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Council closes a double non-taxation loophole

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At the Economic and Financial Affairs Council meeting on 20 June the ministers agreed an amendment to EU tax rules that will close a loophole which had allowed cross-border corporations to profit from double non-taxation.

tax ruling tax evasion vat corporate multinationals companies profit

The agreed amendment to the parent-subsidiary directive will put an end to the situation whereby cross-border corporate groups could exploit differences between national tax laws and profit from double non-taxation by means of hybrid loan arrangements. According to the agreed text the member state of the parent company would only refrain from taxing profits from the subsidiary to the extent that such profits are not deductible by the latter. 

The amendment is part of the EU’s wider effort and international commitment to fight tax evasion and aggressive tax planning. Member states would have to transpose the amending provision into national law by the end of 2015.

Source: Consilium “Council closes a double non-taxation loophole”

Key definitions:

Base erosion and profit shifting

Tax planning strategies that exploit loopholes in the international tax system to artificially shift profits to places where there is little or no economic activity or taxation, resulting in little or no overall corporate tax being paid.

Tax ruling

A written statement issued by a tax authority, setting out in advance how a corporation’s tax will be calculated and which tax provisions will be used. They are legal but may, under the EU rules, involve state aid and thus be subject to scrutiny from the European Commission. Tax rulings have sometimes been criticized when multinationals are found to pay less in taxes than ordinary tax payers.

Tax avoidance

Using legal instruments in order to pay the lowest amount of tax possible. It is different from tax evasion, which consists of illegal and deliberate acts to pay less in taxes or even no taxes at all.

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