Consultation on fighting the use of shell entities and arrangements for tax purposes

Position

on the European Commission’s

Consultation on fighting the use of shell entities and arrangements for tax purposes

Federation of German Industries e.V. EU Transparency Register: 17718117758-48

Date: 20 August 2021

Consultation on fighting the use of shell entities and arrangements for tax purposes

Contents 1.

General remarks ................................................................... 3

2.

Substance requirements ...................................................... 5

3.

Final remarks ........................................................................ 5

About BDI......................................................................................... 7 Imprint .............................................................................................. 7

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Consultation on fighting the use of shell entities and arrangements for tax purposes

1. General remarks BDI, as the voice of German industries, appreciates the opportunity to respond to the European Commission’s consultation on fighting the use of shell entities and arrangements for tax purposes. While we support the European Commission’s fight against aggressive tax avoidance practices, we want to recall that in the last couple of years, a considerable amount of anti-avoidance measures have already been discussed and adopted at European and international level in order to tackle abusive tax practices by a limited number of businesses. 1 For example, the Anti-Tax Avoidance Directives (ATAD) I & II already introduced measures targeting forms of aggressive tax planning by setting a minimum level of measures against tax avoidance practices. One has also to recall that there are several legislative proposals at the table or have most recently been agreed upon, such as the OECD’s Pillar II initiative on establishing an effective minimum taxation level of corporate profits on a jurisdictional basis or the public country-by-country reporting directive, to mention the most prominent examples. In addition, the implementation of Art. 7 MLI which introduces a minimum standard anti-abuse provision in the form of a so-called principle purpose test has not yet been completed in all jurisdictions.

German industry is therefore concerned that the traditional industry, which never benefitted from aggressive tax planning practices that have already been addressed by several BEPS-related initiatives, would have to face another administrative burden under the envisaged initiative on fighting the use of shell entities and arrangements for tax purposes without added value to the Member States. Instead of taking new legislative action, we feel more focus should be given on completing the implementation of existing measures through established channels such as dialogue with and assistance to Member States with regard to capacity building as a first step and formal infringement procedures for violation of EU law as a second step. Only in this case existing regulations can produce their full effects.

In addition, the European Commission should conduct a review of the regulations already in place and stick to its announced ambition to further

1

Among them are the fourth Anti-Money-Laundering Directive (AMLD), the Parent-Subsidiary Directive, the Anti-Tax-Avoidance Directives (ATAD) I & II, the Hybrid Mismatches Directive, the Directive on Administrative Cooperation (DAC) which has been amended several times since its adoption as well as the EU list of non-cooperative jurisdictions for tax purposes.

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Consultation on fighting the use of shell entities and arrangements for tax purposes

evaluate the impact of ATAD via a comprehensive evaluation report of the ATAD measures intended to be published by 1 January 2022.2 If such a review reveals that countries fail to properly implement existing anti-avoidance regulations, the European Commission should work towards a transposition and implementation of these rules by Member States with a view to launching infringement proceedings where necessary, instead of proposing new legislative measures. We therefore support the idea of the European Commission to envisage new monitoring mechanisms in order to check Member States’ implementation of tax avoidance rules against shell entities.

If the European Commission still believes that further action is needed, the focus should be on improving the current tools and its enforcement.

As a further preliminary remark, we would like to emphasize that the use of shell companies is not illegal, bears risks per se or is connected to aggressive tax planning practices but can rather serve legitimate business purposes. A strict delimitation from misuse is therefore necessary.

In some cases, shell entities with real portfolios provide investment tools and may therefore even be needed in order to facilitate mergers, investments or estate planning. In addition, the establishment of a shell company preceding any operations can help to start a new business activity quicker, as the required corporate veil is already available. These examples show that shell entities do not necessarily bear risks connected with tax evasion or other abusive practices. However, if the European Commission still feels that further actions are needed to step up the fight against aggressive tax avoidance connected with the use of shell companies, a specific and more targeted impact analysis would be an indispensable prerequisite.

Last but not least, we are worried that this upcoming initiative does not take into account the most recent global agreement on corporate tax reform which i. a. ensures that multinationals are subject to a minimum effective level of taxation on all of their profits each year and which are going to be transposed via two upcoming EU directives. Before taking new legislative action, we call upon the European Commission to evaluate whether existing and these upcoming initiatives prove to be effective to tackle aggressive tax avoidance practices in shell companies. We encourage the European Commission to carry out an impact assessment which, besides focusing on the administrative burden of existing measures, should evaluate existing BEPS measures and 2

Report from the Commission to the European Parliament and the Council on the implementation of Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market as amended by Council Directive (EU) 2017/952 of 29 May 2017 amending Directive (EU) 2016/1164 as regards hybrid mismatches with third countries. https://eur-lex.europa.eu/legal-content /EN /TXT /PDF /?uri= CELEX:52020DC0383&rid=3 www.bdi.eu

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Consultation on fighting the use of shell entities and arrangements for tax purposes

discuss possible improvements, changes, simplifications or the removal of existing measures.

2. Substance requirements If a comprehensive evaluation of existing measures reveals that additional safeguards are necessary, it is important that new measures are specifically targeted only on those cases where shell companies are exclusively used for aggressive tax planning practices. Therefore, a precise delineation from cases where shell companies are used for legitimate business purposes would be of utmost importance. In this context it is important to note that so far no EU-wide definition of a shell company exists, making the necessary delimitation of legitimate shell companies even more difficult, if not impossible. We are aware that a distinction of different kind of shell companies might be a challenging task, however, a clear definition provides tax certainty and ensures that legitimate business purposes will not be hindered.

We also understand that economic substance requirements do play a major role when it comes to the application of anti-abuse rules and that a certain degree of significant substance such as assets, employees or functions is required for a correct delimitation. German industry is especially afraid that the exact characterization and delimitation of a shell company may be a difficult undertaking, beginning with the question of which economic substance should be attributed to such an intermediary holding entity. Therefore, substance requirements per se cannot be a general approach readily applicable to any situation as substance may differ from case to case depending on sector or business activity. For industry it is therefore important that they can easily state their business reasons behind the existence of shell entities.

3. Final remarks Last but not least, one has to consider that new provisions in this field could potentially conflict with existing tax treaties. Therefore, the European Commission should refrain from introducing another layer of reporting requirements as long as existing systems are not fully utilized. Most recently, the European Court of Auditors has found that despite the fact that the system for exchange of tax information has been well established, more needs to be done in terms of measuring the outcome (monitoring, ensuring data quality and using the information received) as the information collected and exchanged under the DAC is generally used too little.3 We therefore welcome the considerations of the European Commission to examine a better use of 3

European Court of Auditors, Special Report 03/2021 Exchanging tax information in the EU: solid foundation, cracks in the implementation www.bdi.eu

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Consultation on fighting the use of shell entities and arrangements for tax purposes

the existing exchange of information instead of revising the current mechanisms in place. More priority should be given to this approach instead of increasing the compliance burden for taxpayers resident in the EU and thereby increasing the cost of doing business in the EU.

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Consultation on fighting the use of shell entities and arrangements for tax purposes

About BDI The Federation of German Industries (BDI) communicates German industries’ interests to the political authorities concerned. She offers strong support for companies in global competition. The BDI has access to a wide-spread network both within Germany and Europe, to all the important markets and to international organizations. The BDI accompanies the capturing of international markets politically. Also, she offers information and politico-economic guidance on all issues relevant to industries. The BDI is the leading organization of German industries and related service providers. She represents 40 inter-trade organizations and more than 100.000 companies with their approximately 8 million employees. Membership is optional. 15 federal representations are advocating industries’ interests on a regional level.

Imprint Federation of German Industries e.V. (BDI) Breite Straße 29, 10178 Berlin, Germany www.bdi.eu T: +49 30 2028-0 Contact Dr Monika Wünnemann Head of Department Tax and Financial Policy T: +49 30 2028-1507 m.wuennemann@bdi.eu Philipp Gmoser Senior Manager Tax and Financial Policy T: +32 2 79210-12 p.gmoser@bdi.eu BDI document number: D 1432

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