EU Parliament calls for crackdown on corporate tax avoidance

Proposal based on OECD action plan

Members of the EU Parliament have welcomed an EU Commission proposal for an anti-tax avoidance directive but demanded tougher rules on foreign income and stricter limits on deductions of interest payments. They also called for more transparency for trust funds and foundations, common rules for “patent box” tax reductions on intellectual property earnings, and an EU blacklist of tax havens and sanctions against uncooperative jurisdictions.

The anti-tax avoidance directive reflects the action plan of the Organisation for Economic Cooperation and Development to limit tax-base erosion and profit shifting.

The proposal builds on the principle that tax should be paid where profits are made and includes legally binding measures to block the methods most commonly used by companies to avoid paying tax.

It also proposes common definitions of terms like “permanent establishment,” “tax havens,” “minimum economic substance,” “transfer prices,” “royalty costs,” “patent boxes,” “letterbox companies” and other terms open to interpretation until now.

MEPs are more ambitious than the Commission with regard to the “switch-over rule” for earnings taxed in a country outside the EU and then transferred to an EU member state. This so called “foreign income” is often exempt from taxation to avoid double taxation. MEPs favor setting a minimum rate of 15 percent. This would mean if foreign income is taxed at a lower rate outside the EU, then the difference would need to be paid.

The EU parliamentarians further recommend creating a harmonized, common European taxpayer identification number. This would serve as the basis for automatic exchange of tax information between tax administrations of member countries.

MEPs also want to draw up a “black list” of tax havens and countries, including those in the European Union, coupled with a list of sanctions for non-cooperative jurisdictions and for financial institutions that operate within tax havens.

In a separate development, the European Parliament agreed to set up an inquiry committee into the “Panama Papers” and related information on offshore companies and their ultimate beneficiaries.

The committee will investigate alleged contraventions and maladministration in the application by the EU Commission or member states’ laws on money laundering, tax avoidance and tax evasion. It will have 65 members and 12 months to present its report.