The EU and OECD have jointly developed rules to prevent companies from exploiting differences in national legislation for financial gain. According to a new thesis at Uppsala University, however, companies are able to circumvent the rules.
"The losers are mainly developing countries that are not members of the EU or OECD. Although the rules are well intended, they have some technical limitations that make them relatively easy to circumvent. In addition, they have been designed in a way that hands taxation rights primarily to EU Member States," explains Autilia Arfwidsson, doctoral student in Law with a specialisation in fiscal law at Uppsala University.
Differences in national legislations are sometimes used by multinational companies to avoid taxation, something known as hybrid mismatches. The EU and the OECD have recently introduced common rules to tackle this type of tax evasion. Other objectives of the rules are to ensure legal certainty and administrability.
"This is so tax authorities can apply the rules in practice and because companies doing the right thing still have to comply with these rules. Such as the rules are currently designed, however, these objectives are only being met to a very minor extent," says Arfwidsson.
In her research, she has examined the effect of these rules as they interact with other parts of EU law and tax treaty law. The method of the study is mainly governed by legal dogmatics, which in short entails interpreting and systematising the legal materials. The study analyses how hybrid mismatches are handled in different areas of EU law and tax treaty law. It then evaluates the current rules in light of their underlying objectives.
Arfwidsson says that the introduction of the rules is groundbreaking and a first for many countries' tax systems, but there are still loopholes that companies can exploit.
"I question the raison d'être of these rules based on the objectives they are supposed to achieve. This is partly because they can be circumvented and are very difficult to apply, and partly because there are other possible solutions that could address the problem more effectively. They should be reviewed afresh," notes Arfwidsson.
A further problem is that the complexity of the rules risks leading to double taxation. In order for the rules to be effective and feasible from the perspective of legal certainty, they need to be reviewed, says Arfwidsson.
"The rules increase costs for businesses and take resources away from the tax authorities. If we are to keep the rules, it is important that the existing loopholes are removed and simplified. There is also a need to increase the exchange of information on how international payments are taxed in different countries so that tax avoidance situations are actually detected. Otherwise, the rules risk creating more problems than they solve."
Arfwidsson, Autilia, Hybrid Mismatches in International Transactions: A Study of Linking Rules in EU and Tax Treaty Law (2024), https://uu.diva-portal.org/smash/record.jsf?pid=diva2%3A1824686&dswid=-5406
