The European Commission has proposed a suite of reforms in a fresh bid to synchronise corporation tax practices across the single market and increase transparency with a view to reducing aggressive tax planning.
The reforms include requiring businesses to file a single corporate tax return to cover multiple European Union (EU) countries and standardising rules on transfer pricing – the practice of subsidiaries of the same company charging each other for services, which is sometimes used to reduce their tax burden by moving profits to a jurisdiction with a lower rate.
The proposals require the unanimous support of all 27 member states to become law, and are expected to face an uphill battle as attempts to reform or standardise taxation within the EU have failed in the past due to the opposition of Ireland among other countries.
The commission, however, believes the international the Organisation for Economic Co-operation and Development (OECD) agreement on tax reform has opened a door to trying once again.
“I am a little bit optimistic that this proposal has much greater chances of success, simply because meanwhile we have reached the historical OECD agreement… so we have a global pull factor towards this harmonisation of rules,” economy commissioner Paolo Gentiloni told reporters.
[ Significant shake-up in corporation tax system to be announced by McGrathOpens in new window ]
[ Is Ireland’s corporation tax party over?Opens in new window ]
He described the proposals as consistent with and building upon OECD Pillar 1 and 2 reforms, which have already set down a minimum effective taxation rate of 15 per cent that is due to come into force while negotiations on how to apportion tax between different jurisdictions continue.
Mr Gentiloni added that the reform would help “to ensure a more uniform” implementation of the OECD minimum tax rate and ensure that companies pay “what is rightly due” in tax, while the reform of transfer pricing would prevent the exploitation of differences between member states.
“This has long been a tool used and frequently abused by multinationals to reduce their tax liability,” he said.
“Inconsistencies between international rules cause a number of problems such as profit-shifting, tax avoidance and litigation.”
Budget 2024: 'You might have a bit of a bonanza in terms of one-off spending'
Small differences in transfer pricing rules between EU countries have also led to disagreements between national authorities and 2,300 ongoing interstate tax disputes within the EU, he said, with an average cost of €1 million each. “This is clearly an unnecessary drain.”
A reform called Befit would apply to large cross-border businesses with revenue of over €750 million, and would mean the earnings of different company groups across various EU countries would be aggregated together into one single tax base and would be reported to a single tax authority.
The percentage of tax due to each country in which the group operates would be based on the status quo: it would be doled out according to the average across the previous three years.
[ Mairead McGuinness denies pressuring EU countries to limit tax transparencyOpens in new window ]
[ The EU is poised for a giant leap towards further integrationOpens in new window ]
In case of disputes between the countries involved, the authority of national tax agencies to determine where tax is due would be weighted according to what percentage of the company’s revenue was taxable in their jurisdiction in the past.
Under a separate proposal, small and medium enterprises that operate in several EU countries would be able to report taxes only to the administration where their headquarters is based, rather in several jurisdictions, with the aim of reducing the cost of compliance and easing cross-border trade.
Some industry representatives have questioned whether the proposed reforms would really simplify compliance requirements for business and create more certainty, as the commission has promised.
Yet to critics of aggressive tax practices within the EU, the proposals do not go far enough, and some expressed disappointment that the commission had abandoned plans to propose “formulary apportionment”, a way of dividing pretax profits between countries depending on where value is created.
