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November 18, 2012 4:41 pm
The European Commission is pushing for a significant bolstering of Europe’s defences against aggressive corporate tax avoidance schemes, as the EU bids to clamp down on practices which cost its member states as much as $60bn per year.
Pressure is mounting on companies which artificially shift profits to tax havens or low-tax jurisdictions, following months of revelations about the very low tax rates enjoyed by some groups at a time when cash-strapped governments across Europe are struggling to boost revenues.
According to draft documents seen by the Financial Times, the Commission is recommending that member states adopt a common, tougher definition of what constitutes a tax haven, and then scrap or suspend existing double taxation agreements with such countries, meaning that companies would no longer be able to use them to avoid taxes.
The tougher definition is based on the EU’s code of conduct for business taxation, whose criteria for identifying tax havens include not just lack of transparency and refusal to exchange information, but also practices such as offering certain tax benefits only to non-resident companies.
The Commission is also recommending two further steps intended to make it harder for companies to arbitrage the gaps between different tax codes. The first is that member states should include a “general anti-abuse” clause in their national legislation which would allow tax authorities to disregard any corporate arrangements deemed to serve tax purposes rather than commercial purposes.
The second is that, in order to prevent “double non-taxation”, member states should insert a clause into their double tax agreements specifying that one country is precluded from taxing income only if that income is taxed in the other contracting state.
Such moves might affect countries such as Ireland which have both generous treaty provisions and relatively weak anti-abuse provisions. The country is the base for the European operations of a number of US multinationals, such as Google, which routes royalty payments for intellectual property to Bermuda.
However, tackling profit-shifting is complex because of the constraints of European law which mean that putting subsidiaries in low-tax European countries cannot be treated as tax avoidance if they carry out genuine economic activities.
This point, established by anti-discrimination provisions in the Treaty of Rome, was highlighted in a 2006 European Court of Justice ruling in favour of Cadbury Schweppes, the confectionery company.
The task is further complicated by the rise of ecommerce and the growing importance of intangible assets, such as intellectual property or the value of a company’s brand, in economic activity.
An EU-wide approach is better than unilateral action, says Heather Self, director of Pinsent Masons, a law firm, but she is sceptical about its long-term prospects. “It reminds me of the Dutch boy with his finger in the dyke - it won’t plug the leaks for long,” she said.
Nonetheless, the topic is gaining momentum. Earlier this month, Wolfgang Schäuble, Germany’s finance minister, and George Osborne, his British counterpart, called for “concerted international co-operation” to make corporate taxation more effective.
The recommendations will be proposed by Algirdas Semeta, the EU’s tax commissioner, on December 5, and must then be approved by a meeting of Europe’s finance ministers.
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