In early June in 2014, the European Union moved to close a loophole that allowed multinational companies to lower their tax bills by exploiting differences in national rules. This was in response to the pressure put on Ireland, Luxembourg and the Netherlands about their deals that they cut with corporations such as Starbucks, Fiat and Apple. These corporations were said to have used loopholes to avoid paying taxes by shifting profits into EU countries with lower tax rates, doing this by creating “hybrid loan arrangements” --a combination of equity and debt often used as a tax-planning tool.
The tax-planning tool works by taking advantage of certain provisions in the Parent-Subsidiary Directive, which is meant to ensure cross-border company groups are not taxed twice. Member states introduced tax exemptions in parent countries on profits received by parent companies from their subsidiaries in other European countries. This still applies even if the profits are tax deductible in the subsidiary’s country. That has prompted some multinational companies to open subsidiaries in other member states, so they pay little or no tax.
The situation stems from longstanding issues of finding unanimity among member states about tax law. Small countries have historically fiercely resisted changes to low-tax regimes because they wanted to continue to attract foreign investment while also being wary of driving away big employers. Other members have welcomed high-tax regimes as, to French Finance Minister Michel Sapin, it ‘means a bit more money in state coffers, which as you know we’re quite keen on.’ The Minister has a valid point: taxation provides revenues for national budgets which are used to prop up the economy and combat social problems. In the context of the EU, taxes are used to support the proper functioning of the single market.
However, the closing of the single loophole in 2014 has not prevented multinational corporations from still being able to avoid paying hundreds of billions of dollars in tax around the world. These companies have essentially been unaffected by the blockage of the tax loophole, as there are plenty of other loopholes for corporations to choose from. Tax havens have become a defining feature of the global finance system. Given the nature of the issue, it is intrinsically difficult to detect tax avoidance or evasion.
On the 15 of March in 2018, MEPs in the European parliament voted in favour of plans to establish a common consolidated corporate tax base, which is a common set of rules that companies operating in the EU could use to calculate their taxable profits instead of having to follow different rules for each EU country they are located in. They voted on two pieces of legislation that will make it harder for companies to shift profits to those EU countries where corporate taxes are lower.
Now, in 2021, the EU has moved to force all multinational corporations to publish a breakdown of the tax they pay to each of the bloc’s member states and in tax havens. Country-by-country reporting is designed to shine a light on how some of the world’s biggest companies – such as Apple, Facebook and Google – avoid paying an estimated $500bn (£358bn) a year in taxes by shifting their profits from higher-tax countries such as the UK, France and Germany to zero-tax or low-tax jurisdictions including Ireland, Luxembourg and Malta. “If large companies have to disclose their profits and taxes paid per country, tax trickery is hardly possible anymore. This is a strong barrier against tax avoidance,” said Sven Giegold, the financial and economic policy spokesperson of the Greens group in the European parliament, while also stating that he hopes the UK follows suit. In the UK, chancellor Rishi Sunak can exercise powers under the Finance Act of 2016 to make multinationals’ country-by-country reporting data public in the UK, but the government has said it will only do so if there is an international agreement on the issue.
It has been, and will continue to be, a long, arduous path to the eradication of tax evasion in the EU. The closing of the 2014 Tax Loophole was a single step in the way of success, but multinational corporations will continue to evade taxes until there is complete unanimity with tax rules in countries.
By Anya N
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