A simpler and more modern tax environment sounds good – but what about tax competition?

The Apple case is seen as raising the (very) hot topic of how a multinational group like Apple should be taxed in a modern, digital world. In a briefing on our website, Mike Lane and Isabel Taylor review the case and consider the implications of the decision for other such tax State aid cases.

Although it didn’t quite grab the headlines in the same way as the Apple judgment, the European Commission’s Action Plan for Fair and Simple Taxation was also published yesterday and includes proposals for a fairer, simpler and more modern tax environment. The Action Plan comprises 25 actions that the Commission will propose and implement until 2024. The ones that caught my eye are as particularly relevant to multinationals are:

• Action 3 – an EU cooperative compliance framework to complement existing national and international programmes on cooperative compliance. This is intended to provide a clear framework for a preventive dialogue between tax administrations for the common resolution of cross-border tax issues in the area of corporate income tax.
• Action 7 – legislation to clarify where taxpayers active cross-border in the EU are considered to be resident for tax purposes to ensure a more consistent determination of tax residence.
• Action 18 – updating the VAT rules on financial services to take account of the digital economy and the increase in the outsourcing of input services by financial and insurance operations as well as the way this sector is structured. The intention is to ensure a level playing field within the EU and take into consideration the international competitiveness of EU companies.
• Action 21 – establishing an expert group on transfer pricing to develop pragmatic, non-legislative solutions to practical problems posed by transfer pricing practices relevant for the EU. The aim is to increase tax certainty and reduce the risk of double taxation. The group will accommodate input from Member States and stakeholders from the business and civil society.

Tackling tax abuse and harmful tax competition

The ambitious EU tax agenda for the coming years also includes proposals to tackle tax abuse and harmful tax competition, including allowing proposals on taxation to be adopted by ordinary legislative procedure (rather than unanimity) and reforming the Code of Conduct for Business Taxation. The Commission notes that the nature and form of tax competition have changed substantially over the past two decades for reasons including globalisation, digitalisation, and the increased importance of intangible assets. As the Commission sees it, pressure on states to use taxation to compete for foreign investment has prompted tax competition to escalate and evolve and the Code of Conduct requires modernisation to reflect this.

Ireland’s low tax model has generated real business investment in Ireland but substance may not be enough for low-tax countries to show measures are not harmful in future if the Commission’s proposals are implemented. Together with the global minimum rate of tax which is part of the international tax reform discussions facilitated by the OECD, this certainly looks like the bigger countries ganging up on the smaller ones to prevent tax competition, rather than, as the Commission suggests, “preventing some countries from eroding the tax bases of others”. (For more detail on the current status of the international tax reform proposals listen to our Tax News Highlights podcast.)

EU roadmap for corporate taxation

The Commission will present a dedicated action plan on business taxation this autumn which will take stock of the OECD discussions and will set out a roadmap for corporate taxation in the EU fit to meet the challenges of the 21st century.