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:
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
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.