Analytics, EU – Baltic States, Financial Services, Legislation, Markets and Companies, Taxation

First proposed by the Commission in January this year, new legally-binding rules were agreed swiftly to spur global efforts to clamp down on aggressive tax planning. They are particularly timely given the recent Panama Papers revelations. Since the Parliament has already issued its opinion, the new rules will soon be formally adopted by the Council.

The EU new binding measures (adopted on 21.06.2016) put the member states at the forefront in terms of political and economic approach to corporate taxation following the agreement among OECD countries on recommendations  to limit tax base erosion and profit shifting (BEPS).

It is the Commission’s reaction to President Juncker's promise to deliver on ways to tackle corporate tax avoidance, ensuring a fairer Single Market and promoting jobs, growth and investment in Europe.

Recovering lost profit

The measures in the Directive target the main forms of tax avoidance practiced by large multinationals and builds on global standards developed by the OECD last year on Base Erosion and Profit Shifting (BEPS).

The OECD has estimated about $100bn-$240 billion is lost to global profit shifting every year, equivalent to between 4% and 10% of global corporate tax revenues. The European Parliamentary Research Service put the revenue lost to corporate avoidance at around €50-70 billion a year in the EU.

Commissioner for Economic and Financial Affairs, Taxation and Customs, Pierre Moscovici, underlined that the new agreement strikes a serious blow against those engaged in corporate tax avoidance.

He added that for too long, some companies had been able to take advantage of the mismatches between different EU states’ tax systems to avoid billions of euros in tax. Now, the EU states are able to strike back and make necessary changes to ensure that these companies pay their fair share of tax.

While some of the measures have been changed owing to issues around implementation in some EU states, the Commission remains convinced that fast agreement on this Directive was imperative if for taking quick action. Since the Parliament has already issued its opinion, the new rules will now soon be formally adopted by the Council.

An end to aggressive tax planning

Once implemented, new legislation will put an end to the most common loopholes and aggressive tax planning schemes, which are currently used by some large companies to avoid paying their fair share of tax. For example, all EU states will now have the power to tax profits being moved to low-tax countries where the company does not have any genuine economic activity (so-called CFC rules).

Previously untaxed gains on assets (exit taxation rules) such as intellectual property which have been moved from the EU's territory can also be taxed, while countries have also been empowered to tackle tax avoidance schemes that are not covered by specific anti-avoidance rules (general anti-abuse rule).

During the negotiations, some amendments were made to the original proposal: such as the scope of the provision on interest limitations and its transposition.

Changes made and results achieved

Major initiatives put forward by this Commission to boost tax transparency and reform corporate taxation are already reaping results. The proposal presented by the Commission in January 2016 on Country-by-Country Reporting between EU tax authorities was agreed in March 2016, and will oblige large multinationals based in the EU to provide detailed tax-related information to tax authorities. The Commission's proposal on the automatic exchange of information on tax rulings was agreed by the EU states in October 2015 after only seven months of deliberation.

A number of other substantial corporate tax reforms have also been launched. The Commission will continue its campaign for corporate tax reform throughout 2016, with important proposals such as the re-launch of the Common Consolidated Corporate Tax Base (CCCTB) still to come. In another related issues, the EU states have signaled their intention to compile a common EU list of third country tax jurisdictions that don't conform to international tax good governance standards.

For more information see the following links:

= Proposal on anti-tax avoidance measures;

= Anti-Tax Avoidance Package;

= Memo on the Anti-Tax Avoidance Package;

= Study on Structures of Aggressive Tax Planning and Indicators;

= Action Plan for Fair and Efficient Corporate Taxation in the EU.

Main reference: http://europa.eu/rapid/press-release_IP-16-1886_en.htm?locale=en.