The changes will close loopholes in the Parent-Subsidiary Directive, which some companies have been using to escape taxation.
In particular, companies will no longer be able to exploit differences in the way intra-group payments are taxed across the EU to avoid paying any tax at all.
Algirdas Šemeta, commissioner for taxation said, "EU tax policy is heavily focussed on creating a better environment for businesses in the EU. This means breaking down tax barriers and tackling cross-border problems such as double taxation. But when our rules are abused to avoid paying any tax at all, then we need to adjust them.
"Today's proposal will ensure that the spirit, as well as the letter, of our law is respected. As such, it will ensure greater revenues for national budgets and fairer competition for our businesses."
The Parent-Subsidiary Directive was originally introduced to prevent same-group companies, based in different member states, from being taxed twice on the same income. However, the EC said certain companies have “exploited provisions in the directive and mismatches between national tax rules to avoid being taxed in any member state at all”.
The changes proposed update the anti-abuse provision in the Parent Subsidiary Directive, and obliges member states to adopt a common anti-abuse rule. They will also mean that the directive is tightened up so that hybrid loan arrangements cannot benefit from tax exemptions.
Michael Izza, ICAEW chief executive, said, “Tax avoidance has been one of the hottest topics on the political agenda in 2013. There is immense political momentum behind the drive to improve the international tax system so that it benefits both business and society, with both the G8 and the G20 signing up to tackle the areas of tax law that have not kept up with the evolving nature of modern business.
“The international tax system cannot be improved overnight. It can also not be fixed by making changes in only one part of the world as corporations of the 21st Century are global and mobile. It requires international collaboration at the highest level. Businesses and governments must work together to find a solution that works and is fair for all, and we are supportive of the project led by the OECD.
“With the EU’s Parent Subsidiary Directive there is a mis-match between what the Directive was set up to achieve, namely preventing companies from incurring extra costs from operating in more than one EU Member State by paying double-taxation, and what it has resulted in; some companies escaping taxes altogether. Making changes to ensure the Directive works in the way intended will help clarify the rules for companies and also help governments collect the taxes they are due.”
Izza concluded, “The proposals demonstrate the EC’s clear intention to play an active part in the worldwide efforts by governments, businesses and other stakeholders to make improvements to tax systems.”
Member States are expected to implement the amended directive by 31 December 2014.