Member states fail to reach deal to tackle company tax avoidance

European Union finance ministers failed on Wednesday (25 May) to agree new rules to counter tax avoidance and deferred until June a possible deal on clamping down on schemes by multinational companies to disproportionately reduce tax bills.

In the wake of LuxLeaks and Panama Papers revelations, ministers were under pressure to approve new rules proposed by the European Commission in January to tackle corporations’ tax practices, which are estimated to cost member states up to €70 billion a year in lost revenues, according to an European Parliament report.

But several ministers raised concerns about some of the measures proposed, particularly on rules aimed at deterring companies from shifting profits to low-tax countries and aimed at forcing them to pay taxes on dividends and other profits made in tax-free countries.

Smaller countries, such as Luxembourg, Ireland and Belgium, were among the most critical. Unanimous support from the EU 28 required to pass legislation on tax matters.

“We will continue working on this in the coming weeks. Hopefully we can come to a final agreement on this proposal in June,” said Dutch Finance Minister Jeroen Dijsselbloem, who chaired the meeting.

Commission Vice President Valdis Dombrovskis said: “There are reasons to believe we will reach an ambitious agreement.”

Opposition to tax profits made abroad

But opposition to proposals to tax dividends and profits made by European companies outside the bloc was so widespread the Dutch EU presidency conceded the measure may be dropped.

The so-called switch over clause would allow taxing these incomes when they are moved to Europe from tax-free or low-rate tax countries in a bid to avoid cases of “double non-taxation”. Many ministers feared negative consequences for the competitiveness of European companies if the clause was applied.

Britain urged beefing up proposed rules to counter excessive tax deductions that multinational companies can obtain exploiting diverging rules in different countries.

Ministers agreed to request that the EU Commission put forward a more comprehensive proposal on the so-called “hybrid mismatches” by October.

EU common list of tax havens… in 2017

Ministers did agree to draw up a common list of tax havens next year, confirming a Reuters report last week.

EU countries have their own lists of jurisdictions considered not cooperative on tax matters, but wide divergences exist on the lists and on sanctions applied to tax havens.

To strengthen EU leverage against countries which apply “harmful tax regimes”, ministers agreed to start working on a common list and explore possible joint sanctions. The aim is to establish the list some time in 2017.

EU countries differ on how to define a tax haven and may struggle to establish an effective black list, critics say.

“We hope member states can deliver clear criteria (..) by September so that we can stick to the agreed timeline and have a credible and robust list in 2017,” Dombrovskis said.