The European Commission’s proposal for an EU anti-tax avoidance directive was welcomed by Parliament’s Economic and Monetary Affairs Committee in a resolution voted on Tuesday. MEPs nonetheless advocated stricter limits on deductions for interest payments and an effective corporate tax rate of 15%.
The committee approved its text by 20 votes to 15, with 21 abstentions. This outcome was closer than expected because at the last minute – during the voting – the EPP group decided to vote blank due to the large number of amendments by centre-left groups backed by small majorities.
“We need to study these well and we might support the text after all in the vote in plenary in June”, said EPP shadow rapporteur Luděk Niedermayer (CZ), explaining his group’s sudden hesitation.
The anti-tax avoidance directive reflects the OECD’s action plan to limit tax base erosion and profit shifting (BEPS) and follows recommendations made by Parliament in November (TAXE 1 report) and December (legal recommendations Dodds and Niedermayer) last year. It builds on the principle that tax should be paid where profits are made and includes legally-binding measures to block the methods most commonly used by companies to avoid paying tax. It also proposes common definitions of terms like “permanent establishment”, “tax havens”, “minimum economic substance” “transfer prices” and other terms hitherto open to interpretation.
Rapporteur for Parliament’s opinion Hugues Bayet (S&D, BE) said, “It is inconceivable to incessantly ask for ever more efforts from workers, pensioners, and SMEs while at the same time the wealthy and multinationals evade making their fair contributions to tax.”
“We therefore urge EU member states to be ambitious in the fight against tax evasion by large multinationals. EU citizens are disgusted by the LuxLeaks and Panama Papers revelations and scandals. Today, the fight against tax evasion has become urgent and a priority. This is a major challenge, not only to regain the confidence of our citizens but also for the future of the European project.”
Stricter limits on interest payment deductions
One area in which the committee wants to go further than the Commission is in limiting deductions for interest payments. The Commission proposes that companies should not be allowed to deduct more than 30% of their earnings, whereas MEPs say this should be limited to 20% or €2 million, whichever is higher. MEPs also want to limit the period during which these deductions can be made to five years, whereas the Commission did not propose a limit.
MEPs are also more ambitious than the Commission with regard to the “switch-over rule”. Today, if earnings are taxed in one country outside the EU and then transferred to an EU member state this so called “foreign income” is often exempt from taxation, so as to avoid double taxation. The Commission proposes that this exemption should be denied if the foreign income was taxed at a rate lower than 40% of the national rate. MEPs favour setting a minimum rate of 15%, i.e. if foreign income was taxed at a lower rate outside the EU, then the exemption would have to be refused and the difference would need to be paid.
EU ministers will need to decide unanimously on the Commission proposal, on which they will hold a policy debate at the 25 May Council of Finance ministers (ECOFIN).