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EU To Seal Multinationals’ Tax Loopholes

Due to the seemingly high corporate tax rates in the United States, a significant number of American multinational companies have been calculatedly shifting their bases to favorable European tax regimes to reduce their tax burdens. Fortunately for tax authorities, the situation is set to change after European Union finance minister unanimously agreed to facilitate automatic information exchange on cross-border tax rulings. With that in place, it’ll now be almost impossible for such evasive companies to continue enjoying tax exemptions. The European Union will now be able to pick up any irregular corporate tax activities and subsequently take the requisite actions.

Belgium, Holland, Ireland, and Luxembourg have for long, through legislations popularly known as tax rulings, provided a safe haven for companies seeking to cut down on the huge amounts paid to the US federal government. For long, such legislations have been largely considered lax, with tax authorities issuing comfort letters to individual companies, clarifying the systems used to calculate their respective corporate taxes. The tax rulings are especially employed in the confirmation of prices charged for transfer of transactions between different branches of the same company. .

While this new move is favorable to tax authorities, multinationals are already rushing to secure other alternatives they can legally use to reduce their tax bills. At the moment, Starbucks, Apple and Amazon, which are have strategically placed themselves in Netherlands, Ireland, and Luxembourg respectively, are already under investigation by the European Union Economic and Financial Affairs Council (ECOFIN) for their tax arrangements.

So, how will this move actually help tax authorities crack down on evasive corporations? Tax authorities are now getting the one thing they’ve needed all along- information. Lack of an information flow framework allowed companies to swindle their way into tax exemptions by strategically “basing” themselves in countries like Netherlands and Ireland.

With effectual information exchange infrastructures facilitated by the new agreement, this situation is just about to change. Tax authorities will, by 2017, not only rely on their internal databases, but also information submitted by cross-border authorities in tracking down multinationals capitalizing on the previously existing tax loopholes.

Fortunately for multinational companies, this new directive will not be implemented immediately. The European Union has granted its 28 member states a period of one year to induct the proposal into their national laws before its seamlessly implemented across the board. By the 1st of January 2017, all the countries should have effected the necessary measures to remove part of their country discretions on financial data, and subsequently share it with the rest of the member states.

Of course some of the affected multinational companies’ directors are already hoping for a complication somewhere along the pipeline- probably something along the lines of countries ultimately refusing to share their confidential financial details. Whatever the eventual outcome, nonetheless, companies at least got a one year amnesty period to get their houses in order before the tax authorities begin weeding out the rogue ones

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