The OECD’s Base Erosion and Profit Shifting (BEPS) Project
A few years ago OECD and G20 Leaders noticed that the international tax landscape had changed dramatically. The financial crisis and aggressive tax planning by multinational enterprises had resulted in significant losses to state budgets, and perceived tax evasion had become part of the political agenda. Consequently, joint actions were taken to increase transparency and the cross-border exchange of information in tax matters and to address the weaknesses of an international tax system that had created opportunities for questionable tax tactics.
BEPS refers to tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity. These practices can obviously undermine the fairness of tax systems, as businesses that operate across borders can use BEPS to gain a competitive advantage over enterprises that only operate at a domestic level. The OECD’s BEPS package released in 2015 provides 15 Actions that equip governments with the domestic and international instruments needed to tackle BEPS and ensure that profits are taxed where economic activity and value creation occur. The BEPS project is of major significance for developing countries due to their heavy reliance on corporate income tax.
The European Commission’s Initiative
As a follow-up to the OECD’s BEPS conclusions and in order to provide a common solution at the EU level, in mid-2016 the EU Council adopted Anti-Tax Avoidance Directive 2016/1164 (ATAD), which lays down rules against tax avoidance practices that directly affect the functioning of the internal market. In late 2016, the Commission presented a proposal to complement the Directive with a broader anti-hybrid approach.
The ATAD contains a packet of anti-abuse measures targeting the common forms of aggressive tax planning. With some exceptions, the rules should be applied by all Member States as from January 1, 2019.
Implementation of the Anti-Avoidance Rules in Poland
Poland appears willing to introduce anti-avoidance measures without prodding by Brussels. One of ATAD’s measures – the controlled foreign company (CFC) rule, which is designed to deter profit shifting to a low or no-tax country – has been in force in Poland since 2015. Generally, under CFC rules, a Polish parent company is obliged to pay corporate income tax in Poland with respect to profits generated by a subsidiary located in a low-tax country, even if no dividend payments take place. However, as Poland is not a particularly advantageous jurisdiction for holding companies, it is unlikely that this rule will have a significant impact on taxpayer behavior.
The interest limitation rule has been present in the Polish tax system for many years. The rule addresses a common situation in which intercompany debt is used instead of equity and interest deductions artificially reduce profits. Recently, however, Poland amended these rules by giving taxpayers the right to choose one of two alternative methods of computing tax-deductible interest costs. The “historical” method provides for a simple debt-to-equity ratio (currently 1:1) as a limiting factor. The newer method, which is more aligned with the ATAD’s solution, links the limitation on tax-deductible interest to such factors as company’s EBIT and the value of its assets, and applies also to interest payable to non-related parties.
Another measure – a general anti-abuse regulation – was introduced in Poland in mid-2016 and its wording is similar to the ATAD’s proposal. This rule counteracts aggressive tax planning when other rules do not apply. Due to its potential broad applicability it may turn out to be the most powerful tool used by tax authorities to combat tax dodging in Poland. The rule states that a taxpayer will be denied any tax benefit which results from an artificial arrangement aimed solely or primarily at receiving such benefit.
Other anti-avoidance measures exist or are still to be implemented in the Polish tax system but may require amending to fully comply with ATAD.
The continuing implementation of the anti-abuse packet should be viewed positively. One would hope, though, that such anti-avoidance rules and, in particular, the general anti-abuse regulation, will not themselves be abused by the tax authorities in order to shut down all tax optimization possibilities in Poland, including ones supporting legitimate business purposes.
By Anna Sekowska, Senior Associate, Wolf Theiss Poland
This Article was originally published in Issue 4.6 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
