Luxembourg, 28 November 2024
- Tax revenue losses in the EU due to corporate profit shifting could amount to €100 billion a year according to some estimates
- The EU has built a first line of defence against harmful tax practices
- The European Commission needs to plug loopholes in the EU tax toolbox
Strengthening the EU’s defence measures against harmful tax regimes and corporate tax avoidance has not closed all the gaps, according to a new report by the European Court of Auditors. The EU could only build a first line of defence because EU countries themselves are in the driving seat for direct taxation matters. In addition, the EU’s defence is not watertight because the member states interpret defensive measures differently, and lack a common performance monitoring framework.
Multinational corporations are becoming increasingly adept at using complex tax-planning strategies to reduce their tax burden by exploiting gaps and mismatches in different countries’ tax systems. Using this for aggressive tax-planning purposes leads to a form of harmful corporate tax avoidance. In the EU, aggressive tax planning can result in unfair competition between companies and an unlevel playing field between member states. As the latter may suffer major tax-revenue losses as a result, other taxpayers ultimately make up for the ‘missing’ revenue by contributing more. However, it remains every member state’s right – indeed, it is in their self-interest – to freely design their own tax laws and systems, while the Commission can intervene only in cases of potential distortions of the EU internal market.
“Harmful tax regimes and corporate tax avoidance pose major challenges to ensuring that taxes are paid where profits are made,” said Ildikó Gáll-Pelcz, the ECA Member in charge of the report. “Using its narrow powers in this field, the Commission should plug existing gaps, develop its guidance for EU countries so as to ensure a united front against harmful tax practices, and accelerate a common performance monitoring system.
EU legislation in this area is expanding, and is broadly aligned with international developments. In recent years, three new EU directives have aimed, among other things, to establish common rules across the EU to curb systemic harmful tax practices. However, the Commission has not provided further guidance to clarify how to apply those rules in practice. When faced with gaps and unclear definitions, member states interpret them differently. Although the Commission is good at ensuring that they turn these directives into national laws, the EU’s executive and the member states do very little to check whether their defensive measures bear fruit. Furthermore, comprehensive evaluations of all three directives are overdue, so it remains unclear whether they will be able to achieve their goals.
By exchanging information on potentially harmful cross-border tax arrangements, the member states have a potent tool at their disposal. However, they carry out few quality checks on the reported information, which could thus be incomplete or inaccurate. In addition, they make little use of the information they receive, thus reducing the value of automatic exchanges and making the fight against revenue-escaping taxation less effective. There is also a risk that in some member states the penalty systems for not complying with reporting obligations may not have a dissuasive effect due to the manifestly low level of the related penalties.
When it comes to harmful tax regimes inside the bloc, EU countries did withdraw the preferential measures recommended by the Code of Conduct Group, the EU’s specialised body for business taxation. However, the grace periods – i.e. rollback and ‘grandfathering’ – were often too long, meaning that companies could benefit longer from unfair tax advantages. Member states also take defensive measures against non-cooperative jurisdictions outside the bloc, but their approach is not uniform.
Background information
In the EU, each member state’s national tax system is influenced by other tax jurisdictions, particularly if they offer tax benefits to attract corporations, individuals, or capital into their territory. A tax regime is considered harmful when it has adverse effects, such as eroding foreign tax bases or unfairly distributing tax burdens. The Commission is chiefly concerned with monitoring, coordination, harmonisation and enforcement of EU law. According to its 2024 annual report on taxation, EU revenue losses due to corporate profit-shifting as one strategy of aggressive tax planning could be as much as €100 billion a year. The auditors examined how the EU’s Anti-Tax Avoidance Directive, the 5th amendment to the Directive on Administrative Cooperation (DAC 6), and the Directive on Tax Dispute Resolution Mechanisms were designed by the Commission and applied in Ireland, Cyprus, Luxembourg, Malta, and the Netherlands between 2019 and 2023. The audit did not cover state aid for corporations and specific bilateral agreements between companies and governments, another key issue in harmful tax practices.
Special report 27/2024, “Combatting harmful tax regimes and corporate tax avoidance: the EU has established a first line of defence, but there are shortcomings in the way measures are implemented and monitored”, is available on the ECA website. This audit built on the ECA’s 2021 special report on exchanging tax information in the EU.
Read the ECA Special Report
Read the EU Commission replies
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