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Aggressive tax planning

Aggressive tax planning

The Commission is suggesting ways to address legal technicalities and loopholes which some companies exploit to avoid paying their fair share of tax.

ACT

Commission recommendation of 6 December 2012 on aggressive tax planning (2012/772/EU)

SUMMARY

Tackling aggressive tax planning is one aspect of a detailed and complex Commission action plan designed to combat tax evasion and tax fraud.

The action plan sets out practical ways to improve administrative cooperation between EU countries, fight abuse and double-non taxation, and tackle issues related to tax havens and tax-related crimes.

Currently, some taxpayers may use complex, sometimes artificial, arrangements to relocate their tax base to other jurisdictions within or outside the European Union. In doing this, they take advantage of mismatches in national laws to ensure that certain items of income remain untaxed anywhere or to exploit differences in tax rates. This problem is referred to as aggressive tax planning.

The key difficulty is that increasingly sophisticated tax planning shifts taxable profits to countries with countries with taxation systems that are more beneficial for the taxpayer. This practice reduces tax liability through arrangements that abide by the letter of the law but violate its spirit - i.e. legal loopholes.

Aggressive tax planning takes many forms, and its consequences include double deductions (for example the same loss is deducted both in the country of source and that of residence) and double non-taxation (for example income which is not taxed in the country where it is earned and is exempt in the country of residence).

The Commission is therefore encouraging EU countries to ensure that double tax conventions concluded with other EU and non-EU countries include a clause designed to resolve a specifically identified type of double non-taxation.

It also recommends the use of a common general anti-abuse rule to help to ensure consistency and effectiveness in an area where practice varies considerably between EU countries.

There are many other proposals in this area. For example, the current VAT system has been identified as being vulnerable to fraud. The Commission therefore decided to set up an EU VAT forum. Here, business representatives and tax authorities can exchange views on practical aspects of VAT administration applicable to transactions between EU countries. They can also identify and discuss best practices that could help make it more straightforward to manage the VAT system and cut compliance costs, while also securing VAT revenue.

REFERENCES

Act

Entry into force

Deadline for transposition in the Member States

Official Journal

Commission Recommendation 2012/772/EU

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Official Journal L 338 of 12.12.2012

REFERRED DOCUMENTS

Communication from the Commission to the European Parliament and the Council: An action plan to strengthen the fight against tax fraud and tax evasion. (COM(2012) 722 final of 6.12.2012 - not published in the Official Journal)

Proposal for a Council directive amending Directive 2011/96/EU on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States. (COM(2013) 814 final of 25.11.2013 - not published in the Official Journal)

The parent-subsidiary directive (Directive 2011/96/EU) was originally designed to prevent same-group companies based in different EU countries from being taxed twice on the same income (double taxation). However, certain companies have exploited provisions in the directive and mismatches between national tax rules to avoid being taxed in any EU country at all (double non-taxation).

The proposed amendment will tighten up the directive so that specific tax planning arrangements (hybrid loan arrangements) cannot benefit from tax exemptions. Under the proposal, if a hybrid loan payment is tax deductible in the EU country where the subsidiary is based, then it must be taxed by the EU country where the parent company is established. This will stop companies with branches in more than one EU country from planning payments between branches in different countries so as to benefit from double non-taxation.

Last updated: 21.02.2014

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