European Council backs tougher rules on corporate tax avoidance

9 Mar 16

The European Council has announced it will support a directive strengthening European Union rules to prevent corporate tax avoidance.

The draft directive, which was adopted by the European Commission in January and is pending approval from the European Parliament, will implement recommendations approved by the OECD last October to close loopholes in the international corporate tax system used by companies to legally avoid paying tax.

If adopted, the anti-tax avoidance package will form a legally binding instrument obliging large multinational corporations operating across EU borders to compile reports on their activities in each country. These reports will then be automatically shared between the relevant national tax authorities.

Pierre Moscovici, commissioner for economic and financial affairs, taxation and customs, hailed the agreement as “a major step forward towards enhancing transparency on tax matters”.

“This another important signal that the EU is ready to deliver on our common goal of fair and effective taxation.”

After its entry into force, which is expected sometime in spring this year, large multinational companies will have to provide information including revenues, profits, taxes paid, capital, tangible assets and the number of employees for each jurisdiction in which they operate.

This will only apply to multinationals with a total revenue of at least €750m, or 10-15% of companies operating across borders, but the council noted these groups hold 90% of corporate revenues.

Under the directive, a multinational company will be obliged to file its country-by-country tax report to the tax authorities of the member state where its parent company is resident.

If its parent company resides outside of the EU, this will be done through the company’s EU subsidiaries. This “secondary reporting” will be mandatory from 2017.

Member states’ tax authorities will have to share this information automatically. The EU’s existing framework for information exchange between tax authorities will be built on to enable this, saving on implementation costs, the council said.

The directive will set deadlines of 12 months after the fiscal year for reports to be filed, and a further three months for automatic exchange.

This will harmonise member states’ approach to international corporate tax and prevent multinational corporations from employing aggressive tax planning schemes which shift profits towards states where tax regimes are more favourable or take advantage of loopholes or mismatches between different jurisdictions.

Member states will have 12 months to transpose the directive into national law after it comes into force. The commission noted that the UK’s agreement on the directive is subject to the scrutiny by the country’s parliament.

Speakers at a UK All Party Parliamentary Group on Responsible Tax event yesterday criticised Britain’s approach to corporate taxation. Journalist and author Richard Brooks told the meeting that the UK makes much of its role in the fight against tax avoidance, while quietly undermining these principles in its pursuit of maintaining a competitive tax regime.

The impact of harmful tax practices pursued by governments and multinational corporations take a heavy toll on the developing world too, where they are an even more significant drain on even more scarce resources.

The UK’s Independent Commission for Aid Impact announced earlier this week that it will be reviewing how effectively the country’s Department for International Development addresses global issues of cross-border tax avoidance.

The OECD’s plan has been criticised for not addressing the issue of corporate tax avoidance effectively for the developing world.

Commentators have also flagged up other shortfalls affecting stakeholders everywhere, such as the fact that the country-by-country reports will only be available to tax authorities and not to the public.

The European Commission however is currently finalising an assessment on the impact public CbC reporting could have, and will present a proposal on the matter in April. 

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