Corporate Profits

E.U. Takes on Corporate Tax Dodgers

  • Why it matters

    Why it matters

    Brussels is responding to mounting public pressure over corporate tax-dodging by proposing new rules, but it will likely prove difficult to get all 28 E.U. member states on board.

  • Facts

    Facts

    Europe’s commissioner for economic affairs, Pierre Moscovici, will issue draft directives meant to curb corporate tax evasion next week.

    The proposed changes include an end to tax exemptions on revenue earned abroad, as well as new country-by-country reporting requirements.

    Companies such as Amazon are accused of avoiding paying enough taxes in Germany.

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    Audio

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Amazon-DPA-HenningKaiser
Amazon has long been among the companies best at avoiding European taxes. Source: DPA / Henning Kaiser

The European Commission wants to make it much harder for companies to wriggle out of paying tax on their profits. Commission sources in Brussels told  Handelsblatt that authorities in Brussels would soon present two new proposals to rein in corporations’ use of loopholes to lawfully lower their tax burdens.

The new rules are meant to ensure that companies pay taxes on all profits – regardless of where the money is earned. The Commission also wants to limit the tax benefits corporations can gain by taking loans from and paying interest to their own subsidiaries in countries where taxes are low.

In addition, E.U. member states would be obliged to collect a minimum level of corporate tax; otherwise, profits would be deemed taxable in those countries in which the money was earned.

This push for greater corporate transparency is part of an E.U. effort to implement a plan on base erosion and profit shifting. That proposal, from the Organisation for Economic Cooperation and Development, was agreed upon by leaders from the Group of 20 economies (G20) late last year.

The draft directives are also a response to fallout from the so-called Luxleaks scandal of 2014, when leaked documents revealed that Luxembourg had negotiated a number of sweetheart deals with multinational corporations, including the Internet-based retailer Amazon.

Handelsblatt has obtained copies of both draft directives, which Europe’s commissioner for economic affairs, Pierre Moscovici, is expected to present by the middle of next week.

Despite doing a good business in Germany, the U.S. retailer does not pay taxes there – because Amazon’s European headquarters are in Luxembourg.

One proposal would keep companies from shifting profits within the European Union in a way that allows them to decrease their tax liabilities. Recognizing that businesses take advantage of “differences between national tax systems,” according to the draft, taxable earnings cannot be reduced by more than 30 percent of pre-tax earnings, or €1 million ($1.08 million).

A new “exit tax” would also make it more difficult for companies to move to E.U. countries with lower tax rates.

The second directive would set up more extensive disclosure requirements for corporations. All businesses with annual sales in excess of €750 million, or nearly $814 million, would have to report to authorities a country-by-country breakdown of their profits and the taxes paid to each country. The firms would not be required to disclose those figures to the public.

McDonald's Europe and the Tax Dilemma-new

Sven Giegold, a Green Party member of the European Parliament, welcomed the Commission’s proposals as a first step on the road to promoting fairer tax legislation within the European Union. But he said authorities are doing nothing to combat other tax avoidance strategies, such as the so-called “Amazon scenario.” Despite doing a good business in Germany, the U.S. retailer does not pay taxes there – because Amazon’s European headquarters are in Luxembourg.

The new directives also fail to address so-called patent box schemes, or tax breaks given to companies in some countries, including Ireland, the Netherlands and the United Kingdom, that apply to revenue flows from patented research.

Since all 28 member states have to agree to the rules before they take effect in the European Union, there’s little hope that the Commission will be able to move forward quickly with its plans. Reaching consensus within the bloc on issues of taxation has proven exceedingly difficult, and it seems fair to expect that European finance ministries will have to spend a good deal of time negotiating the details.

 

Ruth Berschens is Handelsblatt’s Brussels bureau chief. To contact the author: berschens@handelsblatt.com

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