June 20, 2014 / 1:11 PM / 5 years ago

UPDATE 1-EU closes tax loophole for multinational firms

(Adds German and French ministers, Switzerland talks)

By Annika Breidthardt and Ingrid Melander

LUXEMBOURG, June 20 (Reuters) - The European Union on Friday moved to close a loophole that has allowed multinational companies to reduce their tax bills by exploiting differences in national tax rules, ending months of negotiations and potentially boosting EU states’ tax revenues.

Corporate tax avoidance has become a hot issue in industrialised nations. Campaigners have drawn support from public anger at companies avoiding taxes at a time of austerity.

“The aim is to close a loophole that currently allows corporate groups to exploit mismatches between national tax rules so as to avoid paying taxes on some types of profits distributed within the group,” finance ministers said in a statement.

The change in the so-called parent-subsidiary directive addresses “hybrid loan arrangements”, a combination of equity and debt often used as a tax-planning tool.

Some member states classify profits from such tools as a tax-deductible debt; others do not. That has prompted some multinational companies to open subsidiaries in other member states so they pay little or no tax.

“Using an (EU) directive that was based on common sense - avoid double-taxation - a few cunning devils had managed to pay no tax at all,” French Finance Minister Michel Sapin said, welcoming the move. “That will mean a bit more money in state coffers, which as you know we’re quite keen on.”

All EU tax law requires unanimity among member states, and getting all states on board has been an uphill struggle. Europe has been torn between the demands of small countries fiercely resisting change to low-tax regimes that attract foreign investment, and others wary of driving away big employers.

Earlier this month, the European Commission increased pressure on Ireland, the Netherlands and Luxembourg over their corporate tax practices, saying it would investigate deals they cut with Apple, Starbucks and Fiat.

Member states will have until the end of 2015 to turn the change into national law.

German Finance Minister Wolfgang Schaeuble said the EU should go even further and tackle what he said was the growing abuse of patent boxes — countries adopting lower taxation for companies to commercialise their patents and R&D.

Governments which offer them say they encourage innovation and high-value jobs in research and development. Critics see the scheme as government-sanctioned tax avoidance.

“We have to decisively move forward on this in Europe or we will not live up to our own expectations,” he told reporters.

In another move towards more cooperation on tax issues, the Swiss government reaffirmed on Friday its willingness to abolish some corporate tax regimes, such as the different treatment of domestic and foreign revenues. Disagreements over corporate taxation have strained relations between the EU and Switzerland for almost a decade.

“In return, the EU member states confirm their intention to lift corresponding countermeasures as soon as the regimes in question have been abolished,” it said. (Additional reporting by Ingrid Melander in Luxembourg and Katharina Bart in Zurich; Editing by Larry King)

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