EU push on tax avoidance threatened by Prague veto

An EU push to narrow the kinds of tax loopholes exploited by companies in the LuxLeaks scandal is facing last-minute hurdles from Prague, as the Czech government threatens to veto the entire package.

Finance ministers will seek to strike a deal on Friday on the anti­tax avoidance legislation, which has been hailed by the European Commission as a big step towards tackling the most egregious forms of abuse.

The measures include a cap on how much companies can slash their tax bills by shifting profits abroad and curbs on the use of complex intra­group loans to slim down taxable income.

National officials have toiled for months on a grab bag of different objections from capitals about the draft law, which was presented by the European Commission in January.

These include addressing Irish worries that certain provisions went too close to interfering with the country’s hallowed 12.5 per cent corporate tax rate, concerns from Luxembourg that some restrictions on profit shifting would harm investment, and Austrian fears that loan rules would clash with its own standards.

According to diplomats, some points remain open ahead of Friday’s meeting, but these pale in comparison with the Czech blocking manoeuvre, which centres on deep frustration on the part of Andrej Babiš, finance minister, that the EU has not backed his strategy for tackling VAT fraud, a big problem in the Czech Republic as well as other EU nations.

Mr Babiš warned on Tuesday that, despite agreeing to the substance of the anti­tax avoidance law, he will not sign up to it until the commission makes a separate proposal that would allow the Czech Republic to experiment with an overhaul of its VAT system known as “reverse charging”.

As EU tax measures must be unanimously agreed on by capitals, the veto threat carries real weight.

“Immense political capital has been invested in the fight against corporates and individuals avoiding paying taxes,” he said. “I want to fight VAT fraud with the same determination and pace.”

Mr Babiš has been calling on Brussels for months to allow the reverse­charging experiment. According to diplomats, his patience snapped last month in response to a policy statement by EU finance ministers that he judged to be anaemic.

The stance has prompted bafflement among Brussels officials, who see reverse charging as an extreme, and potential very cumbersome, option for tackling fraud.

EU officials are also concerned to lock down an agreement on the anti­tax avoidance directive before any potential compromise unravels.

Pierre Moscovici, the EU tax commissioner, has said that the directive is key to addressing the kinds of tactics revealed by LuxLeaks — a cache of 28,000 pages of documents from auditor PwC which showed how hundreds of multinational companies had slashed their effective corporate tax rates to as little as 1 or 2 per cent by routing money through units in the grand duchy.

A deal on the law would “would mark a major leap forward in tackling corporate tax avoidance,” Mr Moscovici told the Financial Times. EU nations “quickly joined the chorus of global anger condemning the scourge of tax avoidance. They must now show that they have the courage of their convictions,” he said.

“It’s a question of doing what is right and what is fair. It is about ensuring that the EU is a global frontrunner in this area.”

The draft directive has been slammed by tax campaigners as too weak to really constrain tax avoidance by multinationals, while at the same time it has also raised the hackles of the business community as elements of it go beyond international agreements struck by the Organisation for Economic Cooperation and Development.

BusinessEurope, the EU employers’ federation, warned earlier this year that the plans risked “putting the EU at a competitive disadvantage in attracting global investment”.

For Tove Maria Ryding, at the European Network on Debt and Development, “the directive was always a rather unambitious attempt to patch up the rules rather than reform them”.

Bringing parts of the standards up to scratch “would require a level of political will that has so far been absent,” she said.

By: Jim Brunsden in Brussels

Zdroj: Financial Times

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