EU tax avoidance standards are inadequate and need reform, finds EconPol study

A report by EconPol Europe has found that the measures included in the recently legislated Anti-Tax Avoidance Package (ATAP), which aim to reduce profit shifting activities by multinational enterprises (MNEs), are not likely to solve the perceived problems at reasonable costs and that a reform of the key principles of the international tax systems is required.

The EU’s ATAP was first published in January 2016 and includes the Anti-Tax Avoidance Directive, Country by Country Reporting, Recommendation on Tax Treaties, External Strategy, and Study on Aggressive Tax Planning. While the ATAP measures address several means of profit shifting, e.g. debt shifting, artificial arrangements, removal of valuable assets and treaty abuse, it does so by introducing an extreme amount of complex new legislation.

The authors of the report* found that while elements of the ATAP are likely to raise the minimum standards of anti-tax avoidance measures in Europe, they do not mitigate the incentives inherent in the current disjointed international tax systems. Due to the continuing disparities, common issues, including mispricing of commodities of international companies within the same group, corporate debt-shifting, and locating intangible assets and company headquarters in low-tax countries, are likely to remain widespread.

Further, compliance costs are likely to increase due to the introduced measures as are costs from distorted economic behaviour. Thus the balance between benefits and costs will not be satisfactory. Admittedly, the evidence concerning the cost side is still incomplete due to scarce data but this should be no reason for neglecting the worry.  An influx of complex new legislation with differences between countries inevitably leads to increased costs and economic losses.

The report’s authors examine several alternatives, including withholding tax on intra-group interest and royalties, a common consolidated corporate tax base in the EU, and destination-based cash flow tax. While none of these alternatives is unproblematic, it is evident that in order to identify a truly viable approach to tax avoidance and other problems of the current approach a complete overhaul of the international tax system is necessary, they conclude.

See the full report:

Dissecting the EU's Recent Anti-Tax Avoidance Measures: Merits and Problems. EconPol Policy Reports 8/2018, September 2018

*Richard Collier, Martin Simmler (Center for Business Taxation, Said Business School, Oxford University), Seppo Kari, Olli Ropponen (VATT Institute for Economic Research, Helsinki), and Maximillian Todtenhaupt (ZEW, Centre of European economic research, Mannheim).

About EconPol

EconPol Europe was founded by the ifo Institute in spring 2017. Funded by the German Federal Ministry of Finance (BMF), the network is a collaboration of policy-oriented university and non-university research institutes, each of which contributes scientific expertise to the discussion of the future design of the European Union. The founding members are ifo Institute – Leibniz Institute for Economic Research at the University of Munich e. V. (Munich), Centre for European Policy Studies (Brussels). Centre d’Études Prospectives et d’Informations Internationales (Paris), Institute for Advanced Studies (Vienna), Toulouse School of Economics (Toulouse), University of Oxford (Centre for Business Taxation) (Oxford), Università di Trento (Department of Economics and Management) (Trento), VATT Institute for Economic Research (Helsinki) and Centre for European Economic Research (Mannheim).

With its cross-border cooperation on fiscal and economic issues, EconPol Europe aims at promoting growth, prosperity and social cohesion in Europe and, in particular, at providing research based contributions to the successful development of the European Economic and Monetary Union (EMU).