The EU’s anti-base erosion and profit shifting (BEPS) proposals could have consequences for captives in Europe, as politicians pinpoint reinsurance arrangements as a means of unfair tax avoidance.
The European Commission introduced a range of anti-tax avoidance proposals on 28 January, following the release of the Organisation for Economic Co-operation and Development’s global BEPS standards last year.
Under the proposals, which are made up of legislative proposals and revisions, as well as tax treaty recommendation, the EU will introduce a controlled foreign company (CFC) rule that aims to deter profit shifting to no or low tax countries.
According to a European Commission document explaining the CFC rule: “The CFC rule will be triggered if the effective tax rate in the third country is less than 40 percent of that of the member state in question. The company will be given a tax credit for any taxes that it did pay abroad. This will ensure that profits are effectively taxed, at the tax rate of the member state in which they were generated.”
The document uses the example of an insurance company that has its headquarters in an EU member state to illustrate how the CFC rule would work.
“It sets up a reinsurance company as a subsidiary in a no tax third country. The insurance company makes inflated premium payments to the offshore reinsurance company, thereby reducing its taxable profits in the EU member state. The payments that the reinsurance company receives are not taxed either, because of the third country's zero rate.”
“With the proposed CFC rule, the EU member state can tax the insurance company's profits as though they had not been shifted to the no-tax country, thereby ensuring effective taxation at the tax rate of the Member State concerned.”
The anti-tax avoidance package also includes proposals to improve transparency between EU member states and ways to protect tax treaties against abuse.
Commenting on the anti-tax avoidance proposals, which must still pass the European Parliament and Council, European Commission vice president Valdis Dombrovskis said: “People have to trust that the tax rules apply equally to all individuals and businesses. Companies must pay their fair share of taxes, where their actual economic activity is taking place.”
“Europe can be a global leader in tackling tax avoidance. This requires coordinated European action, avoiding a situation of 28 different approaches in 28 member states.”
