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Balázs Károlyi: Tackling tax avoidance within the EU

The aim of the dissemination event was to hold a presentation about the right and obligation of the Member States to fight against tax avoidance strategies of corporate taxpayers. Such a right (or obligation) forms a fundamental part of the tax sovereignty of the Member States and therefore, it was examined within the framework of the Economic Governance research project. The presentation was organized under the auspices of the University of Debrecen at the Faculty of Economics and the target audience consisted of the bachelor and master students of the university, studying business administration or leadership. However, the participation was open to all the interested people free of charge. Eventually, 13 participants attended the dissemination seminar.

The participants could get an insight of the interdependent yet different topics of tax avoidance, national sovereignty and tax competition. In the era when global tax coordination is more enhanced than ever, these issues strongly influence the discussions in the field of tax policies. Therefore, addressing these topics has lots of practical relevance that Member States, international organizations, in particular the European Union must encounter when devising their tax agenda.

A commonly accepted definition of tax avoidance is that it amounts to an action of the taxpayer when it engages in arrangements that come with a tax benefit and such arrangements comply with the literal wording of the applicable tax provisions, nevertheless, they contradict the spirit and objective of the relevant tax law.

Originally, the fight against tax avoidance was not explicitly required by EU law, however, the Court of Justice of the European Union (CJEU) acknowledged the right of the Member States to take measures against avoidance practices of the taxpayers. Even if these anti-avoidance measures brought about a restriction on the fundamental freedoms of the taxpayers, they amounted to an overriding public interest and could be justified upon the condition that the measures were proportionate (suitable and necessary) to the aim.

In later developments of the case law of the CJEU, the fight against tax avoidance became a specific reflection of the general principle of EU law, namely the prohibition of abuse of law. It resulted that Member States were not only entitled but also obliged to tackle tax avoidance in situations that were covered by EU law.

Further changes occurred with the adoption of the Anti-Tax Avoidance Directive (ATAD) and its amendment that prescribe the obligation for the Member States to tackle tax avoidance in the field of corporate taxation, irrespective of whether the abusive situation arises in an EU law or a purely domestic setting.

The ATAD, which was born in the midst of a heated environment after the LuxLeaks scandal and the comprehensive work carried out at international level under the OECD BEPS Project, contains one general anti-avoidance rule (GAAR) and four specific anti-abuse (SAAR) rules.

  1. A general anti-abuse rule is meant to cover the gaps that may exist in between the Member States special anti-abuse rules and it prescribes to disregard transactions that defeat the object and purpose of the applicable tax measure and whose main purpose or one of the main purposes was to obtain a tax advantage.
  2. It also introduces uniform de minimis interest limitation rules to prevent multinationals from artificially shifting their debt to a jurisdiction with more generous deductibility rules;
  3. Exit taxation is also enshrinedto ensure that where a taxpayer moves its assets or its tax residence out of the tax jurisdiction of a Member State, this Member State can tax the economic value of any capital gains created in its territory even though that gain has not yet been realized at the time of the exit;
  4. CFC rules apply to prevent the shifting of large amounts of profits towards controlled subsidiaries in low-tax jurisdictions;
  5. Rules were also introduced on hybrid mismatches to prevent corporate taxpayers from taking advantage of disparities between national tax systems in order to reduce their overall tax liability.

In conclusion, it was stated that tackling tax avoidance became a general obligation of the Member States in the field of corporate taxation. The fact that the ATAD was adopted in record short time signals that the harmonized anti-avoidance measures was in the interest of all the Member States and their diverging views were reflected in the phrasing of the ATAD provisions as they include plenty of options and safe harbor rules that Member States can chose to adopt so that it maintains flexibility.

The issue of tackling tax avoidance displays an interesting interplay with the issue of tax coordination and harmonization. The Member States realized that tackling tax avoidance of multinationals can be realized only with international coordination and harmonized their anti-avoidance measures at EU level. However, the substantive tax rules of the Member States remained untouched and the diverging rules kept tax avoidance opportunities alive. Such a phenomenon pushed the Member States towards further harmonization that was not merely about anti-avoidance. Consequently, agreement on the global minimum tax has been reached that addresses the issue of tax competition rather than tax avoidance because its rules are applicable irrespective of whether the low taxation is caused by tax avoidance or other genuine reasons. Thus, the fight against tax avoidance can evolve into measures restraining tax competition and can urge substantive harmonization. Indeed, converging substantive tax rules would be a key to the creation of a non-distortive international tax system, however, it would undermine the tax sovereignty of the Member States in this field.

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