EU agrees new rules to fight corporate tax avoidance

EU member states have backed new anti-tax avoidance measures that may make it more difficult for multinational companies to exploit loopholes in national tax systems.

Following months of behind-the-scenes discussions in Brussels the EU’s 28 member states on Tuesday endorsed a proposal that was published by the European Commission in January, though a number of the initial proposals were watered-down following opposition by countries.

The Commission’s Anti- Tax avoidance Directive builds on much of the Base Erosion and Profit Shifting (BEPS) principles agreed at OECD level last year. But unlike the OECD measures, the new EU rules will be binding on member states, representing a significant escalation of the EU’s power over tax regimes in member states.

Among the measures included in the directive are new rules on Controlled Foreign Companies (CFC) which aim to tackle the practice whereby multinationals shift profits from a high-tax country to a low tax jurisdiction in order to avoid tax. A new exit tax will be levied on companies moving assets such as intellectual property or patents from one tax jurisdiction to another, while the EU is tightening up the way companies exploit inter-company loans to benefit from the fact that interest payments are generally tax-deductible. Proposed “switch-over” rules were omitted from the final agreement.

While most elements of the directive will have to be transposed into national law by December 31st 2018, member states who can show they already have equivalent practices to the interest limitation rules will be given a deadline of 2024.

Ireland is understood to be broadly in favour of the new rules, which were discussed by EU finance ministers in Luxembourg last Friday.

Ahead of the meeting Minister for Finance Michael Noonan had raised concerns that the principle of effective minimum taxation would be included in the CFC rules, thereby enshrining the concept into EU legislation. In the end, no mention of a minimum effective taxation was included in the final CFC proposal, with the calculation of tax liability instead based on a relative rather than absolute assessment of tax liabilities.

Similarly, there had been concern from countries including Ireland that not all EU countries had signed up to the OECD rules, potentially putting those EU member states that had at a competitive disadvantage.

EU Commissioner Pierre Moscovici said the rules would strike "a serious blow" against those engaged in corporate tax avoidance. "For too long, some companies have been able to take advantage of the mismatches between different Member States' tax systems to avoid billions of euros in tax."

But others criticised the new directive. Oxfam accused European countries of watering-down the proposals and transforming the European Commission’s initial proposal into “waste-paper,” arguing that it would be impossible for tax administrations to implement the new rules.

Green MEP Sven Gielgold criticised the removal of switch-over rules from the final package and the fact that the limitation on interest deduction will not apply to loans already in place.

“The directive against tax avoidance does not live up to the promise of its name. An already limited proposal from the European Commission has been further weakened by EU finance ministers,” he said.

The agreement on the anti-tax avoidance package marks the latest stage in the EU’s fight against aggressive tax planning in the wake of the Luxembourg Leaks and the Panama Papers scandal. The European Commission is expected to come forward with fresh proposals on the common consolidated corporate tax base (CCCTB) later this year.