EU struggles to close tax loopholes with new law

The outcome received a warm welcome from the European Commission, which had proposed the draft legislation in January.

”Today’s agreement strikes a serious blow against those engaged in corporate tax avoidance,” said Pierre Moscovici, the EU commissioner for economy and taxation.

The commission highlighted that the deal had been reached in record time.

But the EU bloc failed for years to outlaw the practices that large companies use to avoid paying taxes, as all EU countries must agree unanimously on tax matters.

Some member states - such as Ireland and Luxembourg - are low-tax havens for multinational companies that register there. The Netherlands, Belgium and Cyprus provide a wide array of legal options that allow businesses to dodge taxes.

The UK has also declined to extend its tax secrecy laws to overseas its territories, several of which are offshore tax havens.

Growing pressure

Pressure on EU governments to step up the fight for global tax justice grew in the wake of recent scandals.

The Panama Papers leaked, for one, showed how the global elite used offshore accounts to hide their true wealth.

A European Parliament study has estimated that EU states lose up to €70 billion in tax revenue every year due to the practices.

The new EU legislation is based on recommendations from the OECD, the Paris-based club of industrialised states, which will now become enshrined in EU law.

The controlled foreign companies (CFC) rule aims to deter companies from shifting profits to their subsidiaries in tax havens - one of the most popular ways for companies to reduce tax bills.

The directive foresees that a special procedure would be triggered when a controlled foreign company paid half or less of tax the that would be due in the its home jurisdiction.

Another rule aimed to discourage companies from moving intellectual property or patents out of the EU by introducing an exit tax.

The legislation also contains a general anti-abuse clause to counteract aggressive tax planning when other rules don’t apply.

Easy to circumvent

A commission spokeswoman said the bill struck the strongest blow against tax dodgers in the past 30 years.

But Oxfam, the UK-based anti-poverty charity, feared the rules could easily be circumvented.

”Controlled foreign company (CFC) rules are crucial against profit shifting into low-tax jurisdictions,” said Aurore Chardonnet, Oxfam tax policy adviser, but she said the EU directive envisaged exceedingly complicated procedures for recovering taxes from subsidiaries.

”These complex procedures could deter administrations from going that way,” she said.

She added that companies do not have to disclose publicly where they make their profits and where they pay their taxes.

"The text on the table is not sufficient as it limits reporting requirements”, she said.

The finance ministers scrapped several commission proposals, such as the switchover rule which aimed to tax dividends and capital gains that European firms pay to subsidiaries in low-tax or tax-free countries. They also dropped a provision ensuring that money flowing back into the EU from tax-havens would be properly taxed.

Some ministers had feared that these clauses would scare away multinational investors.

"Each member state got their own candy exemption," said Fabio De Masi, a German far-left MEP.

He called the outcome "scandalous".

Most of the new rules will come into effect on January 2019. Some member states, however, can keep their own rules until 2024.