Czech Republic threatens to derail EU anti-tax avoidance deal unless VAT fraud addressed

Ahead of tomorrow’s ECOFIN meeting seeking agreement on the EU anti-tax avoidance directive, Czech Republic finance Minister Andrej Babiš is warning that, to win his country’s support for the directive, EU ministers must also agree to a separate measure to combat VAT fraud.

“I am strongly in favour of the anti-tax avoidance package. However a temporary application of reverse charge as envisaged by the Commission in their own Action Plan must go along with it,” Babiš said in a statement released June 15.

The anti-tax avoidance directive, proposed by the Commission in January, would place EU-wide limits on interest deductibility and add controlled foreign corporation (CFC) rules, hybrid mismatch rules, a general antiabuse rule, an exit tax, and a “switch over” clause. The directive requires unanimous support from all 28 EU countries to pass, making the Czech position concerning.

According to Babiš, though, VAT fraud creates greater financial loss in the Czech Republic than MNE tax avoidance. Worse, the funds go to criminals and likely finance terrorism, he said. The Czech Republic has requested to pilot the domestic reverse charge, an anti-VAT fraud measure, on numerous occasions, but this has been met with resistance from other EU Member States.

The EU finance ministers failed to reach agreement on the anti-tax avoidance proposal at a May ECOFIN, with ministers raising particular concerns over the proposal’s CFC rules.

At that time, Jeroen Dijsselbloem, Dutch finance minister and president of the Eurogroup, proposed a compromise that included modifications to the CFC rules that provide a more precise definition of “substance” for EU subsidiaries, as well as an extension of hybrid mismatch rules to third countries, and deletion of the proposal for a switch over clause.

Dijsselbloem said that an agreement could have been reached very quickly on the anti-tax avoidance measures during the May session simply by giving in to all the objections of all the ministers. “But that is not the way we are doing it, we need an effective deal, not just a deal,” he said.

Meanwhile, reaction to the Czech statement has been varied:

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