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EU Reaches Preliminary Deal on Watered-down Tax-dodging Rules

  • Reuters

FILE - European Commissioner for Economic and Financial Affairs Pierre Moscovici speaks during a media conference at EU headquarters in Brussels, Jan. 28, 2016.

FILE - European Commissioner for Economic and Financial Affairs Pierre Moscovici speaks during a media conference at EU headquarters in Brussels, Jan. 28, 2016.

European Union states reached preliminary agreement on Friday on new rules to counter corporations' tax avoidance, but it watered down some proposals
after lobbying by smaller countries, such as Belgium and Austria.

Ministers were under pressure to approve new rules proposed by the European Commission in January, after revelations in the so-called Panama Papers and Luxleaks cases
.
After months of wrangling, EU finance ministers in a regular meeting in Luxembourg backed an amended version of the Commission proposals, excluding some controversial measures and delaying others.

The deal is suspended until Monday. If no country raises objections by then, the agreement will take effect. The Belgian and Czech finance ministers asked for the extra time to sort out pending technical issues.

"I am confident that what we have is still a good step forward in the fight against tax avoidance," Jeroen Dijsselbloem, the chair of the talks and Dutch Finance Minister, told a news conference after the meeting.

Corporate tax practices cost EU states an estimated 70 billion euros ($76.10 billion) a year in lost revenues, according to an EU Parliament report. But the plan to curtail them is less ambitious than what was originally planned.

A proposal known as switch-over clause was dropped because some finance ministers said it could cause double taxation of European corporations, making them less competitive. The clause would have taxed dividends and capital gains that European companies pay to companies they control in low-tax or tax-free countries, which are then returned to the parent company. In theory, the money was liable to tax by the tax haven country — even though little or no tax was imposed — so on its return it is not subject to tax, to avoid duplicate taxation.

The European Parliament, which in tax matters has only a consulting role, had urged states to tighten the original switch-over clause.

Measures to reduce multinationals' artificial shift of profits to subsidiaries in tax havens were also changed, granting states leeway on how to apply the new rules.

The original proposal said that states should automatically tax profits shifted to countries with tax rates 40 percent below theirs. The ministers eliminated the rate threshold, although officials said the substance of the proposal remained unchanged.

Ministers were also stuck on when to apply proposed rules to reduce tax deductions of interest payments. Some companies use those deductions to cut their taxes by arranging artificial loans from subsidiaries in low-tax countries.

Belgium, Austria, Malta, Slovenia and Lithuania asked for the new rules on limitation of interest deductions to be delayed. They want them to become effective only after an agreement is reached at international level by the Organization for Economic Cooperation and Development.

After pressure from the EU commissioner for tax affairs Pierre Moscovici, countries eventually agreed to put the interest limitation rules in place from 2024, instead of the original 2019 deadline.

Belgium is assessing whether it can accept this compromise by Monday. The Czech Republic is seeking the EU Commission's authorization on a pilot project to counter fraud on value added tax, and it has linked its approval of the tax avoidance package to that.

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