24 July 2015
European Commission Introduces Action Plan to Tackle Tax Avoidance, Secure Sustainable Revenues and Strengthen the Single Market for Businesses
On 17 June 2015, the European Commission presented an Action Plan comprising a series of initiatives designed to tackle tax avoidance, secure sustainable revenues and strengthen the Single Market for Businesses. The measures are hoped to – collectively – significantly improve corporate taxation in the EU by making it fairer, more efficient and more growth-friendly. This matter will be of particular interest to Hong Kong traders with, or related to, offices established within the EU.
The initiatives build on the measures set out in the Tax Transparency Package (which aim to create more openness and cooperation between EU Member States on corporate tax issues), presented by the Commission in March this year. The new plan also echoes ongoing work at the Organization for Economic Cooperation and Development (the OECD) that aims to limit tax base erosion and profit shifting.
President Juncker, in his July 2014 Political Guidelines, had already stated that “we need more fairness in our internal market. While recognising the competence of Member States for their taxation systems, we should step up our efforts to combat tax evasion and tax fraud, so that all contribute their fair share.”
It is felt that currently, some companies make large profits in the Single Market but pay little or no tax on them in the EU. They take advantage of the Treaty Freedoms (e.g. the freedom to move capital freely across the EU’s internal borders), national divergences, and provisions in EU corporate tax law to shift profits between EU Member States and out of the EU, untaxed. This is believed to lead to significant revenue losses for EU Member States, a heavier tax burden for citizens and competitive distortions for businesses that pay their share.
Similarly, multinationals are understood to have been legally reducing their bills by basing themselves in low-tax centres. The EU is already investigating the tax arrangements of business giants Apple, Starbucks and Amazon in some Member States.
Additionally, EU Member States’ unilateral efforts to protect their tax bases with uncoordinated anti-abuse measures create obstacles for businesses in the Single Market and legal disputes. The lack of coordination between EU Member States on corporate taxation also causes legal uncertainty, administrative burdens and compliance costs for businesses and investors. This, it is perceived, undermines the EU’s goals of creating a stronger and more competitive Single Market. The Commission put forward the Action Plan on fair and efficient corporate taxation in order to redress this situation.
The Action Plan sets out a path to ensure effective taxation in the EU: it is stipulated that companies will pay a fair share of tax in the country where they make their profits. This can be done without harmonising corporate tax rates across the EU. For example, the Commission is proposing measures, amongst others, to close legislative loopholes and implement stricter rules for preferential tax regimes. The initiatives should also help to advance the ongoing debate between Member States to define and agree on an EU approach to effective taxation.
As was stated by Vice-President Valdis Dombrovskis, who is responsible for the Euro and Social Dialogue, the “ambitious yet realistic plan for fairer and more growth-friendly taxation in the EU […] rests on the core principle that all companies – big or small, local or global – must pay a fair share of tax where real economic activity is taking place and where their profits are actually made.”
In addition, in order to increase tax transparency, the Commission has published a pan-EU list of third country non-cooperative tax jurisdictions. The list will be used to screen such jurisdictions and develop a common EU strategy to deal with them. It will reinforce EU Member States’ collective defence system against external threats to their revenues. Hong Kong traders may find it alarming that Hong Kong is on that list.
The Commission also launched a public consultation on 17 June 2015, to assess whether companies should have to publicly disclose certain tax information, including through Country-by-Country Reporting (“CbCR”). The consultation, along with the Commission’s ongoing impact assessment work, will help to shape any future policy decisions on the issue in question.
The European Peoples’ Party (EPP) and the Socialists and Democrats group (S&D), the largest political groups in the European Parliament, welcomed the Commission’s plan. Burkhard Balz, the EPP’s spokesperson in the Parliament’s Special Committee on Tax Fairness, said that it is only possible to stop tax avoidance and aggressive corporate tax planning by the joint action of all the EU Member States. He added that only big multinational companies profit from the mismatches between national systems; small and medium-sized enterprises (SMEs) do not have the resources to set up complicated tax planning schemes. The new Action Plan should end the discrimination against SMEs.
Hong Kong traders may also recall that a key element in the Tax Transparency Package proposed by the Commission in March was a proposal for the automatic exchange of information on tax rulings. The proposal received unanimous political support from Finance Ministers at the Informal Economic and Financial Affairs Council (the ECOFIN) in April. EU Member States are now discussing it at a technical level with the aim of reaching agreement by the end of 2015 (see: Issue 8/2015 of the Business Alert-EU for more background on this).
For more information on the latest Action Plan, please see the Questions and Answers on the Action Plan for Fair and Efficient Corporate Taxation in the EU on the Commission’s website.