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EC tightens corporate tax rules

28 November 2013

The European Commission (EC) is to tighten key corporate tax rules to reduce tax avoidance in Europe.

In particular, the proposals will seek to close loopholes in the Parent-Subsidiary Directive, which, according to the EC, some companies use to escape taxation.

The EC states that ‘the Parent-Subsidiary Directive was originally conceived to prevent same-group companies, based in different Member States, from being taxed twice on the same income (double taxation). However, certain companies have exploited provisions in the Directive and mismatches between national tax rules to avoid being taxed in any Member State at all (double non-taxation).’

The proposal includes an update of the anti-abuse provision in the Parent Subsidiary Directive and obliges Member States to adopt a common anti-abuse rule. In addition, it aims to ensure that the Directive is tightened up so that specific tax planning arrangements (hybrid loan arrangements) cannot benefit from tax exemptions. 

Currently, the Parent Subsidiary Directive obliges Member States to give parent companies a tax exemption for the dividends they receive from subsidiaries in other Member States. However, in some cases, the Member States where the subsidiaries are based classify these payments as tax deductible ‘debt’ repayments. The result is that the payments from the subsidiary to the parent company is not taxed anywhere.

Algirdas Šemeta, Commissioner for Taxation, emphasising the focus on creating a better environment for businesses in the EU, said that ‘this means breaking down tax barriers and tackling cross-border problems such as double taxation. But when our rules are abused to avoid paying any tax at all, then we need to adjust them. [This] proposal will ensure that the spirit, as well as the letter, of our law is respected. As such, it will ensure greater revenues for national budgets and fairer competition for our businesses.’

Commenting on the proposal, Michael Izza, ICAEW Chief Executive, said: ‘[it] demonstrates the EC’s clear intention to play an active part in the worldwide efforts by governments, businesses and other stakeholders to make improvements to tax systems.

‘Tax avoidance has been one of the hottest topics on the political agenda in 2013. [However] the international tax system cannot be improved overnight. It also cannot be fixed by making changes in only one part of the world as corporations of the 21st century are global and mobile. It requires international collaboration at the highest level. Businesses and governments must work together to find a solution that works and is fair for all’. 

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