#Tax: MEPs close tax loopholes that abuse different treatment of tax in third countries - so-called 'hybrid mismatches'

Economic and Monetary Affairs Committee MEPs have voted to close loopholes which allow some of the world’s largest corporations to avoid paying tax on profits by exploiting differences in the tax systems of EU and third countries.

They backed a resolution recommending changes to the EU’s anti-tax avoidance directive by 44 votes to 0 with 2 abstentions. These amendments relate to the different tax rules in third countries which give rise to loopholes — “hybrid mismatches” — and allow firms to escape tax in both jurisdictions.

“These arrangements are frequently used by the largest companies with the sole purpose of reducing corporate taxation. We have seen it in both the Apple case and in the McDonald’s case . It is about time that these corporations pay their fair share of taxes,” said rapporteur Olle Ludvigsson (S&D, SE).

These mismatches, for example, allow corporations established in two jurisdictions (inside and outside the EU) to use the lack of coordination between national tax systems either to have the same expenditure deducted in both jurisdictions (so the firm enjoys a double tax deduction), or to have a payment recognised as tax deductible in one jurisdiction but not recognised as taxable income in the other.

Hybrid mismatches can also take place within one state, as demonstrated in the recent decision on SDF Suez (now Engie).

Margrethe Vestager, Commissioner in charge of competition policy, said at the time that: "financial transactions can be taxed differently depending on the type of transaction, equity or debt - but a single company cannot have the best of two worlds for one and the same transaction.”

It is probable that the Commission will rule on similar cases in countries that allowed similar arrangements

The Parliament is only consulted on tax issues, so cannot stop the proposal in its current form. The report now goes to the Council for its consideration.

Background

A ‘hybrid mismatch’ is a situation where a cross-border activity is treated differently for tax purposes by the countries involved, resulting in favourable tax treatment. Hybrid mismatches are used as aggressive tax planning structures, which in turn trigger policy reactions to neutralise their tax effects. When adopting the Anti-Tax Avoidance Directive in July 2016, the Council requested that the Commission put forward a proposal on hybrid mismatches involving third countries. The amendment proposed by the Commission on 25 October broadens the provisions of the directive accordingly. It seeks to neutralise mismatches by obliging Member States to deny the deduction of payments by taxpayers or by requiring taxpayers to include a payment or a profit in their taxable income.

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