Transnational firms have been exploiting differing national tax laws across the EU, considerably reducing their tax burden without even having to resort to exotic tax havens. The EU Commission wants to stop this.
European Union member countries lose huge amounts of tax revenues annually as big transnational companies engage in tax avoidance by legally exploiting the differences in national tax legislation.
In many cases, internationally operating enterprises often pay very little tax despite posting decent profits. "The tax burden is sometimes close to zero," says the director of the Institute of Tax Law in Cologne, Johanna Hey. According to estimates, EU countries lose about one trillion euros ($1.34 trillion) annually because of so-called aggressive tax planning.
The transnational companies use the same technique. They book their profits in places where taxes are particularly low. "Tax havens cannot only be found on Caribbean islands," says Hey. EU member countries also compete for the lowest tax levels.
Since 2007, corporate tax has been lowered in several countries, including Britain, Germany, Italy, Spain, Greece and Sweden, to lure investments and safeguard jobs.
More transparency and fairness
Lithuanian politician and economist Algirdas Gediminas Semeta has been the EU's Commissioner for Taxation, Customs, Statistics, Audit and Anti-Fraud since 2010. He's presented an action plan to the Commission whereby transnational firms would no longer be able to exploit such tax loopholes. According to the plan, parent companies and their subsidiaries in different EU nations would be subjected to the same tax legislation throughout the EU. He wants member countries to implement the proposal by the end of next year.
"The proposal ensures that laws are respected," says Semeta. The new regulations aim to keep states from forging artificial tax avoidance plans designed to stop companies from carrying out their threats to relocate abroad. Companies would have to pay their taxes according to their actual business operations.
"We can no longer afford freeloaders who reap huge profits within the EU without contributing to the public purse," Semeta said in Brussels.
No offense meant
He was asked whether the proposal was directed at specific companies such as Apple, Google or Amazon, but he replied that it was not directed at individual firms: "The problem exists not only among the big names, but there are many other multinational companies which use such schemes in order to avoid taxes."
Semeta stressed the plan was not only an instrument to raise tax revenues. He said it would also foster fair competition among firms by subjecting them all equally to the letter and spirit of EU tax laws.
Aggressive tax planning is nothing new. A year ago, British parliamentarians lashed out against Google, Starbucks and Amazon for posting their billions worth of profits in tax havens. In May of this year, Apple CEO Tim Cook was summoned before the US Congress to justify his tax avoidance strategy.
EU nations are facing a dilemma, too. In view of record-high unemployment in much of the 28-member bloc many governments just don't feel like taking the risk of driving away companies through tax hikes. They fear losses not only of tax revenue, but also of investment and employment.
Countries such as Spain, Greece and Hungary plan instead to raise sales and value-added tax. But this puts a burden disproportionately on low-income groups.