Commission Introduces Guidelines for Tax Competition and Letterbox Companies –

Commission Introduces Guidelines for Tax Competition and Letterbox Companies -

Two-and-a-half months after 137 countries ratified the minimum tax for companies as part of the OECD mediator agreement, the EU Commission has issued guidelines for the implementation of the minimum tax in the EU.

Linked to this is a guideline aimed at making letterbox companies’ tax evasion more difficult.

“The latest investigations, such as the Openlux or Pandora papers, are just another reminder of the injustices of our economy today,” said Commissioner Paulo Gentiloni on Wednesday (December 22).

Mailbox companies usually hide the money and other assets that these investigation reports reveal. It enables wealthy individuals and companies to transfer their assets to countries with favorable regulation and taxation without engaging in financial activity or physical presence.

Definition of letter box companies

Whether the EU classifies a company as a letterbox company is determined by three criteria: the company’s revenue, cross-border transactions, and corporate governance.

If more than 75% of the proceeds include passive income such as dividends or interest, and a large portion of the transaction is cross-border and outsourced by the company’s management, the company should undergo a material inspection.

If the company fails the tax authorities’ inspection of its financial property, it is considered a “mailbox” and does not receive a certificate of residency. As a result, the company cannot be used for tax evasion.

In addition, the Draft proposal If member states believe they are a letterbox company, they may ask other states to investigate.

“I think this is a strict system commensurate with the administrative burden,” a senior commission official argued.

When the proposed proposal affects letterbox companies in the EU, the definition of the proposal will serve as the basis for future Commission action on tax systems outside the EU.

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There has long been a call for the letterhead box companies’ financial material standards to be included in the list of non-cooperative tax regions and the EU blacklist of tax havens.

136 countries agree to an international tax reform

More than 100 countries on Friday agreed to reform the international tax system. The agreement is aimed at adapting the tax system to the digital age and avoiding corporate tax evasion.

Two mechanisms for enforcing the minimum tax

The global surge in corporate tax rates will end with the lowest tax for companies. In October 2021, 137 countries agreed to impose a 15 percent lower tax on large companies.

The EU Commission on Monday (December 20) issued guidelines for the implementation of the agreement in accordance with the OECD Model Rules.

The proposal contains two basic mechanisms for including EU-based companies, but also includes companies headquartered outside the EU.

If a company’s head office is located in an EU member state and one or more of its subsidiaries pay less than 15 percent of the tax, the Company’s Tax Authority can unilaterally increase taxes to ensure that the company has a total effective tax. 15 percent rate.

If the company’s headquarters are outside the EU, the tax authorities in that country will allow member states to levy additional taxes on the EU affiliates of these companies, unless the minimum tax rate of 15 percent is applicable.

This would make it unattractive for federal states to offer tax rates below 15 percent, thereby restricting tax competition between federal states.

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Uncertainty results

The Commission did not provide an estimate of the additional tax revenue of the EU member states, as no estimate is currently in place.

EU Tax Observatory Congratulations However, in a report for October 2021, the additional annual tax revenue was .5 71.5 billion. In the same report, the authors conclude that the minimum tax would increase corporate tax revenue by 19 percent in developed countries but only by two percent in developing countries.

Critics of the tax treaty fear that a lower tax rate of 15 percent could lead to higher tax rates for countries with lower tax rates.

“While this proposal will put an end to the aggressive competition for corporate tax cuts, it will deploy tax rates and keep them at a relatively low 15 per cent,” said Sol Picoto, a Lancaster University professor and senior director adviser at the Tax Justice Network. .

For example, earlier this month, Spain reduced corporate tax rates on some startups from 25 percent to 15 percent.

However, the Commission should also heed the critics on the other side of the debate. The governments of Estonia, Hungary and Ireland have been reluctant to ratify the OECD tax treaty, which could influence negotiations as it requires the consent of the governments of all member states to accept the proposal.

The Commission hopes that the proposal will be discussed soon between the governments of the member states and the European Union Parliament.

“By moving forward with this proposal very quickly, we are paving the way for a preliminary discussion between the finance ministers in January to reach an agreement quickly under the French presidency. This is in line with the globally accepted 2023 deadline for the rules to take effect, ”Gentiloni said.

[Bearbeitet von Alice Taylor]

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