Corporate tax legislation changes proposed by the European Commission will have no effect on Ireland as they address a difficulty that does not exist in this jurisdiction.
But tax experts warned that the announcement by the commission yesterday is the opening salvo in a global project to address aggressive corporate tax planning which could see new rules introduced that could have positive or negative implications for Ireland, depending on their nature.
The commission wants to close a loophole in the parent-subsidiary directive, which some companies have been using to escape taxation. In particular, companies will no longer be able to exploit differences in the way intra-group payments are taxed across the EU to avoid paying any tax at all.
Double non-taxation
The commission said that measures introduced to stop double-taxation have been used by some companies to achieve double non-taxation.
In fact, some companies have been managing to use the loophole to get a tax credit in one country without incurring a mirroring tax liability in another. The plans will tackle gaps in the taxation of “hybrid” instruments, such as convertible preference shares.
First issued in 1990, the parent-subsidiary directive allows a subsidiary that makes a profit in one country transfer that profit as a dividend to its parent in another EU country without incurring further taxation.
However, some companies have put in place certain arrangements that end up treating interest on a loan from the parent company as a deductible expense in the subsidiary’s jurisdiction while the payment is treated as a non-taxable dividend in the parent company’s jurisdiction.
The proposed change does not affect Ireland, according to Fergal O’Rourke, head of taxation at PricewaterhouseCoopers because, under Irish law, such dividends and quasi-dividends from abroad are already taxed.
He said the announcement yesterday is an initial step in the EU setting out to eradicate taxation misalignments and asymmetries across the union.
The crackdown, which would hit one of the most common forms of international tax planning, follows growing public pressure for action against avoidance.
The EU proposals come at a time when international authorities are mounting a concerted attack on “hybrid” structures that allow corporations to exploit mismatches between different countries’ tax systems to escape taxation.
Wide-ranging global plans to tackle hybrids have been drawn up by the Organisation for Economic Co-operation and Development (OECD) and are now being circulated around tax authorities.
Hybrid schemes
Cross-border financing structures that rely on hybrids are "key" to many European multinationals' low tax rates, according to an analysis by Citigroup.
Edward Kleinbard, a law professor at the University of Southern California, said the structures created an effective subsidy for the acquisition of US companies by foreign multinationals.
“The result is global inefficiency and a very large shortfall in tax revenues around the world,” he said.
Algirdas Šemeta, commissioner for taxation, said EU tax policy is heavily focused on creating a better environment for businesses in the EU.
“This means breaking down tax barriers and tackling cross-border problems such as double taxation,” he said. “But when our rules are abused to avoid paying any tax at all, then we need to adjust them. Today’s proposal will ensure that the spirit, as well as the letter, of our law is respected.
"As such, it will ensure greater revenues for national budgets and fairer competition for our businesses."
– Additional reporting: The Financial Times Limited 2013
