EU Laws Targeting Multinational Hybrid Mismatch Blocked

Trust Bloomberg Tax for the international news and analysis to navigate the complex tax treaty networks and global business regulations.

By Joe Kirwin

European Union plans to finalize rules clamping down on corporate tax avoidance by exploiting hybrid mismatches—practices in which different tax treatments result in different outcomes—have been dashed.

The EU legislation, which had been due to be finalized this month, is now blocked because of a dispute over exemptions for regulatory capital and the final implementation date.

EU finance ministers previously committed to reach an agreement by the end of 2016 but then set a new deadline for the end of January 2017, when that plan, too, failed.

The legislation targeting the abuse of hybrid mismatches was designed to implement the Organization for Economic Cooperation and Development’s base erosion and profit shifting changes on hybrid mismatches.

“The hope was to get an agreement when EU finance ministers meet” Jan. 27, “but that is not possible because of disputes about hybrid regulatory capital and various exemptions,” an EU official told journalists Jan. 25 in advance of a Jan. 27 Council of Economic and Finance Ministers meeting.

The upcoming meeting is the first steered by Malta in its role as the holder of the rotating EU presidency.

U.K. Versus Netherlands

EU diplomats from various countries told Bloomberg BNA that disputes revolve around demands by the U.K. for exemptions for the financial sector and demands by the Netherlands to postpone the implementation date of the legislation from 2019 to 2024.

Further, the Dutch are insisting that if the U.K. receives exemptions—despite plans to exit the EU in 2019 when the legislation is currently targeted to take effect—the Netherlands’ demands should be accommodated.

The Dutch insist a delayed implementation date until 2024 is required in order to soften the impact it will have on more than a hundred U.S. multinational companies.

Currently U.S. multinationals with European headquarters in the Netherlands use a special Dutch “CV-BV” corporate tax regime. This triggers a hybrid mismatch because it allows a U.S. multinational to transfer profits—primarily from intellectual property royalty fees—out of the Netherlands without being taxed. By taking advantage of U.S. “check-the-box rules,” the profits also are not taxed in the U.S.

U.S. Multinationals, Job Losses

Dutch Finance Minister Jeroen Dijsselbloem told his fellow ministers in December that the pending EU ATAD2 legislation would trigger the loss of thousands of jobs and, therefore, the country needs an extended delay in implementing the legislation.

At the same time, the Netherlands is also contesting demands by the U.K. for “carve outs” that exempt the financial sector from hybrid regulatory capital, as well as payments by financial traders under a hybrid transfer. The Dutch government insists these exemptions aren’t in line with the OECD BEPS hybrid mismatches overhaul.

However, the OECD’s John Peterson, who oversees the BEPS work on hybrid mismatches, told Bloomberg BNA in December that the pending EU hybrid mismatch exemptions are “consistent” with the BEPS changes.

The delay finalizing EU hybrid mismatch legislation has triggered significant frustration within the European Commission and many EU governments, which insist they are losing hundreds of millions—if not billions—of dollars a year in lost revenue because of the way multinational companies exploit tax rules in the EU and in foreign countries.

To contact the reporter on this story: Joe Kirwin in Brussels at correspondents@bna.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bna.com

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.

Request International Tax