Wednesday

25th May 2022

EU struggles to close tax loopholes with new law

  • Oxfam activists mocked up their own Caribbean tax-haven outside the EU commission building in Brussels earlier this year (Photo: Oxfam)

EU states have cleared a deal that aims to close some of the loopholes used by large companies to dodge taxes.

Finance ministers tentatively agreed to an anti-tax avoidance directive last Thursday, pending consultations with capitals. Their representatives gave a final green light on Tuesday (21 June).

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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.

Finance ministers baulk at tax-avoidance rules

Member states will discuss again in June a proposed directive to outlaw practices used by large companies to avoid paying taxes. Meanwhile, the European Parliament makes progress on its probe of Panama Papers.

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Antoine Deltour and Raphael Halet, former employees at PricewaterhouseCoopers (PwC) who revealed how corporations hid away profits, were fined and given suspended sentences by a court in Luxembourg.

Apple faces massive Irish tax bill

The EU executive will announce how much the tech giant must pay back to Ireland, two years after it ruled that tax decisions in Dublin amounted to illegal state aid.

EU Commission extends borrowing curbs in 2023

The European Commission on Monday proposed to extend suspension of fiscal borrowing rule in 2023 — but advised prudence amid already rising real interest rates.

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EU leaders unveiled a €210bn strategy aiming to cut Russian gas out of the European energy equation before 2027 and by two-thirds before the end of the year — but questions remain on how it is to be financed.

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