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The EU Commission proposal for an EU anti-tax avoidance directive was welcomed by Parliament in a resolution voted on Wednesday. MEPs nonetheless advocated stricter limits on deductions for interest payments and tougher rules on foreign income. They also called for more transparency for trust funds and foundations, common rules for “patent box” tax reductions on intellectual property earnings, and an EU blacklist of tax havens and sanctions against uncooperative jurisdictions.

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 drafted by EP rapporteurs Dodds and Niedermayer) last year. The resolution was passed by 486 votes to 88, with 103 abstentions.

The proposal 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”, “royalty costs”, “patent boxes”, “letterbox companies” and other terms hitherto open to interpretation.

Switch-over clause

MEPs are more ambitious than the Commission with regard to the “switch-over rule" for earnings taxed in a 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. MEPs favour setting a minimum rate of 15%, i.e. if foreign income was taxed at a lower rate outside the EU, then the difference would need to be paid.

Further recommendations include, inter alia:

  • limiting the deductibility of exceeding borrowing costs only up to 20 % of the taxpayer's earnings or up to an amount of EUR 2 000 000, whichever is higher,

  • drawing up an exhaustive 'black list' of tax havens and countries, including those in the Union, complemented with a list of sanctions for non-cooperative jurisdictions and for financial institutions that operate within tax havens,

  • prohibiting the use of letterbox companies,

  • swiftly introducing of a common consolidated corporate tax base (CCCTB),

  • increasing the transparency of trust funds and foundations,

  • introducing a common method for calculating the effective corporate tax rate in each member state, so as to allow for comparison across the EU,

  • a cross-border tax dispute resolution mechanism with clearer rules and timelines, to be introduced by January 2017, and

  • creating a harmonised, common European taxpayer identification number (TIN) to serve as a basis for effective automatic exchange of information between member states tax administrations.

Next steps

This proposal is for a Council directive, upon which EU member states would have to agree unanimously.

Procedure:  Consultation