EU Commission Starts Fight Against ‘Letter-Box’ Companies

The European Commission (EC) has unveiled proposals that aim to close a loophole that allows companies to cut their tax bill using subsidiaries in other EU member states.

The EC wants rules to prevent companies setting up what are referred to as "letter-box subsidiaries" in countries solely to qualify for a softer tax regime and cut their bill.

Algirdas Šemeta, the EU's taxation commissioner, wants to insert an anti-abuse clause by the end of next year, allowing authorities to target artificial 'parent-subsidiary' schemes that flout the spirit of the tax code. "When our rules are abused to avoid paying any tax at all, then we need to adjust them," he said. "Today's proposal will ensure that the spirit, as well as the letter, of our law is respected."

Šemeta declined to name countries or companies that exploited the loophole but said that billions of euros were at stake. Speaking anonymously, an EU official said that the drive would in particular hit Luxembourg and the Netherlands.

Schemes used by Starbucks, Apple, Amazon and others, operating within the law to minimise taxes, put aggressive tax "planning" at the top of the political agenda earlier this year.

But progress in tackling the problem is likely to be slow. Europe is torn between the demands of small countries, such as Luxembourg and Ireland, fiercely resisting change to their low-tax regimes which attract foreign investment, and states such as Britain and Germany, wary of driving away big employers. Taken at face value, the global political direction towards tax reform is clear. But Šemeta’s limited success so far points to the difficulties ahead.

His suggestion for a 'Common Consolidated Corporate Tax Base' –including a standard way to calculate tax breaks – made scant progress, with countries such as Ireland, worried it would lead to a single EU tax rate. Šemeta also wants tighter control of so-called hybrid financing, where companies take advantage of varying definitions of loans versus equity stakes between countries to cut their tax bill.