Tackling tax avoidance: Reforming capital income taxation in the EU

Fostering welfare requires just and efficient taxation. Unfortunately, the target has been undermined by tax avoidance and tax evasion related to international investment. The good news is that the past decade has seen a major turn in tackling tax base erosion and harmful tax competition. While major international reforms have made corporate tax avoidance more difficult, they have not yet addressed the problems of capital income taxation. This study describes the current state of capital income tax avoidance in the EU and presents policy proposals to solve the current problems. The analysis is based on earlier research and distinctive case studies that examine tax regimes in 15 selected European countries. Several countries have very low tax rates on capital income, which taxpayers in other countries can benefit from by avoiding the higher rates that would be applicable in their country of residence. The case studies also highlight good tax practices, such as exit tax rules, to protect tax bases. The study presents five essential recommendations that would tackle tax base erosion addressed in the study. The EU should essentially adopt a directive establishing a minimum capital income tax rate and extend the scope of its anti-tax avoidance directive to capital income.