Tackling corporate tax avoidance

European Commission unveil plans to combat corporate tax avoidance

On the 18 March, 2015, The European Commission unveiled plans to combat corporate tax avoidance with a proposed tax 'Transparency package'. Its aim is to tackle businesses exploiting the complexity of tax rules and the lack of transparency within the European Union (EU) Member States as they manoeuvre profits and minimise their tax exposure.

Eliminating discretion
As things stand, Member States have discretion over whether they deem a tax ruling will be of relevance to other EU countries. The transparency package is designed to eliminate this discretion. They propose that every three months, national tax authorities must share reports with other Member States on all their cross-border tax rulings. The Commission said:

“National tax authorities will have to send a short report to all other Member States on all advance cross-border tax rulings and advance transfer pricing arrangements that they have issued. The automatic exchange of information on tax rulings will enable Member States to detect certain abusive tax practices by companies and take the necessary action in response.”

Following this announcement the proposals will be submitted to the European Parliament for consultation, and Member States should agree by the end of 2015, with a view to implementation on 1 January, 2016. The proposed package may become quite an administrative burden for the revenue authorities. Member States will need to think carefully on how they will be able to deliver on this.

Further transparency initiatives
The package also outlines a number of further initiatives to promote tax transparency within the EU. Amongst others, this includes 'assessing possible new transparency requirements for multinationals, such as the public disclosure of certain tax information by multinationals'. The Commission will review the benefits and risks of any such requirements against their intended objectives. This is an area where a careful balance will be needed rather than short-term knee-jerk reactions. Disclosure rules could be seen as running counter to the right to confidentiality between tax authorities and taxpayers, a position supported by business and the Organisation for Economic Co-operation and Development (OECD) in relation to country by country reporting requirements, for example.

Corporate tax equality and efficiency
A second 'Action Plan', to be presented before the summer, will review initiatives to ensure equality and efficiency across corporate taxation within the Single Market. This will include a re-launch of the common consolidated corporate tax base (CCCTB). This is an idea that was first floated many years ago but has never made it from page to execution. The concept is to have a common set of rules to determine taxable profits but it is not without its own complexity when it comes to implementation. It will also include further ideas for integrating more of the OECD/G20 actions to combat base erosion and profit shifting throughout the EU. This is usually known as the BEPS project.

What does this mean for businesses?
Increased transparency may contribute to better accountability and improved decision making, but only where it is relevant information of the appropriate quality. We may eventually see greater clarity with tax rulings being published, as opposed to just exchanged between jurisdictions.

The announcement reinforces the need for businesses to have the appropriate controls in place for tax compliance. A robust policy on how tax affairs are conducted is essential and all businesses need to be comfortable defending their tax policy in the public domain.