EU agrees to close tax loopholes for big corporations

European Union finance ministers agreed on Tuesday (February 21) to close loopholes which multinational corporations use to skip paying taxes on dividends, part of a drive to stop them from parking profits where they pay the least tax.

The new rules, due to go into effect in 2020, should help the EU recoup revenues from companies that cut their tax bills by declaring profits in countries with low or no taxation.

Tax-saving schemes used by Apple, Amazon, Google, Starbucks and other companies – all legal under current laws – have raised public pressure for EU-wide rules to close these loopholes.

“We have agreed on the proposal aimed at closing down hybrid mismatches with the tax systems of third countries. This directive is the latest of a number of measures designed to prevent tax avoidance by large companies, preventing them from exploiting disparities between two or more tax jurisdictions to reduce their overall liability,” said Finance Minister Edward Scicluna of Malta, who holds the current six-month rotating EU presidency, after the deal was reached.

He called it a “bold step” to reduce these tax differentials, known in EU jargon as hybrid mismatches.

The deal postponed application of the new rules by one year to January 2020 because some countries noted possible negative consequences on competitiveness if changes were too quick. In some limited cases, the new rules will apply from 2022.

Ministers also found compromise on the criteria to define a tax haven. Attempts to have a common EU list of “non-cooperative jurisdictions” have so far failed as several EU countries preferred to maintain their own, often empty, listing.

The idea of setting up a common list has gained traction after several revelations of massive tax avoidance in countries such as Panama or the Bahamas. EU sanctions could be imposed on countries on the list.

“The final touches were put in place for the screening process to continue (blacklist of non-cooperative countries) and, what is important now, is that the work gets on in earnest, so the final list can be published by the end of this year, to keep up pressure on those countries that are not playing by the rules,” European Commission Vice-President Valdis Dombrovskis said.

Ministers agreed that countries that apply zero tax rates will not automatically be considered tax havens, but they will be subject to checks against other criteria, such as their level of cooperation with the EU on tax matters or the existence of offshore structures in their jurisdictions.

“I didn’t say that zero is fine. It is part of a package of criteria on which the experts will be basing their evaluation,” Scicluna said.

So far, letters have been sent to 92 countries, including the United States, to start screening practices that could be seen as facilitating tax avoidance.