Taxation and development
When the OECD presented the final BEPS package in October 2015, with fifteen actions to address corporate tax dodging, I wrote a paper warning that this would accelerate the race to the bottom in tax rates. Unfortunately, that is precisely what is happening now. For governments that manage to resist the pressure for tax cuts, the OECD’s initiative can still help to recover large revenues losses due to aggressive profit shifting. It all depends on the implementation of BEPS actions.
In the EU, there are some encouraging signs. The Nasty Four – Ireland, Luxembourg, Belgium and the Netherlands, each with a nasty history of enabling mismatches – are moving. Ireland took some measures against the Double Irish and Luxembourg reformed its harmful ruling practice. In addition, Belgium is to address international tax avoidance via its notional interest deduction scheme, which the BEPS actions did not cover properly. And this month, the Netherlands announced a withholding tax on interest and royalties paid to low-tax jurisdictions.
It is clear what drives them. The Nasty Four are trying to shed their reputation as corporate tax havens, by removing harmful features and bringing their tax systems more in line with international standards.
Yet there are worrying signs too. For example, the Netherlands tried to hold off the closure of mismatch structures, with billions of profits ending up untaxed in between the US and the Netherlands. Luxembourg also announced an aggressive new patent box.
So what are they up to? Are the Nasty Four serious about leaving their nasty past behind, or are they merely replacing one loophole with another, as they have done in the past?
Soon they must show their real colours. An EU directive adopted last year requires all EU governments to adopt rules for multinationals based in their country against parking profits in tax havens. These are so-called CFC rules, based on BEPS action 3. Each government can choose between two types of CFC rules. Only one type, model A, addresses profit shifting from foreign subsidiaries to tax havens. The other type, model B, is limited to profit shifting out of the home country itself.
Thus, Ireland, Luxembourg, Belgium and the Netherlands have an important choice to make. Are they serious about addressing corporate tax dodging?
A – Yes
B – No
It will make a big difference not just for other countries, but also for their own reputation.