The EU has given Belgium and the Czech Republic until midnight on Monday to accept a new anti-tax avoidance package proposing six legally-binding measures to fight against aggressive tax planning.
The decision to provide the two countries with a time limit was made by the Netherlands, which is holding the rotating presidency of the EU and has been actively lobbying member states for months to adopt the measures.
“The Belgium government has requested more time to work on [one outstanding measure] and reconsider its position on that,” Jeroen Dijsselbloem, the Dutch finance minister, confirmed Friday at a meeting of finance ministers in Luxembourg. “Let’s wait for Monday and then hopefully we can come to a definite conclusion on that.”
The legislative proposal was put forward by the European Commission in January to implement ways of tackling complex tax-avoidance schemes implemented by companies and sanctioned by European governments such as profit shifting and aggressive internal lending practices used to increase the amount they can deduct from their taxable income.
The rules are part of a the recently agreed Base Erosion and Profit Shifting framework established by the Organisation for Economic Co-operation and Development and endorsed by the G20 last year.
In recent months, member states have struggled to reach an agreement over the scope of the commission’s anti-tax avoidance package with some members fearful that the rules risk being stricter than those already proposed at an international level by the OECD.
Belgium has taken issue with draft legislation governing the amount of interest payments that are tax deductible and often abused by multinational companies. Currently, companies operating inside the EU can use internal lending practices between different company subsidiaries as a way to shift their profits to low tax jurisdictions and avoid taxation.
Belgium, which has deals with dozens of multinational companies, objected to the commission’s proposal to cap the total amount of deductible interest payments from their overall profits to 30% of EBITDA (Earnings before interest, taxes, depreciation and amortization.)
Instead, the Belgian government wants to wait until OECD members have decided on a fixed threshold for deductible interest payments before pressing forward with its own exact number inside the EU.
Countries like Spain, Italy, France the UK and a host of other members said Europe should not wait for the international community and instead commit to implementing its own rules by 2024 at the latest if the OECD fails to come to an agreement.
The Czech Republic is on board with the compromise text but is holding out as it wants to ensure the EU will alter VAT legislation that will help it clamp down on tax fraud, a demand that Pierre Moscovici, the EU commissioner for economic affairs, opened up to on Friday.
Johan Van Overtveldt, the Belgium finance minister, said during a publicly broadcast debate with his 27 national counterparts that moving forward ahead of proposed anti-tax avoidance legislation proposed by the OECD could create a tilted playing field between the EU and its international partners.
“If we do [go beyond the OECD] we risk weakening the competitiveness of the EU economies,” he said, adding that Belgium would rather propose a so-called “transition rule” for Europe to move at the same speed as its international partners on the issue.
Regardless of whether a deal is made next week, some countries in the EU as well as tax justice campaigners feel the EU anti-tax avoidance package falls way short of what is needed to curb aggressive tax planning.
“We should all be aware of the signal we are sending if we keep opting for less ambitious rules,” said Claus Hjort Frederiksen, the Danish finance minister during the meeting of EU finance ministers in Luxembourg. “Going forward we should carefully assess whether current measures and these new measures are sufficient to tackle problems with tax avoidance or whether we need to do more.”
The French Finance Minister, Michel Sapin, said: “We need to show people, the press and everyone that Europe is moving forward in order to help our economies. Our public opinion has to be convinced.”
Tove Maria Ryding, tax justice coordinator for the European Network on Debt and Development (EURODAD), said the proposal to limit interest deduction to 30% of a company’s earnings before tax and interest payments was already weak and would allow multinational companies to continue using internal lending and borrowing as a way to shift their profits abroad.
“In reality the loophole is far from closed,” she said.
Another contentious issue during Friday’s debate was over so-called rules on controlled foreign companies whereby subsidiaries in low-tax jurisdictions receive large profits from subsidiaries in higher tax jurisdictions.
A common way of doing this entails transferring intangible assets such as intellectual property and trademarks to a subsidiary in a low-tax jurisdiction and then paying that part of the company royalty fees for the right to use those assets.
Some countries have taken issue with such rules due to the advantageous deals they already offers multinational companies that want to set up such subsidiaries in their country. The idea of the commission’s proposal is to make sure that subsidiaries taking advantage of such mechanisms would no longer be able to do so by ensuring the government in the company’s home-country can tax profits located outside of its jurisdiction if they are located in a low-tax jurisdiction.
Tax-justice campaigners also say that changes to the text no longer oblige companies to justify having so many profits in third countries by displaying credible levels of staff, equipment, assets and premises in the country where they are shifting their profits.
“We’re coming from a period where in our national tax policies we’re all trying to be very competitive and it’s not just small countries, it’s everyone is trying to be competitive in its tax policies,” Dijsselbloem said Friday at a press conference. “There’s a real change in attitude that we have to make now and all of us have to change our legislation to do that and move toward more common standards.”
“I don’t think companies will immediately stop with their tax planning but their tax planning will definitely be effected,” Dijsselbloem added.
