Multinational companies have long been in the sights of European Union authorities because of the way they can legally reduce their bills by basing themselves in low-tax centers. The EU is already investigating the tax arrangements of Amazon and Fiat in Luxembourg, Apple in Ireland and Starbucks in the Netherlands and may start new investigations. Today's agreement will facilitate this effort.
The decision taken today by the EU Economic and Financial Affairs Council (ECOFIN) will enable EU member states in 2017 to have the information they need to protect their tax bases and effectively target companies that try to escape paying their fair share of taxes.
Read MoreTrouble brews for Starbucks, Apple as Europe takes aim at taxes
But to do this effectively, the 28 EU member states will have to transpose the new European rules into national law before the end of 2016 so it will come into effect on Jan. 1, 2017. When it does, the new EU directive for the automatic exchange of information on cross-border tax rulings will remove European countries' discretion to decide on what information is shared, and when and with whom. These developments are likely to bring into focus U.S. companies that have used the favorable tax rules in the recent past to pay minimum taxes.
"The automatic exchange of information on tax rulings will provide national authorities with insight on aggressive tax planning. It marks a leap forward in our efforts to advance on tax coordination and tax harmonization. The current system of corporate tax rules is unjust and unfit for purpose. There is a plethora of national rules that allows some companies to win while others lose out. This unfair competition is anathema to the principles of fair competition within our internal market," said Jean-Claude Juncker, president of the European Commission and former prime minister of Luxembourg. Juncker has been criticized for the tax model of the Grand Duchy.
For multinationals, there is a positive wrinkle in the new tax proposal. The EU finance ministers decided to reduce the retroactive application on existing cross-border tax rulings cases from 10 to five years. As a consequence of this movement, possible tax claims by the member states will be reduced considerably.
European Parliament is vehemently opposed to this. Alain Lamassoure, European Parliament's Tax Rulings Committee chairman, has already called the proposal to limit retroactive application to five years "absurd."
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