The EU Commission is targeting intra-group loans in the opening salvo in its clampdown on corporate tax avoidance.
The Commission plans to close loopholes in the Parent-Subsidiary Directive, which it claims has been used by multinationals to avoid paying taxes.
In particular, companies will no longer be able to exploit differences in the way intra-group payments are taxed across the EU to avoid paying any tax at all.
The result will be that the Parent-Subsidiary Directive can continue to ensure a level-playing field for honest businesses in the Single Market without opening opportunities for aggressive tax planning, it said in a statement.
Companies with operations across the EU have been able to avoid tax through exploiting loopholes on existing legislation for hybrid loans, which have both a debt and equity component.
Companies were getting tax relief on hybrid loans made to parent companies. But the parent companies were treating these loans as dividends and were then avoiding taxes on these dividends because they were intra- company.
“EU tax policy is heavily focused on creating a better environment for businesses in the EU. This means breaking down tax barriers and tackling cross-border problems such as double taxation.
“But when our rules are abused to avoid paying any tax at all, then we need to adjust them. Today’s proposal will ensure that the spirit, as well as the letter, of our law is respected.
“As such, it will ensure greater revenues for national budgets and fairer competition for our businesses,” said Algirdas Šemeta, Commissioner for Taxation. “The Parent-Subsidiary Directive was originally conceived to prevent same-group companies, based in different member states, from being taxed twice on the same income (double taxation).
“However, certain companies have exploited provisions in the Directive and mismatches between national tax rules to avoid being taxed in any Member State at all (double non-taxation). This proposal aims to close these loopholes,” he added.
The OECD is putting together a legislative initiative on corporate tax avoidance, which is known as base erosion and profit shifting. This will also address the problem of ‘double non-taxation’ by multinationals.
Minister for Finance Michael Noonan announced in October’s budget that companies will no longer be allowed to be domiciled in Ireland and not registered for tax either here or in another jurisdiction.
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