The measures, originally proposed by the European Commission in January and based on the OECD’s recommendations to overhaul the global tax system, will make it harder for companies operating across borders to exploit mismatches in member states’ tax architecture.
Pierre Moscovici, commissioner for economic and financial affairs, EU-wide agreement was a “serious blow” to those engaged in corporate tax avoidance.
Companies have been able to take advantage of loopholes created by incongruous tax systems “for too long”, he said, congratulating member states for “fighting back” and cooperating on a solution.
According to estimates, EU member states lose between €50-70bn in revenues every year to corporate tax avoidance.
The package, which has been agreed by the European Council and is scheduled to be formally adopted in a forthcoming council meeting, sets provisions to prevent a number of common tricks used by multinational firms to lower their tax bills.
These include limits on interest deductions, which discourage firms from financing operations in high-tax jurisdictions through debt and arranging to pay back inflated interest to subsidiaries in low-tax jurisdictions, reducing the bill for the company as a whole.
Measures to enable member states to charge tax on assets or profits that have been moved to a lower tax jurisdiction, known as exit taxation and controlled foreign company rules respectively, are also included.
As well as this, the package contains a “general anti-abuse rule” that empowers member states to tackle tax avoidance schemes that are not covered by specific legislation, because they are too new or complex.
EU finance ministers had been expected to reach a deal on the proposals late last month, but could not agree on the measures.
Some of the commission’s original, more controversial proposals have been amended “owing to issues around implementation in some member states”, the European Commission said. These include the scope of the provision on interest rate limitation.
With all member states on board, the council said the directive will ensure the OECD’s recommendations to tackle tax avoidance, known as the Base Erosion and Profit Shifting (BEPS) project, are implemented in a coordinated manner across the EU. Five areas of the directive are in line with OECD best practice.
But Diarmid O'Sullivan, tax policy advisor at ActionAid, said the proposals, which “were weak to start with” have now been “diluted to the point of making them almost meaningless, especially on anti-tax haven rules”.
“Efforts at meaningful reform in Europe have been undermined by the determination of some countries, like the UK, to undercut each other on tax. We call on European countries not to be limited by this feeble compromise but to adopt much stronger national rules which deter tax avoidance by big companies at home and in developing countries,” he said.
Once adopted, member states will have to incorporate the directive into national law to bring it into effect. They can strengthen its provisions if they wish.
Margaret Hodge, chair of the UK’s All Party Parliamentary Group on Responsible Tax, added that the “devil will be in the detail” – measures must be backed up by solid legislation that allows for no grey areas which multinationals could easily exploit.
“Careful planning for the implementation of the regulations is vital,” she continued. “The commission has come a long way in developing these anti-tax avoidance measures; it would be devastating to fall at the final hurdle by ignoring the details.”
The commission said it will continue its campaign to tackle corporate tax avoidance throughout 2016. Proposals including an EU-wide set of rules known as the Common Consolidated Corporate Tax Base and the development of a blacklist of non-EU countries that don’t conform to good tax governance standards due to be explored.
