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THE FIGHT AGAINST TAX EVASION AND AVOIDANCE: TOWARDS A HARMONISATION OF CORPORATE INCOME TAXES WITHIN THE EU
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Another common form of tax avoidance re-
ferred to as transfer mispricing or transfer pric-
ing manipulation, is driven by a similar logic.
This practice involves artificially distorting the
prices of goods and services traded between en-
tities of the same corporate group and localiz-
ing profits in subsidiaries based in jurisdictions
with lower tax rates.
Nevertheless, companies may also avoid
paying taxes by taking advantage of the intrica-
cies of double taxation agreements (referred to
as DTAs going forward). DTAs are bilateral
agreements forged between two countries for
the purpose of determining the legal jurisdiction
under which the profits of companies with busi-
ness activities in both will be taxed. These trea-
ties have been conceived to facilitate cross-bor-
der trade by eliminating double taxation, which
is to say they avoid situations in which compa-
nies would otherwise be obliged to pay taxes on
the same profits in two different countries.
However, certain corporations’ skilful use (or
misuse) of the wide network of CDIs has result-
ed in an unacceptable number of cases of “dou-
ble non-taxation”.
Another aspect of DTAs that must be ad-
dressed is the establishment of withholding
taxes, which is done to ensure that transnation-
al companies pay at least a minimum tax in the
source country or the country in which profits
have been generated. This practice is meant to
prevent companies from shifting the bulk of
their profits gained in a given country to more
amenable jurisdictions by means of tax engi-
neering. Some transnational companies resort
to “treaty shopping” to avoid paying withhold-
ing taxes in countries where their activities gen-
erate taxable profits.
It should be remembered that the EU’s initial
position in this area was relatively lax, in that it
favoured freeing transnational companies from
paying retentions in source States under specific
circumstances and on certain categories of prof-
it (passive income). Parent-Subsidiary Directive
90/435/CEE, issued in 2003, further relaxed
conditions for exempting dividends on the basis
of prevailing opinion that taxation of dividends
constituted an intra-community trade barrier.
Nevertheless, in 2014 the EU made an about
face on this issue and added two key amend-
ments to the directive designed to bring it into
line with concerns articulated by the G20 and
the OECD. As it now stands, this directive not
only deals with the problem of double taxation,
but also addresses troubling spectre of double
non-taxation.
The first amendment to the Parent-Subsidiary
Directive was intended to neutralize the effects of
“hybrid mismatch arrangements” (transfers of
ownership of assets from one company within a
group to another so that they can be collateral-
ised as a loan in another country). Its objective
was to ensure that whenever interest on an intra-
group loan was deductible in the jurisdiction of
the recipient company, loan payments to the
lending company within the group would be
taxed as income in the corresponding jurisdiction.
The binding a “de minimis” anti-abuse clause
added to the directive by the Economic and
Financial Affairs Council (ECOFIN) in December
2014 was intended to serve as a prompt to
Member States to include special clauses in the
DTAs that each had developed to curb tax avoid-
ance practices and aggressive tax planning on
the part of corporate groups. This recent revision
of the Parent- Subsidiary Directive also requires
Member States to refrain from extending the
benefits of the directive to any arrangement or
series of arrangements that are not genuine in
the sense that they have been put into place for
the sole purpose of obtaining a tax advantage
and do not reflect economic reality.