European Commission proposes minimum corporate tax and end to tax havens in the EU

European Commission proposes minimum corporate tax and end to tax havens in the EU
Off-shore tax haven, British Virgin Islands, credit: Unsplash/Matt Briney

The Commission proposed before Christmas two initiatives for fair taxation in the EU. The first one is a directive ensuring a minimum effective tax rate for the global activities of large multinational groups. The other one is a directive against the misuse of shell entities for improper tax purposes in the EU.

Presenting the first directive at a press briefing last Wednesday (22 December), the Commissioner for Economy, Paolo Gentiloni, referred to the OECD multilateral agreement on minimum effective taxation reached in October by 137 countries.

“We are taking the first step to put an end to the tax race to the bottom that harms the EU and its economies. The directive we are putting forward will ensure that the new 15% minimum effective tax rate for large companies will be applied in a way that is fully compatible with EU law.”

The proposal sets out how the principles of the 15% effective tax rate will be applied in practice within the EU. It includes a common set of rules on how to calculate this effective tax rate, so that it is properly and consistently applied across the EU. The new rules will apply to any large group, both domestic and international, with a parent company or a subsidiary situated in an EU Member State.

If the minimum effective rate is not imposed by the country where a low-taxed company is based, there are provisions for the Member State of the parent company to apply a “top-up” tax. The proposal also ensures effective taxation in situations where the parent company is situated outside the EU in a low-tax country which does not apply equivalent rules.

There is no figure on how much the new rules will raise tax income in the EU, the Commissioner explained. He referred to OECD’s assessment according to which the new minimum tax rate is estimated to generate around USD 150 billion in additional global tax revenues annually.

Member states will need to unanimously agree in Council on the directive. The only EU member state that has not formally committed to the agreement is Cyprus. However, the Commission expects Cyprus to support the directive.

Tax havens in EU member states

The other directive aims at correcting a shortcoming or loophole in the EU to ensure that entities in the EU that have no or minimal economic activity are unable to benefit from any tax advantages and do not place any financial burden on taxpayers.

While shell, or letterbox, entities can serve useful commercial and business functions, some international groups and even individuals abuse them for aggressive tax planning or tax evasion purposes, according to the Commission.

Certain businesses direct financial flows to shell entities in jurisdictions that have no or very low taxes, or where taxes can easily be circumvented. Similarly, some individuals can use shells to shield assets and real estate from taxes, either in their country of residence or in the country where the property is located.

The EU has been adopting a list on off-shore and other “non-cooperative jurisdictions” or tax havens since 2017. The purpose of the list is to help EU member states to deal with countries that encourage abusive tax practices.

Although some of member states could also be considered as tax havens, they were not included in the list. Until recently, the EU was reluctant to act against tax havens in the EU member states.

When for example the Council updated the list last October, it did not take into account the disclosures in the Pandora Papers of tax evasion in other tax havens. A Commission spokesperson, however, said that the Commission was preparing new legislative proposals before the end of the year to tackle the misuse of shell companies for tax purposes.

This proposal will tighten the screws on shell companies, establishing transparency standards so that the misuse of such entities for tax purposes can more easily be detected,” commented Commissioner Gentiloni.

“Our proposal establishes objective indicators to help national tax authorities detect firms that exist merely on paper: when that is the case, the company will be subject to new tax reporting obligations and will lose access to tax benefits. This is another important step in our fight against tax avoidance and evasion in the EU.”

There are several examples of misuse of tax rules but the directive is not targeted against a specific member state, he explained. The proposal should come into force as of 1 January 2024 once adopted by the EU member states.

M. Apelblat

The Brussels Times

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