European Union (EU) finance ministers have agreed to roll-out further measures to prevent multinational corporations (MNCs) from exploiting differences in tax rates between member countries those outside the EU to reduce their tax bills.
Meeting in Brussels, they backed proposals to target various practices employed by MNCs to take advantage of loopholes between different tax systems in order to reduce their tax liability.
They include devices to shift profits and move debt to countries outside the EU that offer more generous interest deductions. EU officials said the new rules would prevent companies from taking advantage of so-called double non-taxation agreements. These were introduced to ensure a company didn’t pay tax in two different countries, but have since been aggressively exploited.
Critics of these so-called “hybrid mismatches” point out that they have been used by major corporations such as Apple and McDonald’s, to reduce their tax payments, so that European governments miss out on billions of revenue. A mismatch could see a firm deducting expenses from income in two jurisdictions with the aim of reducing, or even eliminating, its tax liabilities.
“The possibilities of tax planners to abuse the different legislations will be seriously curtailed,” said Belgium’s finance minister Johan Van Overtveldt. “We cannot tolerate that citizens and small enterprises correctly pay their taxes, while others apply fiscal high technology to avoid paying taxes.”
Under the terms of the agreement, EU member states will have until the end of 2019 to legislate changes into their national law, although the UK is expected by then to be out of the EU, should the government’s exit timetable go to plan. The new rules would then come into effect between January 2020 and January 2022.
“Today is yet another success story in our campaign for fairer taxation,” said Pierre Moscovici, the European Commissioner for Economic and Financial Affairs, Taxation and Customs. “Step by step, we are eliminating the channels used by certain companies to escape taxation.”
However, EU member states Luxembourg and Belgium have urged caution in implementing tougher global tax avoidance standards, stressing that EU could put itself at a competitive disadvantage globally and alienate itself from the US. Earlier this year it was reported that leaked documents show European Commission (EC) president Jean-Claude Juncker, spent years in his previous role as Luxembourg’s prime minister secretly blocking EU efforts to tackle tax avoidance by MNCs
Luxembourg’s finance minister, Pierre Gramegna, told his peers at the Brussels summit: “It is high time we look around us at what others are doing – what is key here at the end is that we have a level playing field. We must make sure others are following, that we are not alone out there implementing base erosion and profit shifting (BEPS).”
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The new rules aim to prevent companies overpaying tax and to increase the competitiveness of the eurozone.