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22nd Feb 2024

EU states warm to tax avoidance measures

  • "Governments will need to look closely at their current tax systems and assess if they meet public expectation,” EU commission vice-president Jyrki Katainen said. (Photo: Fotolia)

The EU is accelerating towards stronger legislation on corporate tax in the wake of the European Commission's order to Apple to pay a record-breaking €13 billion of tax in Ireland.

At a meeting in Bratislava, finance ministers appeared to achieve broad consensus and endorsed a European Commission proposal to fight tax avoidance.

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The aim is to reduce tax uncertainty through implementation of already existing tax laws alongside “further harmonisation and binding tax rulings”, Peter Kazimir, the Slovak finance minister whose country currently chairs the EU Council, said on Saturday (10 September) after the meeting.

Ministers also discussed the creation of a common consolidated corporate tax base, or CCCTB.

The plan was first put forward by the commission in 2011, but at the time received little support from member states.

That mood changed after revelations like LuxLeaks or the Panama Papers and on the back of widespread political consensus for stronger corporate tax law in Europe. The commission is poised to re-propose CCCTB legislation later this autumn.

“We’ve heard the need for certainty and for rules. That is the very idea of the CCCTB," Kazimir said.

"This has elements of harmonisation, but the point is to reduce costs and to build certainty for those who create jobs.”

Under a CCCTB, European corporations would file a single tax return for all of their activity inside the EU, instead of filing separate tax returns in each country.

The scheme would also end transfer-pricing benefits across the EU, which Apple used to avoid tax for its European profits, and harmonise rules on tax deductions.

It could erase competitive taxation benefits that member states use to attract international business to their economies.

“A CCCTB would limit tax competition between countries, regarding their tax bases," said Scott Greenberg, an analyst at the Tax Foundation, a research organisation based in Washington DC.

"While countries would still be able to set lower corporate tax rates to attract businesses and investment, they would no longer be able to alter their tax bases to achieve the same goals.”

However, a CCCTB would simplify many of the complexities that come with separate tax regimes in 28 different member states, including the risk of double taxation for a single product or service.

“Double taxation is a severe hindrance to the internal market. Improving double tax resolution would also re-balance the EU's policy on taxation, which has been lately been very much focused on the interest of member states, and not taxpayers,” said Rudolf Reibel, tax policy manager for the Confederation Fiscale Europeenne, an association of tax advisers.

But, given the political sensitivity of tax consolidation, the commission is unlikely to build an entirely consolidated tax base in its new model for European tax law.

Tax consolidation would allow for companies active in Europe to consolidate their profits and losses in different member states into one single European tax return, which would after be apportioned to member states according to the company’s business activity in that country.

Eliminating uncertainty

But the significant impact that a consolidated tax base could have on member states’ corporate tax revenues has led the commission to cut tax consolidation from its 2016 proposals.

Finance ministers also discussed the proper balance between a crackdown on tax avoidance and a guarantee of tax certainty for European business.

“The introduction of measures to tackle double non-taxation must be combined with efforts to avoid undue uncertainty in tax policy and administration,” a note circulated by the Slovak EU presidency at the ministers meeting pointed out.

The document however said that “coherent implementation of such measures in form of hard law within EU allows for predictability and eliminates a degree of uncertainty and possible double taxation”.

Ministers also endorsed the idea of an increased transparency inside of the financial industry, including measures for the automatic exchange of information between banks and tax authorities.

“The EU has to step up inter-agency cooperation and improved exchange of information. We also need to introduce mandatory disclosure rules for banks of intermediaries who want to profit from tax evasion,” Kazimir said.

'Times are changing'

Fair tax campaigners argue the increased transparency would create a level playing field for tax in Europe, but tax policy experts argue that tax rulings should be kept anonymised.

“Tax rulings and advance pricing agreements are standard legal instruments to create legal certainty for companies. Almost all member states issue tax rulings and usually have nothing to do with aggressive tax planning,” Rudolf Reibel said.

But for EU officials, some reform is needed because the issue has become highly political.

“What’s clear is that with every new case of unfair tax practice or abuse, public frustration grows. Governments will need to look closely at their current tax systems and assess if they meet public expectation,” EU commission vice-president Jyrki Katainen said in Bratislava.

“Times are changing,” summarised Eurogroup president Jeroen Dijsselbloem.

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