In a bid to fight tax avoidance by international business behemoths like Amazon and Apple, the European Commission is proposing mandatory rules to make companies pay taxes to all the countries in which they generate profit.
The Commission on Wednesday unveiled plans to overhaul the European Union's outdated tax system, proposing that a link between taxation and the places where companies actually do business needs to be established, said Valdis Dombrovskis, Commission vice president responsible for economic and financial affairs.
International companies have been striking favorable tax deals with low-tax countries like Ireland and Luxembourg. The deals allow them to funnel profit through subsidiaries established there and avoid paying most corporate taxes in the EU.
To make sure that companies are taxed for all the profit they generate, the Commission wants to introduce a Common Consolidated Corporate Tax Base (CCCTB), said Dombrovskis. Since companies engaged in aggressive tax planning are unlikely to opt in to a voluntary system, the Commission proposes to make the system compulsory.
The CCCTB is a cornerstone of the Commission's new approach, but how exactly the system would work still needs to be determined, Dombrovskis said. The system, however, will build on a 2011 Commission plan that never became law.
The plan called for companies to consolidate profit and loss across the EU. Businesses would have to comply with one set of rules for computing tax instead of dealing with different regimes for every country. Companies active in more than one EU country would also only have to file a single tax return for all their EU activity.
EU countries in which a company is active would be entitled to a portion of its unified tax return. Determining how a company's tax payment would be divided, however, is a problem that still needs to be solved, said Dombrovskis.
The Commission already started an in-depth investigation into favorable and probably illegal tax deals struck by Apple in Ireland and Amazon in Luxembourg. The deals allegedly allowed the tech giants to gain an unfair economic advantage over other companies by paying less taxes.
Amazon on May 1 started booking retail revenue in several EU countries, but the Commission said Tuesday that it would continue its probe into the company's deal with Luxembourg.
The Commission, which in March proposed an "automatic" exchange of tax information among EU countries, is set to reveal detailed tax plans on June 17.
Loek is Amsterdam Correspondent and covers online privacy, intellectual property, online payment issues as well as EU technology policy and regulation for the IDG News Service. Follow him on Twitter at @loekessers or email tips and comments to email@example.com