EU Targets Tax Loopholes for Multinationals

The European Commission (EC) said that it plans to eliminate a tax loophole that enables some multinational companies (MNCs) to minimise their tax bill by routing profits abroad.

The Commission, executive arm of the European Union (EU), is targeting the 2003 Parent-Subsidiary Directive, under which same-group companies based in different EU member states are not taxed more than once on the same income by different tax authorities.

According to the EC, some companies are exploiting differences in national tax laws and the Directive’s provisions to escape any taxation. Some companies use simply a post box address in a country to benefit from lower taxation, despite having minimal or no operations or sales based there.

“EU tax policy is heavily focused on creating a better environment for businesses in the EU,” said Algirdas Šemeta, EC commissioner for taxation. “This means breaking down tax barriers and tackling cross-border problems such as double taxation. But when our rules are abused to avoid paying any tax at all, then we need to adjust them.

“The proposal will ensure that the spirit, as well as the letter, of our law is respected. As such, it will ensure greater revenues for national budgets and fairer competition for our businesses.”

Under the EC’s proposed changes, all member states will be required to adopt a common anti-abuse rule for the Directive. “This will allow them to ignore artificial arrangements used for tax avoidance purposes and ensure taxation takes place on the basis of real economic substance,” it stated.

The UK government, which has often been at odds with the EC on tax issues, voiced support for the proposals. “We welcome the European Commission’s proposal to close off opportunities for corporate tax avoidance and will be considering further the proposal to amend the Parent-Subsidiary Directive,” said a spokesperson.

“In the meantime, the UK continues to engage with the wider G20 and Organisation for Economic Cooperation Cooperation and Development [OECD] work to address corporate tax avoidance and the issues of base erosion and profit shifting. Working through the OECD will ensure the participation of a broad range of countries, resulting in coordinated action to address these issues effectively.”

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