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BackOn 25.11.2013, the European Commission presented a proposal on revising the Directive on the common system of taxation applicable in the case of parent companies and subsidiaries of different EU Member States. According to the competent Commissioner Algirdas Šemeta, the objective is to put a stop to systematic tax avoidance by companies operating on a multinational level. It is the principal aim of the Directive to ensure that profits generated within the EU do not remain untaxed because of artificial shifts between the Member States.
Need for a new regulation
In 2011, the European Commission adopted the so-called “Directive on the common system of taxation applicable in the case of parent companies and subsidiaries of different EU Member States”. However, as it has turned out in the meantime, this 2011 Directive brings in its wake significant problems, giving transnationally operating companies the opportunity to avoid large parts of their profits from being taxed.
Global context of the proposal
Commissioner Šemeta pointed out on several occasions that the Commission proposal has to be seen in the context of global initiatives against tax fraud, tax evasion and tax avoidance. In respect of contents, it was based on the OECD’s “BEPS” concept, which has already been dealt with in previous Newsletter articles.
This issue was not only on the agenda of the recent G8 and G20 meetings, it definitely also played a part in the closing declarations. For example, in June 2013, the G8 heads of state and government came out in favour of adopting a common approach against the erosion of the tax base for corporation taxation.
How does tax avoidance work?
The online retailer “Amazon” skilfully exploits certain legal loopholes. About EUR 8.7 billion of the turnover generated by the subsidiary in Germany is shifted to the parent company in Luxembourg. The reason is simple: on an intragroup level itself, the parent company requires the subsidiary to pay licence fees. These are deducted from the turnover in Germany, which considerably reduces the tax load; they are then directly transferred to Luxembourg, where licence fees are not taxable. From this derives the phenomenon of the so-called “double non-taxation”. The German treasury only receives EUR 3.2 million in tax, because Amazon adopts aggressive tax planning to skilfully exploit loopholes between European tax systems.
By adopting these consistently legal strategies, large concerns enormously reduce their taxes, whist the tax burden for wide parts of society increases ever more dramatically.
What will change?
The Commission, under Algirdas Šemeta would like to make two key changes.
Firstly, the tax exemption included in the 2011 “Parent-Subsidiary Directive” is not to apply to profits, which were already taxable in the source Member State. Secondly, the Commission insists on introducing a European common anti-abuse clause. This had already been announced in the Commission’s Action Plan in December 2012 and shall now be adapted for the “Parent-Subsidiary Directive” to tackle aggressive tax planning by corporations. However, the Commission proposal has not yet specified how this anti-abuse clause will be defined.
There is not yet any reliable data in respect of the impact assessment of the intended changes. Hence, the level of additional income EU Member States may expect is currently not yet entirely clear.
Only a small step
The proposal by the Commission must be seen as generally positive, as it targets the closure of loopholes between national tax systems, which are systematically used by companies to avoid paying tax on large parts of their profits.
Unfortunately, the Commission under Algirdas Šemeta does not go far enough. For example, the European Parliament has already demanded a minimum taxation of 16 % on distributed profits, which so far fell on deaf ears at the Commission. Not least Europe-wide common minimum tax rates for corporate profits are required to have a better chance to tackle the tax competition among EU Member States.
It also remains to be seen whether countries such as Luxembourg, the Netherlands or Ireland will actually approve of Šemeta’s proposal, as they, because of extremely low corporate taxes, are the greatest supporters of the tax race, being major beneficiaries at the same time.
Further information:
Directive proposal of the European Commission
In 2011, the European Commission adopted the so-called “Directive on the common system of taxation applicable in the case of parent companies and subsidiaries of different EU Member States”. However, as it has turned out in the meantime, this 2011 Directive brings in its wake significant problems, giving transnationally operating companies the opportunity to avoid large parts of their profits from being taxed.
Global context of the proposal
Commissioner Šemeta pointed out on several occasions that the Commission proposal has to be seen in the context of global initiatives against tax fraud, tax evasion and tax avoidance. In respect of contents, it was based on the OECD’s “BEPS” concept, which has already been dealt with in previous Newsletter articles.
This issue was not only on the agenda of the recent G8 and G20 meetings, it definitely also played a part in the closing declarations. For example, in June 2013, the G8 heads of state and government came out in favour of adopting a common approach against the erosion of the tax base for corporation taxation.
How does tax avoidance work?
The online retailer “Amazon” skilfully exploits certain legal loopholes. About EUR 8.7 billion of the turnover generated by the subsidiary in Germany is shifted to the parent company in Luxembourg. The reason is simple: on an intragroup level itself, the parent company requires the subsidiary to pay licence fees. These are deducted from the turnover in Germany, which considerably reduces the tax load; they are then directly transferred to Luxembourg, where licence fees are not taxable. From this derives the phenomenon of the so-called “double non-taxation”. The German treasury only receives EUR 3.2 million in tax, because Amazon adopts aggressive tax planning to skilfully exploit loopholes between European tax systems.
By adopting these consistently legal strategies, large concerns enormously reduce their taxes, whist the tax burden for wide parts of society increases ever more dramatically.
What will change?
The Commission, under Algirdas Šemeta would like to make two key changes.
Firstly, the tax exemption included in the 2011 “Parent-Subsidiary Directive” is not to apply to profits, which were already taxable in the source Member State. Secondly, the Commission insists on introducing a European common anti-abuse clause. This had already been announced in the Commission’s Action Plan in December 2012 and shall now be adapted for the “Parent-Subsidiary Directive” to tackle aggressive tax planning by corporations. However, the Commission proposal has not yet specified how this anti-abuse clause will be defined.
There is not yet any reliable data in respect of the impact assessment of the intended changes. Hence, the level of additional income EU Member States may expect is currently not yet entirely clear.
Only a small step
The proposal by the Commission must be seen as generally positive, as it targets the closure of loopholes between national tax systems, which are systematically used by companies to avoid paying tax on large parts of their profits.
Unfortunately, the Commission under Algirdas Šemeta does not go far enough. For example, the European Parliament has already demanded a minimum taxation of 16 % on distributed profits, which so far fell on deaf ears at the Commission. Not least Europe-wide common minimum tax rates for corporate profits are required to have a better chance to tackle the tax competition among EU Member States.
It also remains to be seen whether countries such as Luxembourg, the Netherlands or Ireland will actually approve of Šemeta’s proposal, as they, because of extremely low corporate taxes, are the greatest supporters of the tax race, being major beneficiaries at the same time.
Further information:
Directive proposal of the European Commission