ACCA welcomes this consultation on possible modernisation of the Directive on cross border royalties and interest. While the existing regime can offer benefits over the existing treaty network for those companies which qualify, the restrictions on types of entity which can qualify and their relationship reduce the scope of those benefits.
Withholding taxes generally act as a barrier to cross border trade in Europe. Even where recovery of taxes is possible, there is an associated administrative cost. Neither the administrative cost nor any element of double taxation arising from the inability to recover withholding taxes occur in the context of purely domestic transactions. The existing withholding tax regimes act against the ideals of the European single market.
In particular, the requirement that to benefit from the Directive economic agents must maintain a minimum direct holding of 25% conflicts with the economic realities of multinational groups of companies. While the level of controlling shareholding in such groups is overwhelmingly 100%, the relationships between group treasury companies and the various trading and holding companies to which they provide finance are almost invariably indirect. The potential benefits of the Directive are denied to these businesses, which make up the bulk of related party lending in the EU. These groups are forced instead to rely on existing treaty clearance mechanisms or initiatives such as the UK’s Double Taxation Treaty Passport Scheme, which reduce but do not remove the administrative burden on businesses. The Directive should be extended to cover indirect as well as direct shareholdings.
The inconsistency between the minimum shareholding requirements of this Directive and the Parent Subsidiary Directive has no discernible benefits. The shareholding thresholds should be aligned, and this should be at the existing 10% level for the Parent Subsidiary Directive.
We further support the extension of the Directive to unrelated undertakings. For many SMEs the ability to expand across borders can be restricted by the administrative costs and potential double taxation arising on cross border funding.