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EU Commission points out member State’s harmful tax regimes

The European Commission has for the first time included aggressive tax planning indicators in its reports on EU member states’ economies, with potential repercussions for Belgium, Cyprus, Hungary, Ireland, Luxembourg, Malta, and the Netherlands.


The European Commission has for the first time included aggressive tax planning indicators in its reports on EU member states’ economies, with potential repercussions for Belgium, Cyprus, Hungary, Ireland, Luxembourg, Malta, and the Netherlands.

“This is a new step. We put the issue of aggressive tax planning at the heart of our reports and we underline that it’s part of imbalances to correct and reforms to conduct,” EU Tax Commissioner Pierre Moscovici said during a March 7 press conference announcing the release of the reports on all 28 EU member states. “At the same time, each report takes note that progress [has not] been made. No country is inert.”

The report on Belgium says that although the notional interest deduction scheme was reformed last year, it still “may facilitate aggressive tax planning via ‘cascading’” because of the lack of specific antiabuse rules in particular. It also emphasizes that “while the economic evidence on the effectiveness of patent/innovation boxes as a means to encourage [research and development] remains limited, it may be used as a tax competition tool.”

The commission’s report on Cyprus notes that “the existence of specific tax rules (e.g. the corporate tax residency rules; the absence of withholding taxes on dividend, interest, and royalty payments by Cyprus companies’ and potential risks associated with the design of notional interest regimes), combined with the lack of some antiabuse rules, suggest that Cyprus’ corporate income tax rules may still be used in tax avoidance structures.”

The commission criticizes Malta’s patent box and the new notional interest deduction, saying that the current “antiavoidance provisions included in the law are not detailed or strong enough.” The large majority of foreign direct investment (FDI) in Malta is held by special purpose entities, according to the commission. The absence of withholding taxes on dividends, interest, and royalty payments made by Maltabased companies may lead to those payments escaping tax altogether, if they are also not subject to tax in the recipient’s country, the report concludes.

The Irish report says something similar regarding the absence of withholding tax on dividend payments by companies based in the country. “Furthermore, the existence of some provisions in bilateral tax treaties between Ireland and some other countries may be used by companies to overrule the new tax residence rule put in place in Ireland in 2015,” according to the commission.

“Luxembourg’s high inward and outward FDI stocks can only be partly explained by real economic activities taking place in Luxembourg,” according to the commission’s report. “The high level of dividend, interest, and royalty payments as a percentage of GDP suggest that the country’s tax rules are used by companies that engage in aggressive tax planning,” it says, adding that, like Malta, the large majority of FDI in Luxembourg is held by special purpose entities.

For the Netherlands, the commission is concerned about the absence of withholding taxes on dividend payments by cooperatives, the possibility of hybrid mismatches made through the use of limited partnerships, and the absence of withholding taxes on royalties and interest payments, combined with the lack of some antiabuse rules. In February, the Dutch government announced that it will introduce in 2021 a withholding tax, to be applied to outgoing interest and royalties flowing to low-tax jurisdictions and in abusive situations.

Hungary is an unexpected addition to the list of scrutinized countries. The commission says that the large amounts of capital flowing through special purpose entities as a share of GDP, combined with the absence of withholding taxes, suggest that Hungary’s tax rules are being used for aggressive tax planning purposes.

French President Emmanuel Macron recently lashed out at Hungary, saying that countries using EU funds to lower their corporate tax rate were taking those countries that are net contributors to the EU budget for fools. Macron proposed linking the access to EU funds to healthy tax competition. When asked about this idea in light of the commission’s upcoming proposal in May for the next multi-annual EU budget, Moscovici refused to comment.

Moscovici said that the EU should lead by example and that all channels should be used to that effect.

Although Moscovici said he was not pointing fingers at any country, member states heavily criticized the commission’s stance.

During a March 7 press conference with European Council President Donald Tusk, Xavier Bettel, Luxembourg’s prime minister, said he was only informed the day before, via the press, that the reports would contain tax planning indicators. It would be better to discuss issues with the country beforehand, and the principle of the EU is not to position one country against another, Bettel said. Officials from the commission have said that drafts were sent to delegations for comments a month ago.

Belgian Finance Minister Johan Van Overtveldt circulated a press release accusing the commission of double standards. “It’s small member states that are principally ‘concerned.’ Meanwhile, there are big member states which have regimes which are really harmful and which maintain them,” he said. The OECD noted in an October 2017 report that both France and Italy had failed to amend their existing regimes in light of the base erosion and profit-shifting project’s new standard on harmful tax practices (action 5). France has been unwilling to amend its patent box for more than 18 months, even though the OECD and the EU Code of Conduct Group (Business Taxation) have asked the country to do so. However, France has finally agreed to make amendments this year. The commission report on France, also published on March 7, contains no reference to the harmful character of patent boxes. Italy has also delayed its own patent box reform.

An Irish government spokesperson said that “given Ireland’s position as a small, open, and highly globalized economy,” the country does not “share the commission’s assumption that high levels of FDI are automatically indicative of aggressive tax planning.” Ireland continues to be the most attractive location for FDI, according to an April 2017 KPMG report.

In a separate report released on March 7, the commission found that data support the view that some EU countries — especially Ireland, Luxembourg, and the Netherlands — have increased their own tax bases at the expense of others.

3 Caribbean Countries to Be Blacklisted

Also on March 7, permanent representatives of member states to the EU discussed the status of the Caribbean countries that were affected by last year’s hurricanes. Anguilla, Antigua and Barbuda, the Bahamas, the British Virgin Islands, Dominica, St. Kitts and Nevis, and the U.S. Virgin Islands were all screened by the EU but were given more time to make commitments in order to avoid appearing on the EU list of noncooperative jurisdictions for tax purposes. Permanent representatives agreed to blacklist the Bahamas, St. Kitts and Nevis, and the U.S. Virgin Islands. It is expected that this decision will be adopted without discussion by EU finance ministers during their meeting on March 13.

By Elodie LAMER

Cette information est extraite de notre service d'actualité taxnotes

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