- QUESTION POSTED BY: Student
- TOPIC: Residency & Treaties
- PROGRAMME: Postgraduate Diploma in International Taxation
- TOPIC: Introduction to Anti-Avoidance (WEEK 17)
- LECTURER: Renier van Rensburg
FULL WRITTEN ANSWER
Anti-avoidance legislation within the European Union (EU) has become increasingly harmonised, particularly in response to concerns about tax base erosion and profit shifting (BEPS). While EU Member States, including lower-tax countries like Bulgaria, retain sovereignty over their tax systems, they must also comply with overarching EU directives aimed at preventing tax avoidance. The consensus within the EU regarding anti-avoidance legislation can be summarised as follows:
1. Adherence to EU Directives:
- Anti-Tax Avoidance Directive (ATAD): The ATAD is a key piece of EU legislation designed to ensure a coordinated and effective approach to combat tax avoidance. It includes provisions on interest limitation, exit taxation, general anti-abuse rules (GAAR), controlled foreign company (CFC) rules, and hybrid mismatches. All EU countries, including low-tax jurisdictions like Bulgaria, are required to implement these rules.
- Country-Specific Implementation: While the ATAD provides a framework, each Member State implements the rules within its national tax law, sometimes with variations to accommodate local circumstances. Bulgaria, for instance, has implemented ATAD, but the impact of these rules is influenced by its overall tax policy and rates.
2. General Anti-Avoidance Rule (GAAR):
- Most EU countries, including Bulgaria, have adopted GAARs that allow tax authorities to counteract arrangements that, while formally compliant with the law, lack economic substance and are primarily motivated by tax avoidance. The EU’s ATAD requires all Member States to implement such a rule, leading to a broad consensus on the need for GAARs within the EU.
3. Harmonization vs. Tax Competition:
- There is a balance between harmonisation of anti-avoidance measures and the preservation of tax competition within the EU. Low-tax countries like Bulgaria use their tax systems as a competitive advantage to attract investment, but they must do so within the framework of EU rules. The consensus is that while tax competition is permissible, it should not lead to harmful tax practices, and all countries must comply with the minimum standards set by EU directives.
4. Bulgaria’s Position:
- As a low-tax country, Bulgaria has historically attracted businesses with its favourable corporate tax rate (10%, one of the lowest in the EU). However, Bulgaria has implemented the required anti-avoidance measures in line with EU directives, including ATAD. This reflects a broader EU consensus that even countries with low tax rates must prevent aggressive tax avoidance strategies that could undermine the integrity of the EU’s single market.
5. Cross-Border Cooperation:
- The EU also emphasizes the importance of cross-border cooperation in tax matters. Bulgaria, along with other EU countries, participates in the exchange of tax information and collaborates on audits to combat tax evasion and avoidance more effectively.
6. Impact of EU Court of Justice (CJEU):
- The CJEU plays a critical role in interpreting EU law, including anti-avoidance measures. Member States, including Bulgaria, must align their national practices with CJEU rulings, which further promotes a harmonized approach across the EU.
In summary, while low-tax countries like Bulgaria benefit from competitive tax rates, they are bound by the EU’s broader anti-avoidance framework, particularly as set out in the ATAD. The consensus within the EU is that all Member States must adopt and enforce robust anti-avoidance measures, ensuring that tax competition does not lead to harmful tax practices or significant disparities within the single market.
VIDEO TRANSCRIPT
What is the consensus in the anti-avoidance legislation between countries within the eu for example, low tax countries like Bulgaria? Very good question. So if you look at anti avoidance legislation within the eu this has become very, increasingly harmonized, especially regarding concerns about tax base erosion and profit shifting and all the bips initiatives.
Now, EU member states, including the lower taxed countries like Bulgaria, daily sovereignty over their tax systems, but they must also comply with the overarching EU directives. Those directors are aimed at preventing tax avoidance because you want to see it as one larger, say, structure of member states and not just the individual jurisdictions as they are. So the consensus within the EU regarding these anti-avoidance legislation can be summarized as follows. So you’ve got to adhere to the EU directives. And there’s EU directors called the anti-tax avoidance directive. And then there’s very specific implementation. Now, if you look at a tad the anti-tax avoidance directive, that’s the key part of EU legislation. And it includes provisions on interest limitation, exit taxation, general anti-abuse rules or car as it is known. And then your typical CFC rules control foreign company rules. So it’s very important that even the low tax jurisdictions also have to abide with these rules, even though the country’s specific rules may say one thing, they’ve also got a because they’re part of the EU they’ve got to follow a certain process and framework.
So important to look at the country’s specific implementation, which provides a framework and any member state implements the rules within international tax law. It has got various or variations to accommodate the local same circumstances. These rules are influenced by its overall tax policy and rates. Bring me to the next ., which is the guard, the general anti-avoidance rule. That is where most EU countries, including countries like Bulgaria, have adapted general anti avoidance rules. And that allows tax authorities to counter arrangements that while they comply with the law, they lack economic substance, and all motivated or primarily motivated by tax avoidance.
Now, this situation does play out, and it can become very challenging within the eu states. That’s why 1 year again, because we’re dealing with not the simplest of scenarios we’re dealing with some of the exceptions to the rule. One should invite involve and good corporate or consulting advisers. Then another, which I think is quite important, is the harmonization versus the tax competition. And that exists also within the EU European Union, as it exists in many other, let’s say, larger jurisdictions or grouped jurisdictions like Africa or sub saharan Africa. So you’ll also see in some of the oceanic countries and so forth. If one looks at this, one would actually understand what is the tax competition within the eu and how do low tax countries like Bulgaria use their tax systems in a compare as a competitive advantage to attract investment, but they need to do it within the framework of the eu rules.
So sometimes this could end up being an issue where the country doesn’t necessary. And I’m not saying Bulgaria is like that. They don’t comply fully with the EU rules, but they comply sufficiently to remain within the EU and then these ways exceptions, which are entertained by the larger, let’s say, entities or the jurisdictions, albeit that it’s on the face value doesn’t comply with. What one would say is the spirit of the eu framework.
Now Bulgaria position is, it is a low tax country. It is historically attracted business with a favorable corporate tax rate of 10 %. One of the lowest in the eu and one of the lowest in the world. However, Bulgaria has implemented the required anti avoidance measures in line with eu director, including the a tad. And this reflects a broader EU consensus that even countries with low tax rates must prevent degrees of tax avoidance strategies.
So what this means then is you end up or in a situation where you’ve got cross-border cooperation between cross-border countries. And then you have the eu Court of Justice, which does come into a play with member states, including Bulgaria, must align their national practices with the an EU Court of Justice. In summary, while low-tech countries like Bulgaria benefit from competitive tax rates, they are bound by the used border anti-avoidance framework.