New wind in the sails

The timing of the Panama papers revelations could not have been better from an EU corporate tax law perspective. The revelations follow the so-called “Lux leaks” scandal from 2014, which revealed to the public deals that the Luxembourg tax authorities had given to multinational companies. This resulted in many EU actions and new initiatives, including the Commission’s investigations into the member states’ tax ruling practices. The Commission has so far fined Luxembourg, the Netherlands and Belgium for giving multinationals favourable treatment on taxation. Further important Commission decisions are awaited, among them the ruling on the Irish tax treatment of Apple.

All these cases have been appealed to the Court of Justice and the final word on them is still to come. However, the Commission rulings have already set a new standard for the equal treatment of companies in taxation.

The European Union has also been able to adopt new tax transparency initiatives at an unprecedented speed. The first directive on exchange of information on tax rulings and other advance arrangements was adopted in 2015 in just eight months; the second directive on exchange of corporate tax information was essentially agreed by member states within a mere two months. These initiatives ensure that national authorities can more accurately calculate the appropriate tax burden of multinationals as they automatically exchange corporate tax information, including information about tax rulings and other arrangements made by the authorities.

Tax fairness on the table

In addition to the tax transparency proposals, in January the Commission also tabled a tax fairness initiative: the Anti-Tax Avoidance Directive proposal. Its underlying aim is to tackle aggressive tax planning generally. The proposal purports to introduce five key anti-tax avoidance rules relating to controlled foreign companies (CFCs), switchovers, exit taxation, interest limitation and hybrid mismatches. Furthermore, the directive includes a general anti-abuse rule, which can be used where no other rules are applicable.

The Netherlands, which currently holds the Presidency of the Council, has been hoping to reach an agreement by the end of June, when its term ends. This ambition is unlikely to materialise as member states are still in disagreement as to the key principles surrounding the CFC rule, hybrid mismatches and effective tax rates.

Discussion in particular seems to be focused on issues where the EU wants to go further than the Organisation for Economic Co-operation and Development (OECD) anti-BEPS (base rate and profit shifting) initiative. This sets out another key component for the sudden EU successes in relation to tax transparency initiatives. The exchange of information proposals were modelled on what had already been agreed in the anti-BEPs programme, and the Union has simply been able to implement them. When it comes to adopting new initiatives, it has not proven quite so easy to agree on the way forward, without the same pressure from the Lux leaks. After all the EU was able to adopt a range of successful initiatives to correct that situation.

The Panama papers fit into this place. Even if they do not directly deal with corporate taxation matters, they echo nicely the Lux leaks. The EU initiatives designed to deal with a Lux leaks type of situation, i.e. aggressive corporate tax planning, can be placed again in the forefront of EU action, and the European Parliament, for example, has been able to build up momentum to argue that the present instruments do not provide for an adequate response.

Transparency across the entities

There was also an immediate response from the European Union. The Commission announced one week after the papers were made public that its new tax transparency proposal, which aims to oblige multinationals to report key tax information publicly, country by country, will now include an obligation to publish information from all parts of the entities, not just from European subsidiaries as originally planned.

The main reason we are seeing corporate tax proposals at EU level is because that is where the EU has competence. It can adopt tax initiatives where there is a link with the internal market, for example making free movement of companies easier. Other areas of taxation policy, including where the matter relates to taxation of individuals and sanctions for breaking the rules, are left for the member states, which in the wake of Panama papers have been busy announcing new initiatives on corruption, tax transparency and fairness.

The upcoming EU initiatives include new proposals to tackle VAT fraud, blacklists of tax havens, and new proposals on the role of tax advisers likely to be published as early as June. There are also plans in relation to anti-money laundering initiatives; however, these open up a wider issue and are not analysed in this article. As the grand finale, the Commission is likely to revive the Common Consolidated Corporate Tax Base, by introducing first the Common Corporate Tax Base without consolidation, with the consolidation to follow. It might just be to the benefit of the national governments to adopt them, in one form or another, as the Panama papers will continue to keep tax planning issues to the forefront.