EU cracks down on corporate tax avoidance

Rules to address practice whereby firms move profits to lower-tax jurisdictions to cut bill

The European Commission has stepped up its fight against aggressive corporate tax practices, announcing a suite of measures to prevent multinational companies from reducing their tax bills.

The new proposals - which will be closely watched by the Government - will tackle the practice whereby companies move their profits to lower-tax jurisdictions to reduce their tax bill. They will also curb the amount of interest repayments on loans companies can claim – an attempt to stop the practice where companies set up a subsidiary which provides a loan back to the parent company, so that the company can take advantage of tax-deductible interest payments.

The two new EU directives, announced in Brussels this morning, are the latest attempt by the European Commission to clamp-down on tax avoidance at an EU level, amid significant public disquiet across Europe about the low level of taxes paid by corporates, particularly multinationals.

Harmonisation

While the Commission’s anti-tax avoidance package does not impinge on national corporate tax rates, the proposed EU rules represent a significant step towards harmonisation of EU tax rules.

Unlike last year’s OECD proposals on Base Erosion and Profit Shifting (BEPS), the new EU proposals will be legislative, meaning they will be legally-binding on EU member states.

Ireland's corporate tax system has come under renewed scrutiny this week after Google reached a £130 million tax settlement with the British tax authorities. The US tech giant has long been shifting the profits deriving from UK sales to Ireland for tax purposes. The issue has also featured in the US presidential campaign this week, with Democratic front-runner Hillary Clinton describing as "outrageous" the 'tax inversion' arrangement whereby American companies buy Irish-based companies in order to benefit from Ireland's low corporate tax regime.

Speaking in Brussels this morning, EU economics commissioner Pierre Moscovici said that the current corporate tax practices were "unacceptable."

“Billions of tax euros are lost every year to tax avoidance – money that could be used for public services like schools and hospitals or to boost jobs and growth,” he said. “Europeans and businesses that play fair end up paying higher taxes as a result.”

In total two proposed EU directives were announced this morning.

Approval

The package must be approved by the Council of EU member states, a process that will take months, if not years, though EU finance ministers are due to give their first response to the new proposals at the next ecofin meeting of EU finance ministers in Brussels on February 12th.

As holder of the rotating chairmanship of the Presidency of the Council of the European Union, the Netherlands will chair the negotiations on the package at member-state level until July when Slovakia takes over.

Ireland, along with a number of countries, is likely to oppose any measures that go beyond the standards enshrined in the OECD Base Erosion and Profit Shifting (BEPS) rules agreed last November..

The revised Common Consolidated Corporate Tax Base (CCCTB) proposal is not included in today’s package, but instead will be published in the autumn.

Responding to the announcement, Brian Keegan of Chartered Accountants' Ireland said that while the move to improve better exchange of information would be welcomed, any moves that may change the tax rules in EU member states have traditionally been difficult to implement.