Multinational corporations are notorious for dodging taxes. Many of them, including famous ones are known to use questionable taxes to avoid paying taxes with the result that countries end up losing billions of dollars in taxes. That is why the recent actions taken by the EU in this context are so important.
The European Union recently tightened its tax laws to prevent tax avoidance by multinational corporations. The action was promoted by reports on tax shifting by companies like Fiat Chrysler, Starbucks and others. The European Commission has said that the action has come at the right time, in the light of the Panama paper leaks that exposed the tactics used by companies to avoid paying taxes.
Minister for Tax Issues at the European Commission Pierre Moscovici said that the recent EU actions against tax evasion will give a serious blow to those who are engaged in avoiding tax. He added that for a long time, these companies were able to take benefit of the mismatch in the tax system of different countries to avoid paying billions of dollars in taxes but that not anymore.
Now EU countries will be able to tax profits that companies shift to low tax countries where they don’t have a significant presence. The new rules even allow countries to collect taxes on gains from intellectual property rights not previously taxes and where the sum has been moved out.
Some multinational companies have evolved an incredulous tax avoidance mechanism where they issue debt to finance operations in high tax countries and then pay high interest rates on that debt to subsidiaries located in low tax countries. The new rules have placed a limit on how much profit can be repatriated as interest for such debt in a given year.
In October last year, the EU had ordered the Netherlands to recover millions of dollars from Starbucks given in lieu of preferential tax treatment that company had received in the country. Luxembourg was ordered to make recoveries of that same order from Fiat Chrysler. Earlier, the EU had started an investigation into alleged tax avoidance by Amazon and Apple.
Amazon has already agreed to pay taxes on profits it accrued in four EU countries. The company allegedly routed profits from those operations through Luxembourg where the taxes are low. But not everyone is happy with the new rules.
Oxfam International released a statement calling the new rules a sell out to the companies. It also accused EU Finance ministers of diluting the sense of the tough regulations proposed by the EU Commission in January.