EC’s call for evidence on simplifying EU rules on direct taxation – Omnibus

Accountancy Europe strongly supports the work of the European Commission (EC) in seeking to simplify and streamline the European direct tax legislation, having previously expressed our views on how to improve European tax systems in our paper, The Accountancy profession’s recommendations to streamline the EU tax system.

Small and Medium-Sized Entities (SMEs)

Leveraging the ‘Think Small First’ principle, SMEs should be excluded from the scope of the Anti-Tax Avoidance Directive (EU) 2016/1164 (ATAD) as they present a significantly lower risk of eroding Member States’ tax bases than do multinational enterprises.

Interest Limitation Rule (ILR) in the Anti-Tax Avoidance Directive (ATAD)

The ILR requires significant revisions, not least to deal with the increasing interest rates since its introduction.

Amongst our recommendations, we call for the Commission to:

• increase the €3-million limit on interest relief and develop an automatic mechanism that flexes the limit on interest relief in line with movements in interest rates
• remove the interest limitation rule for:
  • loans from banks that are unconnected with the borrower and on arm’s length terms
  • other genuine arm’s length financing arrangements, such as publicly issued bonds or financing from third-party institutional investors
• make it mandatory that all Member States permit companies to carry forward and carry back excess interest capacity and adopt the group escape clause
• exclude long-term debt that finances public infrastructure from the ILR.

We also call for specific revisions to the hybrid mismatch rule and a general review of the controlled Foreign Company (CFC) rules in the ATAD.

Impacts of the Pillar Two Directive

Smaller in-scope entities are struggling to make the necessary adjustments to their procedures and systems to comply with their Pillar Two reporting requirements and several EU Member States still struggle with implementation. Consequently, we call on the EC to assess whether a deferral of Pillar Two reporting is necessary.

Additionally, we would encourage the EC to consider whether compliance with Pillar 2 reporting requirements should be ‘rewarded’ by removing the requirements of other EU tax Directives for all companies belonging to the same group that has an EU resident Ultimate Parent Entity – making the adoption of Pillar Two in Europe a real competitive advantage.

In the meantime, the EC should fine-tune the current Pillar Two Directive and we propose numerous areas of improvement, including the introduction of a permanent safe harbour.

Other EU Tax Directives

We propose greater alignment, for example with regards to scope, between the Interest and Royalties and Parent Subsidiary Directives as well as other amendments which would reduce the administrative burden of EU based groups.