An Analysis of Tax Coordination in the European Union for the Prevention of Tax Avoidance

Abstract

The strategic goal of the European Union is creating a level-playing field for businesses and individuals within the Union. One of the key elements to achieve this goal is to maintain the Internal Market with free movement of goods, capital, services and labor within the Union. This is conductive to increase competition, specialization and allowing businesses to establish their production across EU memberstates.
This paper investigates the current company taxation of Controlled Foreign Companies (CFC). EU have recently adopted the anti-tax avoidance directive (ATAD), which aim to counter international tax avoidance. The directive creates a minimum level of protection against profit shifting to a low- or no tax country. This paper investigates the interpretation and application of the substance exemption in the directive’s article 7, based on EU case law.
We have found that the interpretation of the substance exemption have been refined to include artificial arrangements without any economic or commercial justification. In addition, the European Court of Justice has in recent cases provided additional guidelines to what constitutes an artificial arrangement.
This paper furthermore investigates whether the current company taxation in the Internal Market create inefficiencies and prevents businesses from exploiting its full benefits. We have found that the most efficient allocation of resources are achieved when companies specialize their production by comparative advantages.
However, the corporate tax rate is decided by each Member State and creates room for companies to reduce their tax burden by tax planning. We have found that companies, in some cases, have incentive to lower their tax burden by establishing their production in low tax countries. In addition, we have found that the divergent tax rates, in some cases, can distort the competition in the Internal Market.