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The European Commission proposed to revamp the bloc’s tax system and introduce a single corporate taxation rulebook this week that would stop European governments from competing with each other to attract business investments by lowering tax rates.

The new proposal, the third the commission has put forward in the past 10 years, called for a unified way to tax corporations where they generate income rather than where they set up their headquarters ー which is often in a low tax rate jurisdiction.

“Our tax rules should support an inclusive recovery, be transparent and close the door on tax avoidance,” trade commissioner Valdis Dombrovskis said in a statement.

Irene Tenagli, chair of the European Parliament’s Economic and Monetary Affairs Committee, welcomed the proposal as a way to support the recovery of the bloc’s economy which has been affected by the COVID-19 pandemic.

“We cannot properly support recovery with a system that allows hundreds of billions euros in potential tax revenues to be lost because of evasion and fraud,” she said at a press event.

But some tax justice advocates and observers remain skeptical about the scope of the proposal and its chances of being approved by all member states, a key requirement.

“The big question for us is whether the European Commission is ready to take bold and ambitious action to stop large-scale corporate tax avoidance,” said Tove Maria Ryding, tax policy and advocacy manager at the European Network on Debt and Development, a group of more than 50 civil society organizations.

Known as “Business in Europe: Framework for Income Taxation,” or BEFIT, the proposal will be finalized by 2023. It also includes a plan to increase authorities’ oversight of shell companies to stop tax avoidance and evasion.

Each year, Europe loses between $40 billion and $85 billion in corporate tax avoidance, according to estimates cited by the commission. And some of the jurisdictions that aggressively attract multinationals with sweetheart deals and very low tax rates are in the heart of Europe.

“The Commission is in a tight spot due to the fact that EU decisions on tax require unanimity, and several of the EU Member States, such as Luxembourg and Ireland, continue to behave as tax havens,” Ryding said.

In the 2017 Paradise Papers investigation, the International Consortium of Investigative Journalists reported how Apple was able to channel up to two-thirds of its global profits into subsidiary companies, registered in Ireland, that paid almost no tax.

Most recently, the news organization Investigate Europe found that, despite reporting high profits during the COVID-19 pandemic, Amazon’s 2020 balance sheet for its Luxembourg-based umbrella company, which covers its European business, showed a loss of more than $1 billion. This allowed the company to obtain tax benefits, the report said.

The 2014 ICIJ investigation Lux Leaks highlighted some of the strategies many corporations use to drastically cut their tax bills.

The commission’s move follows an initiative by the Organisation for Economic Co-operation and Development that, if approved, will set a minimum rate for multinational companies around the world.

Earlier this year, the U.S. proposed setting a global 21% minimum tax rate for corporations. The finance ministers of France, Germany and other EU countries said they back the plan. The U.K. doesn’t, according to the Guardian.

The commission’s proposed reform wouldn’t touch individual countries’ corporate tax rates. Companies’ profits and losses from their European activity would be added up and the net profit would then be distributed to individual countries.

However, the commission’s political role may make the tax reform efforts fraught and risk alienating some European member states, according to Rasmus Corlin Christensen, a researcher at the Copenhagen Business School and the author of a study about the EU’s role in international tax policy

“By insisting on implementation via directive, the commission risks empowering EU tax havens in resisting, at the EU level, a global minimum tax agreement which they couldn’t resist at the OECD/G20 level,” Christensen said.

While acknowledging such challenges, commission officials told Politico that the proposed European tax agenda may have more chances to go forward if OECD countries agree on the global tax deal, which is expected by mid 2021.

Source of original article: ICIJ (www.icij.org).
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