A COMPREHENSIVE legislative initiative launched by the European Commission on January 28, designed to restrict tax avoidance – especially by multinationals within the European Union (EU) – is likely to be influenced by the raw politics of the upcoming UK in-out referendum on EU membership.
The proposals include a new directive on anti-tax avoidance; amending the EU’s administrative cooperation directive (coordinating the work of tax offices); non-binding guidance (a ‘recommendation’) on making their tax treaties less vulnerable to tax avoiders; and associated policy documents. The package is detailed an ambitious in its scope.
Many suggestions will seem like common sense to electorates shocked at the scope of tax avoidance by major corporations, such as Starbucks and Google, and reflect many actions proposed last October by the Organisation for Economic Cooperation & Development’s (OECD) Base Erosion and Profit Shifting (BEPS) project.
So there will be considerable pressure, both politically and diplomatically, on the British government to agree to a large number of these EU initiatives as proposed by Pierre Moscovici, the EU economic and financial affairs, taxation and customs commissioner, France’s current appointee on the Commission.
And what London thinks matters a great deal. As this is taxation legislation, it will be approved by what the EU Treaty on European Union calls a ‘special legislative procedure’. Essentially, this means carving the European Parliament out of decision-making, reducing it to a consultative role – it has a veto over most EU laws. And because this is a tax law, unanimity is required within the EU Council of Ministers, which will be the sole legislator in this instance. Add in the fact that many member states, notably the Germany of chancellor Angela Merkel, will be loath to give anti-EU campaigners in the UK referendum any fuel to fire their arguments this year, and the British government will certainly have a strong hand in negotiations over the final shape of the Commission’s proposals.
It will welcome this. The package’s key principle, of course, is ensuring multi-nationals account for the profits they earn in each jurisdiction where they are active and pay an appropriate level of tax in those jurisdictions. With the UK remaining host to Europe’s largest financial centre, a base for many international companies and subsidiaries, it will play close attention to how the tax avoidance package might hit UK tax revenues. Its dependent and overseas territories also are home to many more offshore tax havens than other EU member states – witness the brouhaha over Google’s Bermuda tax bills.
Minority of one
But the UK is highly unlikely to demand so many changes to the package that it ends up being overturned, or Britain becomes an isolated minority of one, (or two, if you count Ireland, which has similar concerns regarding country-based reporting).
In this regard, Moscovici has been smart in removing from his package long-standing proposals to create a common consolidated corporate tax base (CCCTB) system, which would enable EU companies to pick a member states’ tax rules for EU tax returns. Controversial, and vigorously opposed by the UK government, the Commission has said it will re-propose reforms enacting this idea later this year (2016). But it will do so separately – so it does not impede its tax avoidance package.
So what is left? The tax avoidance directive, as framed, has six key elements:
- It would give member states the power to tax locally-based MNC parents on any profits these companies transfer to lower tax member states, where the effective difference between tax rates exceeds 40%;
- The proposal would also force companies receiving dividends, capital gains and profits from arms of their business based outside the EU to declare whether tax was paid on these earnings at source. If not, then member states could tax these earnings themselves;
- Exit taxes would be levied on intellectual property or patents moved from a member state to a low tax jurisdiction outside the EU, preventing companies from avoiding paying EU tax on earnings generated from this IP, which may have been developed within the EU;
- Limiting the amount of interest that EU companies can deduct from their tax liabilities, deterring MNCs from shifting debt to high tax jurisdictions from lower tax countries, where interest payments reduce tax bills more moderately;
- Preventing ‘hybrid mismatch’ tax avoidance though exploiting different tax rates for similar categories of earnings (such as royalties), by insisting that the legal characterisation of a type of earning used in the source country be applied when such money is moved to another jurisdiction; and
- A catch-all ‘general anti-abuse rule’ enabling countries to ignore tax arrangements that do not reflect where earnings actually are made – in case clever tax advisors find loopholes in the other five protections proposed by the directive.
All this would be underpinned by reforms to the administration cooperation directive which would tell EU tax authorities to circulate country-by-country reports on key MNC tax-related information. The amendment would ensure this work is done in a harmonised way – although such declarations would not be made public. Also, the recommendation on making tax treaties more watertight includes a suggestion that member states based their legal definitions of permanent establishments on the wording based on BEPS, aiming to ensure that companies cannot pretend they are based in a country, when essentially their work and ownership is elsewhere.
A fair wind
How fast could the new package be approved? Realistically, for such a complex package, there is every likelihood that this will not happen this year, despite the fact that the European Parliament is not formally involved in negotiations. The Dutch government, which holds the presidency of the Council of Minsters until
June 30, has said it will give tax avoidance proposals a fair wind in EU council meetings.
Its presidency programme has said that it “will prioritise action against tax evasion and tax avoidance, including increasing transparency in efforts to tackle corporate tax avoidance, based on…BEPS…” So the proposal will certainly be debated in the coming months. From July to December, Slovakia will assume the EU’s presidency.
It is comparatively poor and far from Europe’s financial fleshpots and so maybe keen to see more multinational cash in its coffers. So it will be hard for Britain to duck the EU’s tax avoidance package, but expect a lot of diving and weaving, until the proposals are trimmed of elements that the UK, and especially the City, really does not like.