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  • Dec 19, 2014
  • Updated: 4:30am
BusinessEconomy

EU trying to close 'letter-box subsidiary' tax loophole

PUBLISHED : Tuesday, 26 November, 2013, 9:20am
UPDATED : Tuesday, 26 November, 2013, 9:20am

The European Commission will attempt to close a loophole that allows companies to cut their tax bill, a top official said on Monday, but the EU executive will first need to persuade member countries to back the change.

The commission wants rules to prevent companies setting up “letter-box subsidiaries” in countries solely to qualify for a softer tax regime and cut their bill.

Algirdas Semeta, the EU’s taxation commissioner, wants to insert an anti-abuse clause by the end of next year, allowing authorities to target artificial “parent-subsidiary” schemes that flout the spirit of the tax code.

“When our rules are abused to avoid paying any tax at all, then we need to adjust them,” he said. “Today’s proposal will ensure that the spirit, as well as the letter, of our law is respected.”

Semeta declined to name countries or companies that exploited the loophole but said that billions of euros were at stake.

When our rules are abused to avoid paying any tax at all, then we need to adjust them
EU taxation commissioner Algirdas Semeta

One EU official, speaking anonymously, said the drive would in particular hit Luxembourg and the Netherlands.

By forcing large companies to disclose how much tax they pay to which country, Semeta hopes they will be shamed into paying more. Without international agreement, companies will be able to arbitrage between different tax regimes.

Schemes used by Starbucks, Apple, Amazon and others, operating within the law to minimise taxes, put aggressive “tax planning” at the top of the political agenda earlier this year.

Taken at face value, the global political direction towards tax reform is clear. But Semeta’s limited success so far points to the difficulties ahead.

His suggestion for a “common consolidated corporate tax base” – including a standard way to calculate tax breaks – made scant progress, with countries such as Ireland, worried it would lead to a single EU tax rate.

Semeta also wants tighter control of so-called hybrid financing, where companies take advantage of varying definitions of loans versus equity stakes between countries to cut their tax bill.

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