Regulators Extend Tax Probe to All European Union States: An Article Authored by Paul Oliveira, CPA from KLR - Accounting Firm Boston, Massachusetts, Providence, Rhode Island

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Regulators Extend Tax Probe to All European Union States

posted Mar 9, 2015 by Paul Oliveira, CPA

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European Union (EU) antitrust regulators have asked all 28 member countries for information on tax arrangements they made with multinational companies between 2010 and 2013.

The move broadens the regulators’ probe into corporate tax avoidance. While not illegal, tax avoidance has prompted authorities in recent years to take action to help ensure that multinational companies pay a fair share of their profits in taxes.

“We need a full picture of the tax rulings practices in the EU to identify if and where competition in the single market is being distorted through selective tax advantages,” EU Competition Commissioner Margrethe Vestager said in a statement.

For 18 months, the EU has been looking into tax arrangements granted by Luxembourg, Ireland, the Netherlands, Britain, Cyprus, Malta and Belgium. Some observers say the regulators want to avoid being accused of partiality by member states already being investigated.

It is not clear whether the Commission can extract information from countries without evidence of wrongdoing. Luxembourg has said such requests are fishing expeditions and incompatible with the rights of defense.

Luxembourg recently gave up its court challenge against the EU’s order that it hand over files related to its tax practices. It maintained the order was a “speculative request for information.” The country gave up the battle after thousands of pages of confidential documents on Luxembourg’s tax deals with multinationals were disclosed.

Specifically, the Commission is requesting a list of rulings, with the names of the companies that have benefited from them, the type of ruling, the date and the duration of the rulings.

Looking ahead

Potentially helping to fill out the tax picture, the Commission asked several countries to provide information on so-called patent boxes. Belgium, Cyprus, France, Hungary, Luxembourg, Malta, the Netherlands, Portugal, Spain and the United Kingdom are being asked to provide data on tax breaks that are linked to patents.

The U.K. has already said it plans to end its existing patent box scheme. It has proposed closing the existing scheme as of June 2016 to businesses that have not used the patent box. Companies already using the scheme are likely to be able to continue using it until June 2021, when it is expected to be abolished.

Observers say they expect a new scheme will be set up to allow a reduced-base tax rate closer to 15 percent — up from the current 10 percent. That would bring the U.K. into harmony with intellectual property tax breaks elsewhere in Europe.

The new scheme is also likely to require that the research and development (R&D) that leads to a new patent be conducted in the U.K. This would follow the “modified Nexus” approach, proposed by the Organisation for Economic Co-operation and Development (OECD) Forum.  It would provide tax relief in the same location as R&D expenditures to develop new intellectual property.