The European Commission has presented its plans to “hunt” tax ‘freeloaders’ in its latest attempt to deal with corporate tax avoidance. EU officials are making an effort to redefine the rules on the tax status of a parent company and its subsidiaries to discourage firms from establishing “letter-box” businesses in tax havens to evade taxes. The EU’s Parent-Subsidiary directive was last revised in 2003 to make sure that firms do not pay taxes twice within the EU which could follow from dividends and other profits that move from subsidiaries to parent companies or vice versa.
Yet, the EU representatives are now concerned that the law is being misused by companies to avoid paying taxes in any country. According to Algiras Semeta, the EU taxation commissioner, companies need to make their fair contribution to public finance, which is done by paying taxes properly. He added that the EU cannot afford freeloader any longer, because they make immense profits in the EU without contribution to the public good. In his opinion, the new brushed up proposal of the directive could make sure that the law is being respected to the full extent, which is why the directive should specifically focus on hybrid loan. The main problem with hybrid loans is the fact that they can be treated as either equity or debt for tax statement purposes.
Moreover, under the current laws, governments have to provide parent companies with a tax exemption from dividends that they obtain from subsidiaries in other countries. The new proposal therefore includes an ‘anti-abuse’ clause enabling governments to levy tax companies based on the economic activity in their home country. Handling corporate tax avoidance has been high on the agenda in recent years as governments bereft of cash are looking at means to increase their tax revenues. It is estimated that the EU lost about 1 trillion USD as a result of tax avoidance and evasion.
