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Commission Recommendation on Aggressive Tax Planning

AUTHOR(S): Joe Duffy
PRACTICE AREA GROUP: Tax, Transfer Pricing
DATE: 07.12.2012

New Proposals: Unfair Tax Competition Between EU Member States

The European Commission’s action plan to combat tax evasion, published yesterday, was introduced by EU Taxation Policy Commissioner Algirdas Semeta following a request by Member States at the European Council in March 2012 for the Commission to “rapidly develop concrete ways to improve the fight against tax fraud and tax evasion”. Publication this month is particularly topical following the widely publicised debates in both Britain and France regarding the corporation tax paid by multinationals in those jurisdictions.

The action plan contains a comprehensive set of measures, which the Commission claims will help Member States “protect their tax bases and recapture billions of euro legitimately due”. As an initial step in implementing the action plan, the Commission has adopted two recommendations to encourage Member States to take “immediate and coordinated action” on specific pressing problems.

The first recommendation encourages Member States to place tax havens on national blacklists, and to persuade these countries to apply minimum standards of good governance. The second recommendation relates to aggressive tax planning. This recommendation encourages Member States to reinforce their Double Tax Agreements to prevent them from resulting in no taxation at all. Member States are also encouraged to adopt general anti-abuse rules into domestic legislation allowing tax authorities ignore any artificial arrangement carried out for tax avoidance purposes and instead impose tax on the basis of actual economic substance. Guidance is provided to help identify artificial arrangements.

The action plan will next be considered by EU finance ministers and the European Parliament. The Commission has also pledged to set up new monitoring tools and scoreboards, in order, it says, to maintain momentum in the fight against tax evasion and avoidance. In addition, a new Platform for Tax Good Governance will monitor and report on Member States’ application of the recommendations. The Commission will publish a report on the application of these recommendations within three years of their adoption.

What does this mean for Ireland?

Although it is difficult to predict what the proposals will mean in practice, the initial view from an Irish perspective should be that very little, if anything, is required. The Irish 12.5% corporation tax rate is already linked to genuine substance.  Irish based multinationals carrying out genuine economic activities, holding assets and bearing risk in Ireland, should not be prevented from declaring their profits in Ireland. Ireland has OECD standard transfer pricing legislation and the Irish Revenue Commissioners have recently announced new compliance measures on transfer pricing with the introduction of a transfer pricing compliance review process (“TPCR”)(see here).

Moreover, the Irish tax code has for more than 20 years included broad anti-avoidance provisions in respect of transactions with no commercial substance that are undertaken primarily to give rise to a tax advantage. 
In summary, Ireland has already implemented the proposed new measures and Ireland’s commitment to the 12.5% tax rate and FDI in general was firmly reiterated by the Irish government this week.

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