by Julie Martin
The EU Commission took tentative steps toward reducing harmful tax competition among EU member countries today, publishing European Semester country reports that identify seven EU countries as potentially facilitating tax avoidance by multinationals.
The Commission today also released a taxation paper detailing economic evidence that suggests that particular tax avoidance structures are being used in many EU States.
“I want to highlight the fact that for the first time, the Commission is today stressing the issue of aggressive tax planning in seven EU countries: Belgium, Cyprus, Hungary, Ireland, Luxembourg, Malta and The Netherlands,” European Commissioner Pierre Moscovici said.
The 2018 European Semester Winter Package, an annual analysis of the economic and social situation in each of the 27 Member States, states in seven country reports that there indicators that the countries facilitate aggressive tax planning structures, though many of the countries have recently taken steps to improve their tax regimes.
Facilitating tax avoidance
The Ireland report states that the absence of anti-abuse rules for the exemption from withholding taxes on dividend payments made by companies based in Ireland suggests that that country’s corporate tax rules may be used in tax avoidance structures.
Luxembourg’s country report notes that the absence of withholding taxes on royalty and interest payments and the lack of some anti-abuse rules invite tax avoidance.
The Netherlands report acknowledges the government’s recently announced tax reform agenda, but states that the absence of withholding taxes on dividend payments by co-operatives, the possibility for hybrid mismatches using the limited partnership (CV), the absence of withholding taxes on royalties and interest payments, and the lack of anti-abuse rules may facilitate aggressive tax planning by MNEs.
Belgium’s patent box may be used as a tax competition tool and the country still needs to transpose the EU Anti-Tax Avoidance Directive (ATAD) into national law, the EU report notes.
Cyprus’s tax rules on corporate tax residency; the absence of withholding taxes on dividend, interest, and royalty payments by Cyprus companies; risks associated with the design of Cyprus’s notional interest regime; and the lack of anti-abuse rules suggest that Cyprus ’s tax rules may be used for avoidance.
Hungary’s report notes the country has relatively high capital inflows and outflows through special purpose entities, which have no or little effect on the real economy. The absence of withholding taxes on dividend, interest, and royalty payments made by companies based in Hungary may lead to tax avoidance. Hungary’s revised patent box may also be used as a tax competition tool, the report said.
Malta’s planned notional interest deduction regime, the absence of withholding taxes, and the lack of anti-abuse rules were noted in that country’s report.
Aggressive tax planning indicators
In addition to the country reports, the Commission today released a 189-page taxation paper titled “Aggressive tax planning indicators,” which provides economic evidence of the “possible existence” of aggressive tax planning structures in EU countries and of the harm caused to by these structures to other EU countries.
These structures, the Commission paper said, allow the tax base of a multinational group member located in a higher tax EU jurisdiction to be passed to another group member located lower-tax EU country. Sometimes there is an interim step, where the tax base is first passed to an entity in a third EU country (conduit entity), the paper said.
The Commission’s new study analyzes aggressive tax planning through the use of deductible interest and royalty payments and use of strategic transfer pricing.
The paper notes, for example, that Cyprus, Malta, and Luxembourg raise more corporate revenues relative to GDP than other countries, suggesting use of these countries for tax avoidance. Ireland is notable because it is the Member State with the highest net royalty payments as a percentage of GDP, which is consistent with facilitating aggressive tax avoidance using royalty payments.
Also, higher tax countries, such as Germany and France, tend to have higher import prices than lower tax countries, the report observes.
Tax blacklist
Today’s release follows EU efforts to address harmful tax practices of non-EU countries through its blacklist of noncooperative jurisdictions.
The EU has been criticized recently for putting many of these non-EU countries on a “gray” list rather than on the blacklist. The EU Council today released letters asking these gray-list countries provide assurances they will improve their tax systems and thus stay off the blacklist.
Julie Martin
Julie Martin is the founder of MNE Tax. She edits the publication and regularly contributes articles on new developments in cross-border business taxation.
Julie has worked as a tax journalist and editor for more than 13 years. Prior to that, she worked as an in-house tax attorney in New York. She also holds an LLM in taxation from New York University School of Law.
Julie can be reached at [email protected].
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