BRUSSELS—The European Union agreed Tuesday on a set of rules and standards aimed at closing loopholes that allow wealthy multinationals to shift profits and avoid footing large tax bills.
The agreement marks a breakthrough for the 28-country bloc, which has been reeling from disclosures that multinational companies struck alleged sweetheart deals in countries such as Luxembourg that allowed them to pay very little tax in the EU.
“Today’s agreement strikes a serious blow against those engaged in corporate tax avoidance,” said Pierre Moscovici, the bloc’s tax affairs commissioner.
“For too long, some companies have been able to take advantage of the mismatches between different Member States’ tax systems to avoid billions of euros in tax,” he added.
The European Parliamentary Research Service estimates that corporate tax avoidance results in a loss of tax revenue to the EU of about €50 billion ($ 56.56 billion) to €70 billion each year.
The new rules, which were proposed by the European Commission—the EU’s executive arm—in January, are part of a push by the 28-country bloc to stop large-scale corporate tax avoidance in Europe, where governments are struggling to close budget gaps in the wake of the financial crisis and assure citizens that large companies are being held accountable for paying their share of taxes.
The agreement, which was struck provisionally by EU’s finance ministers in Luxembourg Friday and rubber-stamped Tuesday, includes rules aimed at discouraging multinationals from using intracompany loans to shift their debts and reduce their tax bills, by capping the amount of interest that companies can deduct from their taxes.
It also includes rules for so-called controlled foreign companies, under which companies that shift their profits to subsidiaries in low-tax jurisdictions where they have little activity could be forced to redistribute their tax bills to the higher-tax jurisdiction in which the parent company operates.
The agreed package aims at making international tax standards legally binding for EU countries, and in some cases goes further than what has been agreed at the Organization for Economic Cooperation and Development. Still, for tax advocacy campaigners, it doesn’t go far enough.
“This agreement is a major disappointment and falls far short of the promise of its name in terms of dealing with the problem of tax avoidance,” said Eva Joly, a tax spokeswoman for the group of the Greens at the European Parliament.
She added that the legislation shows that EU governments “are not taking the problem seriously and that there is a huge gap between the political rhetoric following each tax scandal and the concrete actions of EU decision makers.”
Aurore Chardonne, an EU Policy Adviser for Oxfam International, U.K.-based relief and development organization, said that to end the era of tax havens and the tax race to the bottom, “we need straightforward and easy-to-implement rules that target companies’ subsidiaries in tax havens.”
“But finance ministers are making it impossible for tax administrations to implement such measures, known as [controlled foreign company] rules,” she added.
Still, European businesses have voiced concerns that the package of rules go beyond what was agreed at an international level and may put businesses in the continent at a disadvantage.
“Whilst we support the fight against tax fraud and evasion, we are concerned that by going well beyond global standards agreed at the OECD, finance ministers have taken an unnecessary risk with the EU’s global competitiveness,” said James Watson, chief economist at Businesseurope, which represents businesses federations across Europe.
The bloc has struggled for years to close tax loopholes because all EU countries must agree unanimously on tax matters.
But over the past two years, regulators in Brussels have found another way around that blockade—by using their powers to enforce the bloc’s state-aid rules that prohibit governments from providing aid to some companies and not others.
Those powers have allowed Brussels to open a series of high-profile investigations into alleged sweetheart tax deals for multinational companies, including Apple in Ireland and Amazon.com AMZN 0.12 % in Luxembourg.
In January, the EU’s competition chief said 35 multinationals, including brewer Anheuser-Busch InBev BUD 1.97 % NV, will be required to pay roughly €700 million in additional taxes in Belgium after European Union regulators ruled they had benefited from an illegal tax break.
Pressure on EU governments to crack down on financial secrecy and tax evasion has also mounted following revelations in April of how some clients of Panama City-based law firm Mossack Fonseca & Co. allegedly were able to dodge sanctions and avoid taxes.
In March finance ministers agreed to boost information sharing between their tax administrations on revenue, profit and taxes of large companies. And in May they agreed to set up a blacklist of tax havens, or noncooperative jurisdictions, which they will be able to sanction.
Most of the rules agreed Tuesday will come into effect in January 2019.
Write to Viktoria Dendrinou at [email protected]