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The European Parliament votes for minimum tax rates on royalties and makes it harder for business to dodge taxes

Added 20 Sep 2012

On September 11th the European Parliament voted in favour of introducing a minimum tax rate on interests and royalty income. This is a crucial step in the fight against tax dodging by multinational companies. Royalties and interest payments made between subsidiaries of the same company are two of the main instruments used by multinational companies to evade taxes, at the moment this is far too easy. The process works like this:

  1. A multinational company creates a shell company in a tax haven, where taxation is low or non-existent.
  2. The company transfers the ownership of a license or copyright or trademark to the shell company.
  3. The shell or empty company charges royalties to other companies owned by the group for using the license, trademark or copyright.
  4. Since it is very difficult to assess the value of a trademark, license or other intangible assets, the shell company can charge as much as it wants, thereby reducing profits (an lowering taxation) in the countries where the group operates and shifting them to a tax haven where they are untaxed.

Interest can be sued in a similar way when the company in the tax haven is created as a financing arm. It can extend loans to companies in the group and use interest rates, which are usually deductible in most countries, to shift income to the tax haven where they will be subject to low or no taxation. This is known as thin capitalisation

Both are common practices used by multinational companies. Some examples include a US pharmaceutical company, the brewer SAB Miller and Exxon.

Following the vote, the Green economic and finance spokesperson, Sven Giegold (MEP, Germany), stated that “It is scandalous that EU governments are still failing to take action against businesses dodging their tax obligations in the member states in which they operate at a time when EU exchequers are under such pressure. The EP has today voted in favour of strengthening the draft legislation, with a view to prohibiting the current practice of companies channelling profits through different member states and tax regimes to avoid their tax responsibility. These ‘legitimate’ tax avoidance schemes like the ‘Double Irish’ and the ‘Dutch sandwich’ should be totally outlawed and member state governments should take on board today’s vote.”

This week there was also a vote on a revised Accounting Directive which requires large extractive, logging, banking, telecommunication and construction companies to report their payments to governments on country-by-country basis. In the last two weeks, the European Parliament has taken two crucial steps towards a fairer and more democratic economic system. The European Council should now hear the voices of people and make sure progress is not weakened during the negotiations.