EU to clamp down on corporate tax avoidance schemes

Multinational companies are facing severe constraints on their ability to avoid taxes on their activities in Europe as regulators seek to close loopholes laid bare by the LuxLeaks scandal

Pierre Moscovici, the EU’s tax policy chief, will set out plans next week to curb practices such as using debt interest payments to lower tax bills or shifting profits to minor subsidiaries in low-tax nations, according to a copy of the proposals obtained by the Financial Times.

“The schemes targeted by this directive involve situations where taxpayers act against the actual purpose of the law, taking advantage of disparities between national … systems,” the document says. Such techniques mean that “taxpayers may benefit from low tax rates or double deductions or ensure that their income remains untaxed”.

The measures build on international proposals developed by the OECD and are one of the most far-reaching steps yet by the EU to seize the initiative in the wake of LuxLeaks.

The LuxLeaks revelations emerged shortly after Jean-Claude Juncker became commission president in November 2014, and dogged his early days in office. They documented how during his two decades as Luxembourg prime minister, up to 340 multinational companies, ranging from Ikea to Pepsi, funnelled profits through the tiny country to lower their tax bills to as little as 1 per cent.

The scandal was particularly resonant at a time of rising populist anger in Europe and a sense among many citizens that the pain from austerity measures had not been shared equally.

The commission has sought to get on top of the affair by proposing regulatory changes and pursuing competition cases against tax deals governments have struck with multinationals such as Apple, Starbucks and Fiat.

Mr Moscovici’s proposals, which will need unanimous support from the EU’s 28 national governments to become law, include an effort to limit the extent to which a multinational company can cut its tax bill by financing some parts of its business through debt owed to subsidiaries in low-tax countries.

The plans would limit the amount of interest that a company can claim each year as tax-deductible, setting an upper limit measured as a percentage of operating profits. The commission plans to set the ratio at 30 per cent, the upper limit foreseen by the OECD, with the option for individual nations to go further if they wish.

Banks and insurers would be given a carveout from these rules while the EU develops more tailored requirements for the sector, according to the documents.

Companies already warned the UK Treasury this month that the plans to restrict the generous tax treatment of interest costs were unnecessary and potentially damaging.

The Institute of Chartered Accountants in England and Wales said businesses had “major concerns” and warned that changes to the “current, relatively benign, regime for interest deductibility” could have a negative impact on the UK as a desirable business location.

Sven Giegold, a German lawmaker in the European Parliament who has campaigned on corporate tax avoidance issues, said the plans threw down the gauntlet to national governments.

“Member states now face a test on whether they are serious to fight corporate tax avoidance and should adopt this new directive within the year,” Mr Giegold told the FT. “European citizens can no longer understand why their leaders do not deliver on key reforms.”