A Common Withholding Tax on dividend, interest and royalties in the European Union
Corporate tax avoidance is high on the policy agenda. Government tax revenues are reduced by a few hundred billion euros according to various estimates due to the avoidance strategies of multinational companies. Both the multinationals firms and the countries facilitating these tax planning strategies have been brought into the spotlight. Also, various EU Member States have been labelled as tax havens.
The multinational firms make use of differences in national tax systems, including differences in withholding taxes on dividend, interest and royalties on outgoing intra-firm income flows. This is called treaty shopping. The Parent-Subsidiary Directive (PSD) and the Interest and Royalty Directive (IRD) are used by multinationals firms to steer their income flows to the Member States with the lowest or zero withholding taxes. Both directives have been successfully implemented to facilitate cross border income flows within the internal market. However, the conditions of these directives are also used to reduce withholding tax payments on outgoing income flows from the EU.
The authors argue that these directives can be effective tools against corporate tax avoidance with common withholding taxes at the external borders of the EU. The analogy with the external borders and common import tariffs of the internal market seems clear. An internal market without import and export tariffs on cross border goods and services flows would not function properly if every Member State would levy its tariffs at the external borders. Therefore, the Member States agreed upon common external tariffs. However, this was neglected with the PSD and IRD. This can be corrected with common withholding taxes. Moreover, the proposed tax is strongly related to recent discussions on minimum taxation of corporate profits to curb tax avoidance and tax competition in the BEPS framework.
The revenues of common withholding taxes could be used by the European Union, as is also the case for the tax receipts on import tariffs. Recently, there has been an intense discussion on the financing of the new EU budget between 2021 to 2027 and the emergency fund to deal with the impact of the COVID-19 crisis. Own taxes by the European Union have also very recently been proposed in this context. Common withholding taxes on outgoing income flows could be a good candidate from this perspective.
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