Europe Takes Steps against Corporate Tax Maneuvers

The European Council of Ministers has agreed to take steps to combat the use of corporate tax strategies that shift profits to low-tax countries to avoid paying taxes.

Wednesday’s agreement comes amid growing pressure on companies like Google, Amazon, Starbucks, Apple and other companies to pay a greater share of taxes on the profits they earn in Europe and the U.S. (see Apple Executives to Answer Lawmaker Claims on Tax Avoidance and Multinational Corporations Shift More Profits Offshore).

“Tax fraud and tax evasion limit countries’ capacity to raise revenue and carry out their economic policies,” said a document containing the minutes from the European Council meeting in Brussels. “In times of tight budgetary constraints, combating tax fraud and tax evasion is more than an issue of tax fairness—it becomes essential for the political and social acceptability of fiscal consolidation. The European Council agreed to accelerate work in the fight against tax fraud, tax evasion and aggressive tax planning. In particular, work will be taken forward as a matter of priority on promoting and broadening the scope of the automatic exchange of information at all levels.”

The Council said that priority would be given to efforts to extend the automatic exchange of information at the EU and global levels. Other measures will include improving the EU’s agreements with Switzerland, Lichtenstein, Monaco, Andorra and San Marino, which have traditionally enjoyed a reputation as low-tax states. Work will also be carried out on the European Commission’s recommendations on dealing with aggressive tax planning and profit shifting, as well as what the Council refers to as “harmful tax measures” and base erosion.

They noted that efforts are required to respond to the challenges of taxation in the digital economy, while taking full account of the work of the international Organization for Economic Cooperation and Development, which issued a report in February on base erosion (see OECD Calls for Curbs on Tax Avoidance by Multinationals).

Other measures aim to ensure that third countries, including developing countries, are able to meet standards of good governance in tax matters, and that large companies and corporate groups report key financial information on a country by country basis. The Council noted that identification of beneficial ownership of companies, trusts and foundations is essential.

The agreement comes on the heels of the announcement that several EU member countries are already proceeding with a “pilot project” of automatic exchange and U.K. Prime Minister David Cameron’s declaration that the G8 will discuss automatic exchange at its June summit.

The Washington, D.C.-based research and advocacy group Global Financial Integrity estimates that the lack of transparency in the international financial system drains roughly $1 trillion each year from developing and emerging economies.

“The European Council’s commitments reflect the new Western consensus on the critical importance of greater transparency in the world’s financial system, and we are extremely pleased to witness this positive development, but there is an acute need for any new measures in this area to benefit developing countries,” said GFI legal counsel and director of government affairs Heather Lowe in a statement. “This is the time for governments to grasp the relationship between the causes of their own financial situations and the struggles of developing countries, and to ensure that actions and policies moving forward benefit all peoples.”