Tax avoidance under scrutiny

European Union Tax Commissioner Algirdas Šemeta has welcomed a raft of new measures to combat international tax avoidance, in agreement between the finance ministers of the G20 at a meeting in Cairns, Australia.

The ministers have agreed on a several recommendations that were made to address key areas which were identified in the OECD’s action plan on Base Erosion and Profit Shifting (BEPS), which aims to achieve fairer taxation and global competition when fully implemented.

The EU has actively been involved in the BEPS programme, alongside its own efforts to clean up tax evasion in Europe, within the EU its estimated the losses from unpaid taxes reach up to €1 trillion per year.

Šemeta has said that the initiatives agreed are crucial in creating a fair tax environment on a worldwide scale. He said he believes that it is necessary to fight against aggressive tax practices that many companies engage in.

“However, today’s commitments are just a first step, albeit an important one. There are many other important issues to be addressed before we have delivered upon the BEPS Action Plan. I would urge our international partners, together with the OECD, to keep their eye on the goal so that we meet the 2015 deadline foreseen,” he said.

“For our part, the EU will continue to be an active and constructive partner in the BEPS project, and will push for its swift and successful completion. The EU has always been the flag-bearer in the fight against tax avoidance, and we will continue to lead by example, in Europe and worldwide.”

The areas that were debated at the meeting included precluding particular forms of aggressive tax planning, for example hybrid mismatch arrangements, also steps to prevent tax treaty abuses, and revisions to international transfer pricing rules.

Intellectual property regimes were also targeted, by tackling harmful tax policies such as the “Patent Box,” which is a tax break for patented research.

The Patent Box regulation has drawn criticism from some parties such as Germany Finance Minister Wolfgang Schäuble, who wants an international solution as currently he believes it promotes unfair competition.

For example, the Patent Box tax relief is higher in the UK than in Germany, where UK companies pay 10 percent at corporation tax level on patented innovations, compared with 30 percent tax in Germany, where patented research is viewed as corporate profit.

The BEPS plan contains 15 elements, which are to be addressed by 2015. The first seven have been released.

The areas they will focus on include the coherence of corporate income taxation at the international level, to be achieved through a new tax model and treaty provisions.

Taxes will be realigned to strengthen the intended benefits of international taxation standards, firmer assurances will be made available so that transfer pricing outcomes are in line with value creation.

Predictability and transparency for tax administrations are to be improved, also the effects of the digital economy on tax will be addressed, alongside countering negative tax processes, and it will be a priority that all BEPS measures are established as quickly as possible.

“We have gained a lot of satisfaction from the acceptance of BEPS from the G20 meeting, and that there is movement on the implementation of the action plan,” said Raffaele Russo, head of BEPS Project, for the OECD Centre for Tax Policy and Administration.

“There has been a lot of support for these measures since the G20 meeting at Los Cabos in Mexico in 2012, and year later we had an agreement in place between 44 countries, and this was structured in a way that was compatible with national regulations, and that it made it difficult for any nation state to change the rules on what was agreed.”

The remaining eight elements that have not been released yet,will focus on areas such as allocation over risks of the multinational groups, rules related to taxation of foreign controlled companies, and capital and assets that have been stashed in offshore accounts, according to Russo.

“The BEPS programme I am pleased to say has been very well supported by governments, multinational companies, and NGO’s, the reaction is positive because there is a recognition that change is needed. They realize what is being done is constructive,” he said.

Over the past year the EU has put forward a strong message on tax avoidance, this has included revising EU corporate tax rules, such as the Parent-Subsidiary Directive, which will prevent companies using mismatches in national tax regimes to eschew paying taxes.

A high level expert group was also established attempting to create solutions to the barriers in taxing the digital economy, a final report was released by them after their discussions in May.

The Commission has also looked at all avenues to counter harmful tax regimes which might in member states, where again Patent Boxes came under scrutiny under the Code of Conduct on Harmful Business Taxation, alongside other investigations under various tax rulings.

This is part of a huge EU effort on tax avoidance, where a number of specific working groups have been created, including the Tax Policy Group, where representatives from EU finance ministers debate tax evading.

At the European Council level, the Code of Conduct on Business Taxation group is also in place, where EU member states assess each other’s tax regimes, in order to identify any harmful tax processes which are existing.