The anti-tax avoidance directive reflects the OECD's action plan to limit tax base erosion and profit shifting (BEPS) and follows recommendations made by Parliament in November (TAXE 1 report) and December (legal recommendations Dodds and Niedermayer) last year. It builds on the principle that tax should be paid where profits are made and includes legally-binding measures to block the methods most commonly used by companies to avoid paying tax. It also proposes common definitions of terms like “permanent establishment”, “tax havens”, “minimum economic substance” “transfer prices” and other terms hitherto open to interpretation. [...]
Stricter limits on interest payment deductions
One area in which the committee wants to go further than the Commission is in limiting deductions for interest payments. The Commission proposes that companies should not be allowed to deduct more than 30% of their earnings, whereas MEPs say this should be limited to 20% or €2 million, whichever is higher. MEPs also want to limit the period during which these deductions can be made to five years, whereas the Commission did not propose a limit.
Switch-over rule
MEPs are also more ambitious than the Commission with regard to the “switch-over rule". Today, if earnings are taxed in one country outside the EU and then transferred to an EU member state this so called “foreign income” is often exempt from taxation, so as to avoid double taxation. The Commission proposes that this exemption should be denied if the foreign income was taxed at a rate lower than 40% of the national rate. MEPs favour setting a minimum rate of 15%, i.e. if foreign income was taxed at a lower rate outside the EU, then the exemption would have to be refused and the difference would need to be paid.
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