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EU to close corporate tax loophole

Monday, November 25 11:53:34

The European Union today said it plans to close a loophole in the corporate tax code that allows some companies to pay little or no tax by routing profits abroad.

Amid a mounting furore over the tax practices of major corporations such as Apple and Google amongst others, several of whom use Ireland as a tax base.

The proposal by the European Commission, the EU's executive arm, aims to boost tax revenue for national budgets at a time of biting austerity and ensure that companies pay a fair amount of tax.

Algirdas Šemeta, Commissioner for Taxation said: "EU tax policy is heavily focussed 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. 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."

The EU is mounting a crackdown on tax evasion and tax avoidance in an effort to expand revenue hit hard by the region's financial crisis and assuage voters' anger over tough austerity measures that have forced cuts in public services and increases in taxes paid by individuals.

At a summit meeting in May, EU leaders pledged to cooperate more closely to fight tax avoidance and fraud after a series of reports that some major companies had used loopholes to pay very little tax on their international operations.

On Monday, the commission proposed changes to a 1990 law that aims to avoid double taxation in the single market but has been used by some companies to avoid paying any taxes on cross-border payments from a subsidiary company to its parent.

The tactic involves a structure known as a hybrid loan, which has characteristics of both debt and equity and may therefore be treated as tax-deductible debt payments in one state, and tax-exempt dividends in another.

The commission said that if such a loan payment is tax deductible in the subsidiary's member state, it must be taxed by the state where the parent is established.