least within the EU, mitigate the problem because of the coordinated rules.},
  author       = {Omri, Latifa},
  keyword      = {Interest,limitations,deductions,BEPS,action 4,tax avoidance,presumption,international tax law,EU law,CJEU,thin capitalization,thin cap rules,anti-tax avoidance,fixed ratio rule,group ratio rule,the best practice approach,fundamental freedoms,case law.},
  language     = {eng},
  note         = {Student Paper},
  title        = {Limitations on interest deductions: does BEPS action 4 presume tax avoidance?},
  year         = {2016},
}