Taxing vocabulary: a glossary of fiscal terms

Paying taxes can be complicated, but so can the vocabulary that goes with it. Tax avoidance is legal, but tax evasion isn’t and just what exactly is base erosion? As the Parliament’s second special committee is having its final recommendations debated and voted on during this week’s plenary, we take a closer look at the jargon. Read on for an explanation of the terms used and follow the debate live on Tuesday 5 July from 16.00 CET.

Base erosion and profit shifting

Tax planning strategies that exploit loopholes in the international tax system to artificially shift profits to places where there is little or no economic activity or taxation, resulting in little or no overall corporate tax being paid.

Beneficial owner

The ultimate beneficial owner of a company or other legal entity, which can be hidden behind a string of shell companies. This can mean a lack of transparency as it is not clear who is earning profits or dictating the company’s moves.

In the fight against money laundering and terrorism, Parliament has already managed to get EU countries to create central registers with information on the beneficial owners of companies.  These registers are open to authorities and to people with legitimate interest, such as journalists. Member states have until 26 June 2017 to implement it.

The second tax rulings committee also asks EU countries to put in place public registers of beneficial owners.

Common consolidated corporate tax base

A common set of rules that companies operating in the EU could use to calculate their taxable profits instead of having to follow different rules for each EU country they are located in. They would also be able to consolidate all their profits and losses across the EU. However, national governments would maintain the right to set their own corporate tax rate.

This was first proposed by the European Commission in 2011 and the second updated proposal is due to be published this year.

Patent box regime

A special tax regime for intellectual property rights. In order to boost innovation and attract tech companies some European countries offer tax exemption for income from patents. This means that products such as patents or sales of intellectual property licences qualify for a lower tax rate. Some companies have been accused of incorporating irrelevant patents in their products in order to qualify for the patent box regime and pay lower taxes.

According to the second tax rulings committee, the link between patent box regime and research and development can be artificial as companies use the offered exemption for aggressive tax planning. In its draft report, the committee calls on the Commission to ban the misuse of patent boxes and produce new legislation to regulate it.

Tax avoidance

Using legal instruments in order to pay the lowest amount of tax possible. It is different from tax evasion, which consists of illegal and deliberate acts to pay less in taxes or even no taxes at all.

Tax havens

Countries or jurisdictions allowing foreign companies and individuals who simply register there to pay little or no taxes. Tax havens also guarantee not to divulge the identity of their “customers”.

The second tax rulings committee calls on the Commission to come up with a common EU definition and a list of “uncooperative jurisdictions” as soon as possible.

Tax ruling

A written statement issued by a tax authority, setting out in advance how a corporation’s tax will be calculated and which tax provisions will be used. They are legal but could, under EU rules, involve state aid and thus be subject to scrutiny from the European Commission. Tax rulings have sometimes been criticised when multinationals are found to pay less in taxes than ordinary tax payers.

Watch the debate on the recommendations by the second tax rulings committee live on Tuesday 5 July from 16.00. The vote takes place on Wednesday 6 July at 12.30 CET.