Tuesday

4th Oct 2022

EU unveils plans to go after tax 'freeloaders'

  • Semeta - no more time for tax 'freeloaders'

The European Commission Monday (25 November) unveiled plans to clamp down on tax 'freeloaders' in its latest bid to target corporate tax avoidance.

Officials plan to re-write rules on the tax status of parent and subsidiary companies to prevent firms from setting up 'letter-box' companies in different countries to evade tax.

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The EU's Parent-Subsidiary directive, which was last revised in 2003, was originally designed to ensure that companies would not be taxed twice within the EU, by exempting dividends and other profits passed from subsidiary to parent companies.

However, the EU executive is now concerned that the directive has been manipulated by firms to avoid paying tax in any country.

EU taxation commissioner Algirdas Semeta stated that "businesses need to make their fair contribution to public finances."

"We can no longer afford freeloaders who reap huge profits in the EU without contributing to the public purse," he said.

However, Semeta commented that while the proposal would "ensure that the spirit, as well as the letter, of our law is respected" it was also "business friendly."

It specifically targets the use of 'hybrid loans' which can be classified by companies as either debt or equity for tax purposes.

Under the current rules, governments have to give parent companies a tax exemption from dividends they get from subsidiaries in other countries. The proposal also includes an 'anti-abuse' clause allowing governments to tax firms on the basis of economic activity in their country.

Clamping down on corporate tax avoidance has clambered up the political agenda in recent years as cash-strapped governments look at ways to increase their tax take. An estimated €1 trillion in tax revenues are lost in the EU each year as a result of tax avoidance and evasion.

The EU executive also wants governments to strengthen their double tax conventions and to adopt a common general anti-abuse rule (GAAR). The GAAR would allow governments to tax on the basis of actual economic substance and ignore any artificial tax avoidance arrangements.

For example, coffee shop giant Starbucks paid UK corporation tax of £8.6 million between 1998 and 2011 on sales of over £3 billion. Meanwhile, software giants Apple and Google also pay between 2 and 2.5 percent tax rates on their profits made outside the US by using subsidiaries.

However, the rules, which are primarily targeted at Ireland, Belgium, Luxembourg and Cyprus, all of which have low corporate tax rates in a bid to attract firms, will require the unanimous support of EU countries to become law.

Sven Giegold, the German Green MEP likely to be tasked with drafting Parliament's position on the bill, described it as "an important step to addressing the chicanery by unscrupulous multinationals."

He warned that the plans would "only be effective as part of a wider EU approach on corporate tax avoidance and dumping," calling on governments to agree on a minimum rate of corporate tax.

The plan was also welcomed by accountancy groups.

The proposal would "help clarify the rules for companies and also help governments collect the taxes they are due,” said Michael Izza, chief executive of the Institute of Chartered Accountants.

European states still cutting corporate taxes

European governments cut corporate taxes in 2010, continuing years of decline in taxation on capital and a shift towards taxes on consumption, and, to a lesser extent, labour.

New storm over corporate tax in new member states

French finance minister Nicolas Sarkozy has said that countries rich enough to charge a low corporate tax rate should not be eligible for EU regional funding, again putting pressure on new member states.

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