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EC adopts new corporate tax avoidance rules

EC tax

New rules aimed at stopping multinational companies from taking measures to avoid paying taxes have now been adopted by the European Commission (EC).

The new directive, which was first brought to light last month, will aim to address tax base erosion and profit sharing (BEPS).
It will also apply to apply exit taxation rules and will try to cover gaps in a nation's specific anti-tax avoidance rules.  

The use of aggressive tax planning practices by large companies has been placed firmly under the spotlight in recent months, particularly in light of several high-profile scandals implicating well-known corporations and individuals in certain tax avoidance practices.

The EC said the rules will help to discourage multinationals from artificially shifting debts to jurisdictions with more generous deductibility rules by limiting the amount of interest that is permitted to be deducted from the taxpayer during the course of a tax year.

Companies will also have to operate in line with controlled foreign company rules, which in turn will have to reattribute the income of a low-taxed controlled foreign subsidiary back to its parent company.

Given that parent companies are often situated in jurisdictions where tax rates are higher, the EC is hopeful that the rules will help to close certain loopholes surrounding how companies pay their tax.

Hybrid mismatches will also be the subject of new rules in a bid to prevent corporations taking advantage of the shortcomings of tax systems when compared to those in other countries.

Member states of the EC will subsequently be required to ensure they apply the new directive as part of their national laws and regulations by the end of 2018.

The rules around exit taxation will need to be implemented by the end of 2019.

Peter Kažimír, president of the EC, said, "This new directive aims to protect our domestic corporate tax bases against aggressive tax planning practices that directly affect the functioning of the internal market.

"It is therefore an important step, which also demonstrates that we see the fight against such practices not only as our common priority but also our common commitment."

However, not everyone has reacted positively to the news, with Diarmid O’Sullivan, tax policy advisor at ActionAid telling Public Finance International: "Efforts at meaningful reform in Europe have been undermined by the determination of some countries, including the UK, to undercut each other on tax.

"ActionAid calls on European countries to go beyond this feeble compromise agreement and adopt much stronger national rules which tackle tax avoidance by big companies at home and in developing countries."