Brussels launches new plan to crack down on tax evasion
Diego Velazquez and Zuzanna Reda-Jakima
The European Commission will propose one set of rules for corporate tax for companies operating across the European Union as it cracks down on "aggressive tax planning" in countries such as Luxembourg which are costing the 27-nation bloc "billions of euros" each year.
The Commission plan, seen by the Luxembourg Times, also foresees closer scrutiny of letterbox companies which set up shop in a country for tax reasons only without having any real business there. Such companies were for instance described in the recent OpenLux media investigation.
The plan is to “ensure that multinational businesses are subject to a certain minimum level of tax on all of their profits each year,” the Commisison said in its paper, which is due to be launched on Tuesday.
"The fundamental concepts of tax residence and source on which the international tax system has been based for the last century are outdated," according to the plan. Many businesses operate in countries without any meaningful physical presence, allowing them to abuse existing tax principles.
The Commission’s goal is to “ensure a fair sharing of taxable revenue (…) driven by genuine business activity, and not by aggressive tax planning strategies and excessive tax competition.”
The report is only the first step in what could be a long negotiating process, given that each European Union country has a veto in tax matters and countries can only take joint decisions when they all agree.
At the heart of the Commission's plan is a harmonised system of income taxation for multinational companies. A set of rules will determine the tax base and the allocation of profits between the various EU countries, depending on how much income is generated in each given jurisdiction.
With the reform, Brussels promises to remove an administrative burden for companies, as each country would have the same tax rules. At the same time, the Commission hopes to close tax loopholes, which currently allow companies to shift profits to states with more favourable taxation.
"It will largely eliminate the scope for misapplying transfer pricing rules and of disparities among tax systems, which have facilitated aggressive tax planning," the document said. The Commission has accused the Netherlands, Ireland, Luxembourg, Cyprus and Malta of enabling such practices.
Details of the plan will not be ready before 2023, when the Commission expects to publish its Business in Europe: Framework for Income Taxation, or BEFIT proposal. The new proposal is a restart of an earlier failed attempt to introduce a common corporate tax base (CCCTB), stalled in negotiations between EU countries for years. Luxembourg was one of those blocking it.
Crackdown on shell companies
The Commission also wants to take action against the abuse of letterbox companies described in the recent OpenLux investigation, which found circumventing paying taxes was still possible for corporates and rich individuals under Luxembourg laws. The investigation brought to light that Russian mafia bosses, people close to the Venezuelan regime and with ties to organised crime in Italy are among those hiding money in the Grand Duchy.
Although the Commission recognised there may be “valid reasons” for using such structures, but it wants to block them when they are used merely to reduce taxes. Details of those plans will come out before the end of the year.
A new transparency rule is planned to follow in 2022, forcing large companies to publish the tax rates they pay in different EU countries. "The proposal will improve public transparency around the real effective tax rate experienced by large EU companies, allowing public scrutiny where aggressive tax planning strategies are used to minimise tax liabilities," the report said.