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Commission Tightens EU Corporate Tax Rules

by Ulrika Lomas,, Brussels

03 December 2013

Led by Algirdas Šemeta, the European Commission has moved to close loopholes in its Parent-Subsidy Directive, allegedly used by some companies to escape taxation

Under the changes, firms will no longer be able to exploit disparities in the way that intra-group payments are taxed across the European Union (EU). The Commission hopes that the Directive will then be able to provide a level-playing field for "honest" businesses.

The Directive was originally designed to prevent same-group companies, based in different EU member states, from being taxed twice on the same income. The Commission has proposed that member states be obliged to adopt a common anti-abuse rule, which will allow them to ignore artificial arrangements constructed for tax avoidance purposes, and ensure that taxation takes place on the basis of real economic substance.

At present, the Directive also obliges member states to exempt parent companies from tax on the dividends they receive from subsidiaries in other member states. In some cases, the state where the subsidiaries are based classifies these transactions as tax deductible "debt" repayments. This can mean that the payment is not taxed anywhere.

The Commission has recommended that if such a "hybrid loan" payment is tax deductible in the subsidiary's member state, then it must be taxed by the state where the parent company is established.

Tax Commissioner Algirdas Šemeta said of the reforms: "EU tax policy is heavily focussed on creating a better environment for businesses in the EU. This means breaking down tax barriers and tackling cross-border problems such as double taxation. But when our rules are abused to avoid paying any tax at all, then we need to adjust them. [The] proposal[s] will ensure that the spirit, as well as the letter, of our law is respected. As such, it will ensure greater revenues for national budgets and fairer competition for our businesses."

Reacting to the Commission's announcement, Cormac Marum, head of tax advisory at UK200 Group member firm Harwood Hutton, raised concerns about the reach of the Commission's plans. He explained: "The EU Commission does not have jurisdiction over the corporation tax policies of individual Member States. There is no such thing as the EU's corporate tax legislation into which the Commissioner can introduce an anti-abuse clause. There is already a General Anti-Abuse Rule in UK domestic tax legislation but this specifically is not designed to tackle the abuse perceived from the use, by large multi-national companies, of transfer pricing rules. Nobody has yet demonstrated that Google, Amazon, Starbucks or Apple have broken any existing UK tax rules.

"It is not possible for companies to shift money to cut their tax bills and it never has been. Multi-national companies though are allowed to organize their commercial affairs freely so that profits arise in particular jurisdictions. Those profits are then taxed in the jurisdiction in which they arise subject to a welter of existing anti-avoidance rules. The UK is becoming one of those low tax jurisdictions for corporate tax. If people don't like how the current rules work, they need to get the politicians to change the tax rules. Multinational companies will not change their approach; they will continue to abide by the tax rules in place."

David Ingall, past president of the UK200 Group, suggested that Semeta's initiative offered "a good example of an EU Commissioner jumping on the bandwagon to justify their existence. Frankly we would be better off in drawing our own legislation a little tighter as then we are at least nominally in control of the situation. We have to recall that with taxes at mind blowing levels we could be regarded as being a tax haven as far as France is concerned."

The Commission expects member states to implement the amended Directive by December 31, 2014.

TAGS: compliance | tax | business | European Commission | tax compliance | tax avoidance | tax incentives | revenue guidance | law | budget | corporation tax | United Kingdom | legislation | tax planning | transfer pricing | tax rates | France | tax breaks | dividends | revenue statistics | tax reform | European Union (EU) | Europe | Tax | Tax Evasion

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