The European Commission is pushing to strengthen Europe’s defences against aggressive corporate tax avoidance schemes.
The initiative comes as the EU attempts to restrain practices that cost member states as much as €47 billion a year.
Pressure is mounting on companies which artificially shift profits to tax havens or low-tax jurisdictions, following months of revelations about low tax rates enjoyed by some.
The commission is recommending steps intended to make it harder for companies to arbitrage the gaps between different tax codes, according to draft documents.
Disregard
The first is that member states should include a “general anti-abuse” clause in their national legislation which would allow tax authorities to disregard any corporate arrangements deemed to serve tax purposes rather than commercial purposes.
The second is that, in order to prevent “double non-taxation”, member states should insert a clause into their double-tax agreements specifying that one country is precluded from taxing income only if that income is taxed in the other contracting state.
Such moves might affect countries such as Ireland which have generous treaty provisions and relatively weak anti-abuse provisions. Ireland is the base for the European operations of a number of US multinationals, such as Google, which routes royalty payments for intellectual property to Bermuda.
Constraints
However, tackling profit-shifting is complex because of the constraints of European law which mean that putting subsidiaries in low-tax European states cannot be treated as tax avoidance if they carry out genuine economic activities.
This point, established by anti-discrimination provisions in the Treaty of Rome, was highlighted in a 2006 European Court of Justice ruling in favour of confectioner Cadbury Schweppes.
The task is further complicated by the rise of e-commerce and the growing importance of intangible assets, such as intellectual property or the value of a company’s brand, in economic activity.
The recommendations will be proposed by Algirdas Semeta, the EU’s tax commissioner, on December 5th, and must then be approved by a meeting of Europe’s finance ministers. – Copyright The Financial Times Limited 2012
