EU Seeks to Force Firms to Pay Tax on Hybrid-Loan Payments

The European Union proposed rule changes that would force companies to pay taxes on cross-border hybrid loan payments, so that firms don’t use accounting loopholes to avoid taxation.

EU Tax Commissioner Algirdas Semeta said changes to the EU’s parent-subsidiary directive would make sure companies pay tax in at least one country on hybrid-loan payments. The EU also wants countries to adopt a “common anti-abuse rule” to discourage aggressive tax planning. Hybrid-loan arrangements are financial instruments that have both debt and equity characteristics and can be used to minimize or avoid taxes, the European Commission said.

The proposal has the potential to raise “in the magnitude of billions of euros” in revenues for EU nations, Semeta told reporters in Brussels today. When asked what it would mean for Google Inc., Amazon.com Inc. and Apple Inc., whose tax strategies have attracted international attention, Semeta said the plan would affect a range of companies.

“It’s a proposal which addresses the problem which exists not only among the big names, but also there are many other multinational companies which use such schemes in order to avoid taxes,” Semeta said.

The EU aims to have the new rules in place by December 2014, EU spokeswoman Emer Traynor said. The proposal requires unanimous agreement among nations to be enacted.

‘Fair Contribution’

European laws currently allow subsidiaries in some countries to take tax deductions on loan payments to their parent companies, and EU law lets parent companies avoid taxes on dividends that they receive from their subsidiaries. Today’s plan would require companies to pay taxes on an incoming payment if it has been deducted elsewhere as a debt repayment, the EU said.

“These businesses need to make their fair contribution to public finances,” Semeta said in a statement. “We can no longer afford freeloaders who reap huge profits in the EU without contributing to the public purse.”

Semeta also said he will travel to Australia this week to discuss that country’s upcoming presidency of the Group of 20 nations.

The Association of Chartered Certified Accountants is “broadly supportive” of the effort to discourage companies from exploiting exemptions, said Chas Roy-Chowdhury, the trade group’s head of taxation.

The new rules would clarify tax planning for companies and also allow countries to collect revenue where due, said Michael Izza, chief executive officer of the Institute of Chartered Accountants in England and Wales.

“There is a mismatch 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,” Izza said.

To contact the reporter on this story: Rebecca Christie in Brussels at rchristie4@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

Bloomberg reserves the right to edit or remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.