Addressing Double Taxation for Businesses – EU public consultation

As a cursory glance at virtually any newspaper in pretty much every major EU  Member State will prove, the amount that companies pay in tax is a big issue. One of the most discussed elements – by those accused of not paying the ‘right’ amount of tax, as well as their accusers – is that of ‘double taxation’.

The issue of double taxation is a persistent problem for companies operation in the EU. Since Member States have sovereignty in designing their own direct tax systems, 28 different national tax regimes can potentially apply to the same transaction in the EU and may result in the imposition of comparable taxes by two or more jurisdictions in respect of the same taxable income or capital. So a company operating in several Member States can be taxed on the same income by several Member States. You can see where business complaints about complexity come in.

So far, the mechanisms in place to resolve double taxation cases (based on bilateral or multilateral tax conventions, in particular the EU’s Multilateral Arbitration Convention) have not proven efficient enough. The end result of this is both significant administrative and compliance costs and burden for businesses – and increasingly unpopular methods being used by businesses to get round these costs and burdens. The EU has recognised that such a situation is a headache: it harms economic efficiency (and so economic growth) and, despite all this talk of a Single Market, is a giant barrier to cross-border economic activity. The European Commission also knows that big multinationals will continue to have complicated tax affairs as long as complicated rules that allow double taxation remain in place – they have therefore launched a public consultation on how the current double taxation dispute resolution mechanisms operate and can be improved.

This consultation, which closes on May 10th, aims, amongst other things, to gather views on: (1) the relevance of removing double taxation for enterprises operating across borders; (2) the impact and effectiveness of the double taxation dispute resolution mechanisms, and (3) how these mechanisms can be improved.

The context of this consultation is also important. It’s worth noting that this consultation is part of the Commission’s work on implementing its recently adopted Action Plan for a Fair and efficient Corporate tax system and the Tax Avoidance Package adopted in January, which seeks to address the widely debated issue of cross border tax avoidance and evasion, especially in the context of multinational companies.

The Commission has been more than vocal in attacking deals between Member States and these multinationals. Just ask Apple, the subject of a Commission investigation that could land the company with a tax bill in the billions of Euros. Quietly, however, it is also balancing its attacks on avoidance with a review of the laws that send many big firms into the arms of complicated tax planners. Could a grand bargain, with companies paying more, but simpler taxes, be in sight?