A report by the European Court of Auditors (ECA) has identified vulnerabilities in the EU’s measures to combat systemic harmful tax practices. The audit, which included Cyprus, Ireland, Luxembourg, Malta, and the Netherlands, evaluated EU efforts to address corporate tax avoidance and safeguard fair competition across member states.

The report notes that aggressive tax planning by multinational companies exploits gaps and inconsistencies in national tax systems, amounting to corporate tax avoidance. Such practices ultimately shift the burden to other taxpayers.

According to the ECA, tax revenue losses from profit shifting in the EU are estimated to reach up to €100 billion annually. While the EU has established a first line of defense through directives and regulations, significant gaps in the tools available to the European Commission remain unaddressed.

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The audit focused on the period from 2019 to 2023, examining three key directives: Anti-Tax Avoidance Directive (ATAD), Directive on Administrative Cooperation (DAC 6), and Directive on Tax Dispute Resolution Mechanisms.

These measures aim to tackle harmful tax regimes and enhance corporate tax compliance. However, the report highlights that the directives are inconsistently implemented across member states due to varying interpretations and a lack of uniform monitoring frameworks.

The audit revealed that while EU measures have strengthened defenses against harmful tax regimes, they fail to fully close existing loopholes. A major challenge is that the EU’s authority in direct taxation is limited, leaving member states primarily responsible for tax policy.

ECA member Ildikó Gáll-Pelcz, who oversaw the report, emphasized that ensuring taxes are paid where profits are generated is challenging due to harmful tax regimes and corporate tax avoidance.

"The Commission must address existing gaps, develop clearer guidelines for member states, and implement a unified system to monitor performance," she stated.

The report recommends:

• Improved guidance to harmonize member states’ interpretations of EU tax directives.

• Faster implementation of a common monitoring system for tax performance.

• More stringent evaluations of cross-border tax arrangements under DAC 6.

While the EU’s legislation aligns with international standards, the Commission’s efforts to ensure uniform application across member states remain insufficient. Recent legal actions, including infringement procedures against Cyprus, Spain, Poland, and Portugal for failing to transpose the 2022 directive on a global minimum corporate tax, reflect ongoing enforcement challenges.

The ECA report also underscores the need for a comprehensive evaluation of the effectiveness of all three directives, which is currently delayed.