EU may stop corporate tax regimes favouring debt over equity –officials

The European Commission will propose a draft law next year to stop tax regimes that favour raising corporate debt over equity as it tries to reduce the amount of company loans on banks’ books and to cut companies’ leverage, officials said on Monday, reports Reuters.

In most European countries, companies can defray tax against interest payments on debt but no such deductions are allowed when raising cash through equity markets.

The Commission plans to begin a public consultation on how to tackle this distortion and officials say that the European Union’s executive arm will come up with a proposal in 2016.

Proposed legal changes will be included in a wider plan to introduce a “common consolidated corporate tax base”, or CCCTB, which is mostly aimed at curbing tax avoidance at multinational companies. The CCCTB proposal is due out next year.

A Commission report on skewed taxation, published on Monday, said such practices can “encourage excessive leverage in the corporate sector, lead to higher volatility in the business cycle, be detrimental to investment, and create opportunities for international tax avoidance”.

“In the financial sector, it goes against regulatory policies to strengthen the capital base of financial firms and can increase the fragility of banks and the likelihood and potential costs of financial crises,” the report said.

Tax matters are a national prerogative in the EU and common decisions can be blocked by the veto of a single country.

EU finance ministers are to discuss tax issues at their next regular meeting in Luxembourg on Oct. 5-6.