New EU rules aim at reducing annual tax losses of up to €70 billionThursday 28 January 2016 23.05
The European Commission has proposed allowing EU countries to tax corporate profits at home in some circumstances even if the money has been transferred elsewhere to avoid such payments.
The Commission has proposed a set of measures to tackle some of the most common tax avoidance schemes used by multinational companies to reduce their tax bills.
But businesses have warned that the measures could hurt competitiveness and deter investment.
Major corporations legally avoid taxes of up to €70 billion a year in Europe, a study of the European Parliament estimated, with global losses from such schemes ranging between $100 billion and $240 billion.
"Billions of euros are lost every year to tax avoidance. This is unacceptable and we are acting to tackle it," the EU tax commissioner Pierre Moscovici said as he called "for fair and effective taxation for all Europeans."
Responding to such criticism in Britain, Google agreed last week to pay £130m in back taxes, but it was seen by many as too little compared with the profits made by the company in Britain.
Among the Commission's proposals - which would have to be approved by all European Union member states - is one to deter multinationals from shifting their profits from parent companies to subsidiaries in low or no tax countries.
EU countries would be allowed to tax profits generated in their territories after they are transferred somewhere else.
This is provided that the effective tax rate in the country where the profits are transferred is less than 40% of that of the original country.
Loopholes that allow companies to use dividends or capital gains to skip taxation would be closed and national mismatches in the tax treatment of some complex instruments would also be eliminated, the EU executive said.
Ceilings would also be imposed on the amount of interest a company can deduct from its taxable income.
Currently companies can shift debt to subsidiaries based in countries that allow higher deductions.
The proposed measures aim at turning into binding rules some of the voluntary guidelines against tax avoidance, known as anti-BEPS (base erosion and profit shifting), agreed by the G20 group of the world's largest economies and by members of the Organisation for Economic Co-operation and Development.
Corporations will have to reveal their taxes, profits, revenues and other financial data to the administrations of all countries where they operate, which then will exchange data among themselves, the proposed rules say.
By increasing transparency, the measure is expected to deter aggressive tax planning, but it falls short of a fully public disclosure that may have exposed companies to further scrutiny.
The Commission did however not rule out that such a measure may be proposed in the future.
Markus Beyrer, head of EU companies' lobby group BusinessEurope, said the proposed measures could hurt business.
"The EU must not act as lone front-runner in implementing the BEPS agreement, and must not undermine the competitiveness of EU industry or damage the EU's attractiveness as an investment location," he said in a statement.
EU tax proposals won't have significant impact on Ireland - expert
Commenting on today's proposals, Peter Vale, a tax partner at Grant Thornton, said that broadly the measures should not significantly impact Ireland.
He said that Ireland already has many tax avoidance measures enshrined in domestic legislation and the country's tax regime is viewed by both the EU and OCED as "very transparent".
However some of the measures, including proposed caps on the tax deductibility of interest and the taxation of subsidiaries in tax havens, would potentially impact Ireland, the tax expert added.
Meanwhile, KPMG has said the measures should not undermine and may enhance the attractiveness of Ireland’s 12.5% corporation tax regime.
KPMG noted that Ireland’s taxation laws are already highly compliant with many of the proposals such as those on increased transparency, patent boxes and ‘anti-hybrid’ measures.
"Corporation tax regimes in some other countries have sometimes been based on opaque rulings and special regimes," commented Conor O’Brien, Partner and Head of Tax at KPMG in Ireland.
"These types of regimes are becoming increasingly unacceptable to international policy makers and will have to be reformed while the Irish regime continues to be 'best in class'," he stated.
"At this juncture it is difficult to envisage any likely outcome of the process that would be other than neutral or positive for Ireland,’ Mr O'Brien added.
Meanwhile, 31 OECD countries, including Ireland, have signed the Multilateral Competent Authority Agreement to tackle tax evasion and avoidance by big multinational companies by sharing country-by-country information.
It follows concerns about the way some international firms move their profits to countries with lower tax rates.
Companies such as Google, Amazon and Facebook must now pay tax in the country where their profits are made.
Multinationals will now have to tell every country they operate in what they earn in that country and how much tax they pay.
The information will then be available to every other country that has signed-up to the agreement.
The MCAA agreement will enable consistent and swift implementation of new transfer pricing reporting standards developed under the OECD's Action Plan on Base Erosion and Profit Sharing.