International Business Advisor: EU Adopts Rules to Block Hybrid Mismatching

The European Commission formally adopted a directive to prevent tax avoidance through non–European Union (EU) countries. The directive is designed to neutralize the effect of hybrid mismatches, where companies try to avoid taxes by hopping from country to country to exploit differences between the tax systems of EU members and those of “third countries” — countries that aren’t part of the EU.

Working Against Common Challenges

“Our campaign for fairer taxation in Europe continues to reap results,” said Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs. “Today’s agreement is further proof of what the EU can achieve when we work together against common challenges. It is another victory for fair taxation and another blow against those companies that try to escape paying their fair share.”

The rules will go into effect on January 1, 2020, with a longer phase-in to 2022 for the provision that targets reverse hybrid mismatches.

In addition to the ambitious Anti-Tax Avoidance Directive, agreed in 2016, a host of new tax transparency rules have been adopted to ensure fairer and more open taxation throughout Europe. These include the following rules:

  • Since January 2017, EU member states have been obliged to automatically exchange information on financial accounts, an important step against offshore tax evasion.
  • Since July 2017, similar transparency rules apply for tax rulings, while multinationals will have to provide country-by-country (CbC) reports to tax authorities by the end of the year.

Other Antiabuse Proposals in the Works

The EU Council and the European Parliament are currently negotiating other important proposals to prevent tax abuse, including public CbC reporting (see “EU committees clear public CbC reporting with an exception”), stronger anti–money laundering provisions and tighter good governance rules for EU funds. A number of other substantial corporate tax reforms have also been proposed, notably the relaunch of the Common Consolidated Corporate Tax Base (CCCTB) in October 2016.

EU members are also working on a common EU list of noncooperative jurisdictions to tackle third countries that refuse to adhere to tax good governance standards. The list should be ready by the end of the year.

What’s Ahead?

In the coming weeks, the Commission will bring forward another new transparency initiative, with a proposal for intermediaries to report cross-border tax planning schemes.