Changes to EU corporate tax rules seek to increase revenues for national budgets and level the playing-field by closing loopholes used by some companies to avoid paying tax.
The new rules [125 KB] aim to prevent businesses exploiting national differences in taxation law to avoid paying their fair share.
Dating from 1990, the EU’s parent-subsidiary directive was designed to eliminate the risk of double taxation for companies operating in different EU countries. However, some have used loopholes in the system to avoid paying tax on their cross-border payments.
Ending ‘double non-taxation’
Companies are using hybrid loan arrangements specifically to exploit the current rules. These loans are treated either as tax-deductible debt payments or as tax-exempt dividends, depending on the country.
This can result in a tax deduction in one country, for the subsidiary, and exemption for the parent company in the other. This effectively means the company pays little or no tax on profits made by subsidiaries in certain countries.
The new rules will oblige companies to pay the tax due on incoming payments if it has been deducted elsewhere as a debt repayment. This should stop cross-border companies from planning their internal transfers specifically to benefit from this ‘double non-taxation’ loophole.
This issue is one where an EU-wide response is particularly appropriate – tackling it individually would put member governments at risk of losing tax revenue. It also means businesses will no longer be able to relocate or set up a subsidiary in another EU country purely to exploit differences in national rules.
Fighting tax evasion and avoidance
Corporate tax avoidance is high not just on the EU agenda but also internationally. It was discussed at recent G8 and G20 meetings where leaders endorsed the EU’s action plan on tax fraud & evasion [105 KB] .
Presented in December 2012, the plan sets out a comprehensive set of measures to help EU governments recoup the billions of euros lost through tax fraud and evasion.
As well as closing tax loopholes, the Commission is also working on a package including a taxpayers’ code, an EU tax identification number, guidelines for tracing money flows and measures to curb tax havens.
EU governments are expected to implement the amended rules and adopt an EU-wide anti-abuse law, a safeguard against abusive tax practices, by 31 December 2014.