Large corporations and multinational companies have built complicated cross-country structures to avoid paying taxes by exploiting a wide range of national legal systems. Within the scope of the EU’s Anti-Tax Avoidance Package one of these constructions, namely hybrid mismatches, is going to be more thoroughly regulated.
In the OECD's project on combating base erosion and profit shifting (BEPS), 15 measures have been elaborated to ensure that profits will be taxed in the country where they have been generated. In order to implement these measures effectively, they have to be jointly implemented by as many countries as possible, which is why the EU is currently working at various different issues in order to make legal tax avoidance impossible.
One of the BEPS-actions specifically deals with hybrid mismatches of companies. These are legal constructions, which are used by multinational companies and large corporations to exploit the different tax territories and legal systems for double deductions of expenses or to avoid paying tax on income in several countries at once. As a result, hybrid mismatches reduce the fiscal revenue and currently represent the most frequently used legal tax loophole in the EU. In many cases, countries outside the EU are also involved in these complicated networks – thus, they also have to be covered by an appropriate regulation. Whilst the Council already adopted a Tax Avoidance Directive last summer, there is now the need for improvement.
This week, the Committee on Economic and Monetary Affairs of the European Parliament (ECON) approved of a revised version of the original Commission proposal with a clear majority. Whilst the Commission has provided for exemptions, the now approved report takes a hard stance against the still existing loopholes in order to ensure that hybrid mismatches can be effectively fought against.
As rapporteur Olle Ludvigsson (S&D) points out this proposal is an important, albeit individual component to fight tax avoidance. Hence it needs to be applied together with other measures, such as the new version of a Common Consolidated Corporate Tax Base and the implementation of the Country-by-Country reporting that are currently discussed at EU level. From the AK’s point of view, the tools discussed represent reasonable approaches, which, however, need to be stricter – after all, it is important that companies and banks face their social responsibility and pay their fair share of taxes to enable investments in education, social issues, healthcare, the labour market or infrastructure.