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EU plans to tighten corporate tax loopholes

Algirdas Šemeta, EU commissioner for taxation
Petras Malukas | AFP | Getty Images
Algirdas Šemeta, EU commissioner for taxation

The European Union (EU) plans to close a loophole that allows companies to slash their tax bills by setting up offices in softer tax regimes, amid rising anger over the practices of multinationals such as Google, Amazon and Starbucks.

The proposals by the European Commission, the EU's executive arm, aim to boost tax revenues for countries hit with austerity measures and cut the one trillion euros ($1.3 trillion) the 28-nation bloc estimates it loses every year to tax evasion.

EU officials are seeking to tighten up the so-called Parent-Subsidiary Directive, which was originally introduced to prevent a company based in two member states from being taxed twice on the same income.

But corporations have flouted the rules, setting up "letterbox subsidiaries" with low tax rates in countries such as Ireland and the Netherlands.

(Read more: OECD lists the least tax transparent nations)

Cracking down on tax avoidance has been top of the political agenda across the world. At a summit meeting in May, EU leaders pledged to tackle tax evasion, after reports suggested major companies paid little tax on their earnings.

Executives from Starbucks, Google and Amazon were grilled by members of parliament in the UK last year while Apple came under fire from U.S. Congress over tax avoidance claims.

"When our rules are abused to avoid paying any tax at all, then we need to adjust them. Today's proposal will ensure that the spirit, as well as the letter, of our law is respected. As such, it will ensure greater revenues for national budgets and fairer competition for our businesses," Algirdas Šemeta, commissioner for taxation said in a press release.

The EU also wants countries to adopt an "anti-abuse rule" allowing authorities to target companies setting up parent-subsidiaries.

EU governments now need to approve the plan, but progress could be hampered by Austria and Luxembourg. Earlier this month, the two countries warned they would block new rules to make banks more transparent and fight tax evasion, unless five tax havens including Monaco and Switzerland agreed to similar measures.

—By CNBC's Arjun Kharpal: Follow him on Twitter @ArjunKharpal

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