Ireland’s insistence that it is not a tax haven and that in fact other EU countries have tax regimes that facilitate tax dodging by multinationals will be borne out by a study to be released next week.
But while this will be good news to Finance Minister Michael Noonan a number of directives and recommendations on corporate tax to be released by the European Commission will threaten massive changes in the country’s tax system.
The package of measures to be released next Tuesday builds on the agreements in the OECD and G20 on base erosion and profit shifting — BEPS — but which will make some of them compulsory and align the way they are implemented across the EU.
The cornerstone of the new rules, according to EU officials, is to effectively tax profits where they are generated, rather than where the company is headquartered or where the intellectual property is held.
It will aim to do away with the situation where a multinational company in one member state can assume all the debts which can be offset against tax, as is the situation in Ireland, while equity and dividends are not.
It will prevent moving the value of research and development to an offshore or low-tax country towards the end of the work to avoid profits being taxed in the country where the work was carried out.
However it will not require changes to Ireland’s new ‘knowledge box’ that gives companies preferential tax and which complies with the OECD’s model.
Officials stressed the aim is to ensure a level playing field for member states and said they have built in enough flexibility — proposing minimum standards only — to give countries flexibility to adjust them to ensure their size or geographical location does not militate against them, giving larger better-placed countries an advantage.
The study of what elements of each country’s tax regime facilitates companies to avoid paying their full share of tax, was carried out by an independent body for the Commission.
It supports Ireland’s contention that companies’ actual tax payments of 11% are much closer to the headline rate of 12.5%.
This compares to countries, like France and Germany, with headline rates of around 30%, which have much lower effective rates of around 7.5%, due to a range of items they allow companies to offset against tax.
According to a European Parliament analysis multinationals avoid paying up to €70bn a year because of a range of hybrid mismatches and a lack of transparency, while domestic companies pay, on average, 30% more tax than multinationals.
Taxation Commissioner Pierre Moscovici told MEPs that 2016 will be the year of corporate tax reform and fiscal transparency.
“We have a serious problem with tax avoidance and lack of transparency. Too many people have looked the other way”.
The package will include legal and non-legal proposals, including two analytical documents — one the external study on aggressive tax planning and a second with evidence to underpin the package.
The Dutch government, which has taken over the presidency of the EU for the year, has said that it wants to get agreement on the two directives by July,which will require unanimity.
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