By Courtesy of FT
Germany, France and Italy have launched a campaign to tighten EU tax rules that appears aimed at practices in Luxembourg and will add political pressure on the new European Commission president Jean-Claude Juncker, the Grand Duchy’s former premier.
The three countries are calling for an EU-wide law by the end of next year that would outlaw “aggressive tax planning” and close some common loopholes used by companies and member states to limit their tax bills.
In a key phrase, Berlin, Paris and Rome are demanding “stricter conditions and rules” for unilateral tax rulings, a clear reference to the techniques employed in Luxembourg, where officials repeatedly struck tax deals with big multinationals, such as Amazon and Fiat, that have now become a source of controversy.
“The lack of tax harmonisation in the European Union is one of the main causes allowing aggressive tax planning, base erosion and profit shifting (Beps) to develop within the internal market,” say the three finance ministers – Germany’s Wolfgang Schäuble, France’s Michel Sapin, and Italy’s Pier Carlo Padoan – in a letter to Pierre Moscovici, the European economy, finance and tax commissioner.
In a thinly veiled swipe at Luxembourg and other low-tax jurisdictions, they add: “This situation may lead to uncooperative behaviors between member states, which directly affects the establishment and functioning of the internal market and the benefits provided by Treaty freedoms.”
The letter, a copy of which was seen by the Financial Times, comes amid a roiling controversy over Luxembourg’s tax policies during Mr. Juncker’s long tenure as prime minister that has marred the early days of his new job as leader of the EU’s executive arm.
Under pressure, Mr. Juncker last week defended a series of deals that allowed multinationals to pay as little as 1 per cent tax on their earnings as a way to diversify his country’s banking-dominated economy. He also admitted the rulings should have been better scrutinized.
He has agreed to present anti-tax haven legislation early in his term, putting him in the awkward position of having to oversee proposed regulations that could have a particular impact on the Grand Duchy.
While an embarrassment for Mr. Juncker, the Luxembourg controversy – triggered by the release of thousands of pages of documents from consultancy PwC – has presented an opportunity for Germany and other longstanding critics of low-tax regimes to press for reform.
In their letter, they call for the EU to adopt “a set of common, binding rules on corporate taxation to curb tax competition and fight aggressive tax planning.” The ministers write that EU plans for exchange tax information between member states do not go far enough. EU law “could do more on trusts, shell companies and other non-transparent entities” by establishing compulsory ownership registers, they state.
They also urge the commission to tackle specific loopholes linked to accounting for interest payments, royalty receipts and the connections between parent and subsidiary companies.
“Transparency is not enough. We can surely not concede that situations where treaty freedoms are misused in order to avoid tax remain unaddressed. For this reason, an [EU] anti-Beps directive should set a general principle of effective taxation,” they state.
If implemented, such a rule would have wide-ranging implications far beyond Luxembourg, giving authorities powers to ensure that “tax benefits are not obtained through inappropriate arrangements”.
In a clear warning to tax havens the letter says: “The European Union needs to protect its internal market from tax avoidance through the use of tax havens. The anti-Beps directive will be an opportunity to fix this issue through countermeasures towards jurisdictions whose behavior fosters non-transparency and aggressive tax planning.”
