This week the EU have issued a clampdown on aggressive corporate tax planning by announcing a suite of measures to prevent multinational companies from reducing their tax bills. The European Commission aim to tackle the practice whereby companies move their profits to lower-tax jurisdictions to reduce their tax bill.
The proposals will also curb the amount of interest repayments on loans companies can claim. This is an attempt to stop the practice where companies set up a subsidiary which provides a loan back to the parent company, so that the company can take advantage of tax-deductible interest payments. This is a result of significant public disquiet across Europe about the low level of taxes paid by corporates, particularly multinationals, and represents an important step towards harmonisation of EU tax rules while also not impinging on national corporate tax rates. When the OECD made proposals towards Base Erosion and Profit Shifting (BEPS), they were not proposed as potential legislation, whereas the EU’s new approach towards corporate tax planning will be legislative, meaning they will be legally-binding on EU member states.
Ireland’s tax system has come under recent scrutiny when Google reached a £130 million tax settlement with the British tax authorities. Google have long been shifting the profits deriving from UK sales to Ireland for tax purposes. This has also been an important political issue as it has been heavily featured in the US presidential campaign this week, with Democratic front-runner Hillary Clinton describing the arrangement whereby American companies buy Irish-based companies in order benefit from Ireland’s low corporate tax regime as “outrageous” and an obvious “tax inversion.”
EU economics commissioner also stated on 28 January that the current corporate tax practices are “unacceptable” and that “billions of tax euros are lost every year to tax avoidance – money that could be used for public services like schools and hospitals or to boost jobs and growth…Europeans and businesses that play fair end up paying higher taxes as a result.”
In total two EU directives were proposed but this package must be approved by the Council of EU member states, a process which will take month, if not years, though EU finance ministers are due to give their first response to the new proposals as the next ecofin meeting of EU finance ministers in Brussels in February 12th. Ireland, along with a number of countries, is likely to oppose any measures that go beyond the standards enshrined in the OECD Base Erosion and Profit Shifting (BEPS) rules agreed last November. Brian Keegan from Chartered Accountants’ Ireland said that while the move to improve better exchange of information would be welcomed, any moves that may change the tax rules in EU member states have traditionally been difficult to implement.
However, according to some tax experts this planned crackdown on tax avoidance by multinationals in EU countries could work to Ireland’s advantage. KPMG said the proposed measures could enhance the attractiveness of Ireland’s 12.5 per cent corporation tax regime, and said the country was already “highly compliant” with many of the proposals, including increased transparency, patent boxes – special tax measures to encourage research.
However, only time will tell if the EU’s recent proposals will have any significant impact on Ireland’s tax regime.
By Kate Weedy