EU urges states to co-ordinate on anti-tax abuse laws

EU MEMBER states are being asked to review their anti-abuse rules in the direct tax area, in an effort to ensure it does not conflict with internal market principles and is not being used to allow unfair avoidance of tax.

The European Commission said decisions by the European Court of Justice, including the Cadbury-Schweppes case that involved Ireland and Britain made a review necessary and they hoped it could lead to greater co-ordination between member states.

Tax partner with PricewaterhouseCoopers, Anne Fitzgerald, said this was good news for Ireland because the commission is recognising companies need to operate across borders and the rules of some EU member states can be prohibitive.

“Companies availing of Ireland’s 12.5% tax rate have to have substance in Ireland or they will not benefit from controlled foreign company rules,” she said.

This is part of a twin track approach by the Finance Commissioner Laszlo Kovacs to bring greater co-ordination to the corporate tax area in the EU that includes putting together a common consolidated tax base.

“I understand that member states need to ensure their tax bases are not unduly eroded because of abusive and overtly aggressive tax planning schemes but we cannot tolerate disproportionate obstacles to cross-border activity within the EU. I invite member states together to explore the potential and scope for possible co-ordinated solutions,” he said.

Cases such as Cadbury-Schweppes, Lankhorst-Hohorst and Thin Capitalisation had clarified the limitations on the use of anti-avoidance rules, which must be targeted only at artificial arrangements where there is no genuine establishment, or where there is a lack of commercial underpinning.

In the Cadbury-Schweppes case for instance the court found the company had a sufficient presence in Ireland to qualify for the corporate tax rate, which was 10% at the time, and the lowest in the EU.

But Britain has since changed its controlled foreign company rules to take into account the court’s rulings and some believe it may go too far. Other countries, including France, Germany and Sweden have introduced CFC rules that mean companies established elsewhere can still be liable for tax in their home country.

Ms Fitzgerald said the greatest threat to Ireland’s tax regime was the commission proposal to have a common consolidated tax base in which companies would be able to assess their liability using one system and the tax would be allocated to countries based on rules yet to be devised.

“This needs to be resisted and companies need to understand that it will not benefit them”, she said.

The commission hopes to engage businesses and member states in a discussion on anti-tax abuse rules and in time come up with proposals as to how countries could cooperate and even harmonise their regulations.