The European Union reached a tentative agreement to crack down on corporate-tax avoidance, forcing nations to start closing loopholes that allow companies to get away with paying little or no tax.
EU finance ministers struck a compromise deal at a meeting in Luxembourg on Friday that will set minimum standards for governments to tackle firms that shift profits around different tax systems to reduce liabilities. The agreement will take effect at midnight on Monday unless countries raise last-minute objections, Bloomberg reported.
“If we work together closely on this, the options for companies to move around and shift their profits around will become limited over the course of the years,” Dutch Finance Minister Jeroen Dijsselbloem, who led the talks, told reporters. “It’ll not only have a major impact both in the size of the taxes that the companies will pay and need to pay, but also in the distribution, where they’ll pay it.”
After a succession of leaks about the tax-dodging behavior of some international companies, as well as policy makers’ recognition that the fight against tax avoidance plays well with their voters, the EU has prioritized a set of common rules that all 28 nations must implement.
The EU estimates that its governments lose as much as €70 billion ($79 billion) a year from companies that shop the world for tax bargains and leaders argue that this money could be spent on improving public services. The bloc’s new rules are based on work to tackle the issue globally by the Organization for Economic Cooperation and Development.
The new rules include restrictions on the extent to which firms can move profits to low-tax jurisdictions and how much they can shift money back and forth through a network of subsidiary companies to reduce their overall tax bill.
Limiting Exemptions
Friday’s compromise came after the EU agreed to drop the draft law’s so-called switch-over clause aimed at limiting exemptions on foreign income from taxation.
EU officials have been working on a compromise since January, during which time the Panama tax-cheating leaks exposed billions of dollars hidden in tax havens around the world. The EU had already started tightening up policies in response to revelations in 2014 of Luxembourg’s sweetheart tax deals with companies including Amazon.com Inc. and McDonald’s Corp.
The EU-wide accord has yet to be finalized. Belgium delayed its approval, worried that a rule that would restrict the amount of interest that a company is entitled to deduct could create an unfair playing field between EU and non-EU countries if introduced before an OECD-wide standard.
Czech Finance Minister Andrej Babis, who had threatened to veto the accord, said he would back down if he received written assurances from the European Commission on an unconnected strategy on value-added tax fraud.
Tax changes in the EU must be agreed to by all 28 member states and, unlike most European legislation, don’t need European Parliament approval.
