Jim Brunsden, The Financial Times, 17.06.2016
EU finance ministers hailed a major breakthrough in the fight against corporate tax dodging as they struck a provisional deal on legislation that they said would close gaping loopholes revealed by the LuxLeaks scandal.
While EU capitals have already taken measures to beef up information sharing between their tax administrations and to force companies to reveal more about where they make their profits, Friday’s accord marks the first attempt by the EU to directly regulate and constrain corporate tax planning.
Speaking at the close of Friday’s meeting in Luxembourg, Jeroen Dijsselbloem, the Dutch finance minister said that the law “will have a major impact, both in the size of the taxes that companies will pay, [that they] need to pay, but also in the distribution — where will they pay.”
The measures have come in for strong criticism from tax campaigners, who have warned that they are a missed opportunity, and will do little in practice to rein companies in.
Conversely, the plans have stoked the fears of employers groups who warn that the EU is moving beyond international norms, and placing its firms at a disadvantage compared with those based in the US and elsewhere.
James Watson, chief economist at BusinessEurope, the EU employers’ federation, said that “whilst we support the fight against tax fraud and evasion, we are concerned that a number of the measures discussed today could be a backward step for the European economy.”
Ministers said that the draft deal, which is set to be formally approved early next week, was a sign that the EU can make headway on tax policy — a notorious tricky area because laws require unanimous approval by nations.
Key parts of the plans include a so-called “controlled foreign company rule” which will see businesses have their tax bills readjusted back up if they transfer profits to subsidiaries based in countries with extremely low tax rates.
Other requirements seek to tackle the complex webs of intra-group loans used by some companies to bring down tax bills. The new rules would cap the amount of interest paid on such loans that is tax deductible.
Although large chunks of the rules are based on agreements struck at international level by the OECD, some of the measures go further. Most of the new rules will take effect at the start of 2019, although a derogation will be possible until 2024 for the interest-deduction rule, an issue on which there is currently no OECD standard.
The draft deal was struck overcoming navigating late hurdles from the Czech Republic and Belgium, and is set to be confirmed by the EU on Monday, once the Czech and Belgian ministers have checked back with their capitals.
Governments have turned to action at EU level to address the public outrage over LuxLeaks — a cache of 28,000 pages of documents from auditor PwC which showed how hundreds of multinational companies had slashed their effective corporate tax rates to as little as 1-2 per cent by routing money through units in the grand duchy. The more recent Panama Papers revelations in April, although more focused on individual rather than corporate tax avoidance, have also fuelled public calls to act.
Tove Maria Ryding, tax coordinator at the European Network on Debt and Development, said that Friday’s deal still left companies with much room for manoeuvre.
The “controlled foreign company” rule “could in theory be a way to ensure that companies get taxed on their profits regardless of whether they hide them in tax havens or not,” she said. “Unfortunately, this paragraph has also been weakened to a point where it no longer makes any sense.”
Mr Dijsselbloem insisted however that the law would still bite.
“It it was nothing it would not have been so difficult [to get an agreement],” he said.
“I’m confident that what we have is still good, still firm and a good step in the fight against tax avoidance.”