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In the Pipeline: EU Initiatives on Tax Avoidance and Their Wider Implications

 6 min read / 

Large Tech corporations such as Amazon, Apple, Google (parent company Alphabet) and Facebook, with their lucrative business operations in Europe, are under rising scrutiny by the EU Commission for taxation strategies aimed at minimising their tax liabilities. This is engineered by relocating profits from more lucrative markets such as the UK, France and Germany to the lower tax regimes in Ireland and Luxembourg. Politicians and electorates in many EU jurisdictions are highly critical and growing impatient with the potential loss of substantial corporate tax (CT) revenue – made easy by these multinationals capitalising on the globalisation of their operations to bypass national authorities. Apple is known to have stashed away profits in excess of $236bn dollars offshore.

The EU Commission has led the way with robust leadership in tackling this. It sees this as a means to regain credibility with disillusioned electorates experiencing years of austerity and public expenditure cutbacks since the 2008 Financial Crisis. But the EU’s recent actions are clearly unpopular with the tech giants and even some low taxation regimes, most notably in Ireland and Luxembourg. EU citizens are less sympathetic and acutely aware of their own governments’ problems to increase tax revenues to meet urgent and mounting public spending needs. The populist agenda sweeping through Europe has identified a linkage between the multinationals and their hold on the global economy, which benefits the big players – and is increasingly perceived by the electoral to be rigged in their favour. Citizens have become aware and critical of these large corporations stockpiling profits with impunity in tax havens – through complex tax avoidance measures – to mitigate tax liabilities. It is no wonder that populist movements have pandered to their voter base, fueling the sense of alienation from globalisation symbolised – as they perceive – by multinationals propped up by Brussels and neoliberal elites.

The Historic Battle with Apple

Apple’s sweetheart (corporate tax) deal with Ireland has been by far the most prominent (2016) case on tax avoidance. Margrethe Vestager, the EU’s competition commissioner, pursued a relentless investigation in exposing one of the most glaring examples of tax avoidance orchestrated between the Dublin government and Apple – now by far the richest company in the world. Ms Vestager successfully asserted that Apple should have realised it had a tax deal that was “too good to be true” and dismissed claims that she acted retrospectively to change Irish law. “The state aid rules apply since 1958,” she said. “It has never been a secret that tax exemptions could be state aid, and that, if so, they’d have to be paid back. The only secrets were the tax rulings themselves.” A joint appeal by Apple and the Dublin government – supported by the then Obama administration – was unsuccessful and led to Apple accepting the decision to pay the Dublin government $12bn in back taxes. The landmark ruling (30/8/16) prompted the statement by Margrethe Vestager that:

“Member States cannot give tax benefits to selected companies, this is illegal under EU state aid rules reinforcing that the verdict was based on a claim that Dublin had, in effect, offered illegal state aid allowing Apple to pay annual tax rates of less than 1% on its European profits for over ten years.

In its defence, Apple, along with Google and the other tech giants, could hardly be blamed for exploring ways to mitigate its Corporation Tax (CT) liabilities by establishing its headquarters abroad in Ireland where corporation tax rates were 12% – the lowest in the EU. This is in contrast to US rates of 35%, or the highest in the G20. However, the Trump government has spearheaded the biggest overhaul of CT, cutting effective rates from 35% to 21% to be more in line with other leading world economies.

Fears of Retaliatory Action

With a looming US-China trade war and potential collateral damage for the EU, this may not be the right time to hit US Tech corporations with tax levies, which many agree are justified and long overdue. In its latest drive, Brussels is preparing for a “digital tax” based on EU based turnover at a rate set at 3%. This could raise about €5bn a year by applying the tax on those companies with an annual global turnover of more than €750m and total taxable revenues of €50m generated in the EU.

The European Commission is keen to unveil a three-pronged digital tax soon that targets revenues rather than profits (which are more easily artificially manipulated) – heeding calls in France, Germany and even Britain for a tougher approach to tax avoidance by tech companies. But not all members agree. Ireland (and Luxembourg) maintain low CT thresholds. Leo Varadkar, the Irish prime minister, voiced concerns in the Dublin parliament, stating EU Commission’s plans were “ill-judged”:

“It is important to emphasise that Ireland is committed to global tax reform. However, we are very much for the view that global solutions are needed.”

Germany is equally anxious on the timing of these measures – backtracking on its initial support to cast its focus on gauging Europe’s response to the recently announced US planned steel tariffs. Germany rightly fears a pan-EU levy on digital earnings may prove counter-productive if Trump then threatens retaliation with tariffs on German car sales to the US. This scenario is becoming especially dangerous at a time when prospects of a US-China trade war continue to mount.  For now, however, the US has given a temporary exemption for EU firms from the 25% tariffs on foreign steel imports. Whether this is made permanent could be influenced by the EU’s decision on whether to impose the tax levy on tech companies – half of which are based in the United States. “The fact that the big digital companies are American doesn’t make things any easier, especially in the current environment”, said a German official. “We think this is a difficult technical issue, but it’s a highly political one too and that is why [EU leaders should] openly discuss it.”

Conclusion

For some time now, the Organisation for Economic Co-operation and Development OECD/G20 BEPS (Base Erosion and Profit Shifting) project has been trying to create a single set of consensus-based international tax rules to protect tax bases. This is to increase certainty and transparency with tax authorities and taxpayers alike. An OECD formula may hopefully gain support with an agreement on how to divide a company’s tax base so it better reflects where the economic activity actually takes place – therefore where the profit should be fairly and appropriately taxed.

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