The European Commission took an important step to combat tax evasion among multinational companies. These big tech companies create the biggest tax problems: Apple, Google and Microsoft. But many other companies are also finding tax shelters within current the tax law, La Directiva sobre Compañias Matrices y Subsidiarias.
These companies are claiming that most of their earnings originate in Ireland, where tax rates are very low, and that their losses originate in countries like Spain, Germany and France where they actually do most of their business. The strategy puts local companies at a disadvantage, and EU leaders have been condemning it since the start of last summer.
It looks like the complaints have had an effect, and the President of the European Commission, José Manuel Durao Barroso, has listened with a kind of diligence that is uncommon within EU inner circles. Experts estimate that over a billion euros in tax revenues are lost each year due to tax evasion and tax fraud.
To put an end to multinational tax engineering strategies, which tax advantage of tax laws even though they don't break them, the first step is to create a communal law across Europe. This can be done by making two changes to the law.
First, companies would be required to pay taxes in countries where particular areas of business are conducted. Second, deductions for hybrid loans held among subsidiaries would be outlawed. Fighting these complex tax evasion strategies will be a challenge, but EU nations should feel obligated to make companies pay taxes fairly. This time the EU has made a great move.