In his blog on Kluwer International Tax Blog Francis Weyzig, senior policy advisor at Oxfam Novib, explains why CFC rules are a brilliant idea, even though many tax experts are critical.
In 2016 EU-countries agreed to have Controlled Foreign Corporation rules in place by 2019. Some will only have to make minor adjustments to the rules already in place, while others, like Ireland, Belgium, Luxembourg and the Netherlands, will have to introduce them.
Under model A for CFC rules in the EU Anti Tax Avoidance Directive (ATAD), the home country would tax profits generated elsewhere, even if there is no link at all between those profits and the functions performed, assets employed and risks assumed by the multinational in the home country. This means that profits will be taxed where value is not created, which seems like a direct contradiction of the BEPS project and a solid reason for tax experts to be critical.
However, by taking away the potential gains from profit shifting, there’s no more reason for corporations to shift these profits into a low-tax subsidiary or permanent establishment in the first place. So the threat of these rules being enforced will actually change the behavior of multinationals, ensuring that no more profits get shifted and they instead get taxed where economic activities take place and value is created.
Without these CFC rules the multinationals would simply find other loopholes in the system to exploit and avoid taxes, soon making the whole BEPS project outdated. This is why the world need CFC rules that tax profits where value is not created.
For the entire story and a much better and more in-depth explanation please read Francis Weyzig’s blog: