Corporate tax avoidance

April 2016  |  FEATURE  |  CORPORATE TAX

Financier Worldwide Magazine

April 2016 Issue

April 2016 Issue

Corporate tax has been a hot topic for a number of years. Companies, predominantly in the US, have been taking advantage of inversion deals to redomicile abroad in lower tax bracket nations, depriving their ‘home’ nation of considerable tax revenue. Other companies have been accused of employing aggressive tax planning mechanisms to avoid paying corporate tax. The question of corporate tax and, more accurately, corporate tax avoidance, will not go away.

Considerable pressure is being exerted upon nations and regulatory bodies to do more to extract sufficient levels of taxation out of extremely profitable multinationals. Given the state of public finances, especially in austerity hit European nations, companies such as Google, Starbucks and Amazon have attracted the attention and frustrations of the general public, the press and regulatory bodies. While funding has been slashed from public budgets, there has been an overriding sense that many multinationals have received an easy ride from governments. Though some firms have made tax payments, they have often been nominal in nature, somewhat adding insult to injury.

In January, Google agreed a deal with British tax authorities which involved the company paying £130m in back taxes covering a 10 year period. It also agreed to bear a greater tax burden in the future. Google previously defended its taxpaying record, telling a US Senate inquiry that it was “simply the way the global tax system is working” and that the issue was for politicians to fix. An HMRC spokesperson noted that “the successful conclusion of HMRC inquiries has secured a substantial result, which means that Google will pay the full tax due in law on profits that belong in the UK. Multinational companies must pay the tax that is due and we do not accept less”. However, the deal was met with considerable scepticism in the UK, with critics claiming it was far too soft. The government’s case was not helped in January when treasury minister David Gauke admitted he had no idea what rate of tax Google is paying.

Furthermore, chancellor George Osborne’s claim that the deal was a “major success” for the treasury arguably misjudged the appetite within the UK to see multinationals pay their fair share of corporate tax – and did little to assuage fears that the UK’s government is too beholden to major corporations. Indeed, the deal has been described as nothing more than a ‘sweetheart deal’. The fact that Google is also facing similar pressure in other European markets, such as France where the company is facing a claim of £757m, has done little to put the UK’s Google deal in a positive light.

Google is not alone in being accused of avoiding its tax responsibilities. In February, Swedish furniture retailer IKEA was said to have avoided paying at least $1.1bn in taxes over a six year period. According to the company, it paid an effective corporate tax rate of around 19 percent last year; however, a report commissioned by the Green party in the European Parliament said IKEA was able to avoid its tax obligations by shifting royalty income through a Dutch company and possibly through Luxembourg, Liechtenstein and Belgium.


The European taxation scene is a fragmented place. This issue has persisted for years, and organisations have been able to ‘save’ billions of dollars by identifying and exploiting loopholes.

European countries with low tax thresholds, such as Luxembourg, Ireland, the Netherlands and Belgium, have offered US companies the chance to reduce their tax burden via legislation called tax rulings, used to confirm transfer pricing arrangements. As a result of these tax rulings, tax bills can shrink to virtually zero.

Accordingly, the EU is losing billions of dollars of tax revenue. Recent estimates suggest around €70bn a year is lost through tax avoidance – revenue that could be used to help maintain infrastructure, including schools, transport systems, healthcare, etc. Instead, it slips through the net.

In response, the European Commission is stepping up its efforts to tackle tax avoidance.  EU finance ministers achieved a unanimous agreement on the automatic exchange of information on cross-border tax rulings in October last year, and have been working to draw up an effective and appropriate tax avoidance plan.

The unveiling of the Commission’s tax avoidance plan will help with the EU’s other investigations into tax arrangements. In addition to Google and IKEA, the EU is investigating Amazon and Fiat in Luxembourg, Apple in Ireland and Starbucks in the Netherlands. We may see additional investigations announced soon.

In late January, the Commission announced and published a series of measures aimed at hampering “aggressive tax planning”. It hopes to standardise taxation across the block and prevent companies utilising common tax avoidance methods. A treaty between EU member states has been designed to prevent tax abuse and punish countries that refuse to cooperate.

One of the most striking features of the draft legislation drawn up by the Commission would require large multinationals, predominantly US companies, to disclose their European tax bills. They would also have to publically disclose their earnings. The legislation is due to be tabled in April and would open up some of the largest companies to the full glare of public scrutiny.

The Commission’s ‘Anti-Tax Avoidance Package’, introduced by Pierre Moscovici, Europe’s tax commissioner, will aim to “hamper aggressive tax planning, boost transparency between Member States and ensure fairer competition for all businesses in the Single Market”. The package includes a number of key documents, including a draft Anti-Tax Avoidance Directive, a proposed revision to the Administrative Cooperation Directive, which will introduce country-by-country reporting between tax authorities on key tax-related information, a recommendation on tax treaties, and a proposal for a new EU external strategy for effective taxation.

In effect the Commission, in pursuing its agenda against multinationals, is adapting plans set forward by the Organisation for Economic Co-operation and Development (OECD). The OECD has previously proposed a package of reforms which would require large multinationals to report tax information to the national authorities in the countries where they operate. These proposals were put forward as part of the OECD’s Base Erosion and Profit Shifting (BEPS) set of strategies, designed to lead the charge against tax avoidance achieved through moving profits to low or no-tax locations. According to the OECD’s data, since 2013 states have lost between 4 percent and 10 percent of their global corporate income tax revenues, a figure believed to be between $100bn and $240bn annually.

Among the key proposals put forward by the Commissions are legally binding measures to block the most common methods companies use to avoid paying tax. The Commission will also issue a recommendation to Member States on how to prevent tax treaty abuse. Furthermore, the Commission has also proposed that the 28 EU Member States share tax-related information on multinationals, as well as create a new process for listing countries that “refuse to play fair” and fulfil their tax requirements.

The European taxation scene is a fragmented place.

For some time there have been calls from critics and advocacy groups to force Member State finance ministers to require multinationals to publically report their tax information annually, rather than to simply provide it to the relevant national taxation authorities. The hope is that by forcing companies to go public with their taxation records, the public would be better placed to scrutinise companies and ensure that funds are diverted to the right areas of national economies. This could be particularly useful in developing nations.

Recently, Mr Moscovici has spoken in favour of requiring corporates to submit to greater public disclosure in order to pressurise them to pay tax where they generate their profits. Yet there will likely be some pushback from business leaders.

Though some critics of the EU’s proposals have suggested that the Commission’s plans are not ambitious enough, in some respects they go beyond the remit of the OECD’s proposed country-by-country transparency regime, to the point that some corporate lobby groups have moved to warn the EU against going any further. The concern is that they could put companies at a competitive disadvantage. Furthermore, a group lobbying on behalf of Apple, Google, Facebook, Amazon and others – American Innovation Matters – called the reforms “the latest example of the aggressive moves being made abroad in an effort to tax even more American earnings, and use them to pad the coffers of foreign governments”. These concerns are not just limited to US critics, however. “I am strongly in favour to implement what has been agreed in BEPS in the first regulation and nothing else, otherwise it will take a lot of time to take a decision,” said German finance minister Wolfgang Schaeuble during a public session of a meeting of EU finance ministers. Mr Schaeuble was not alone in voicing these concerns in Brussels.

Mr Moscovici has also called on Britain and Ireland to drop their opposition to comprehensive tax reform across the EU. Mr Moscovici has considerable pedigree when it comes to challenging the tax affairs of internet companies. In January, he told MEPs that he wanted to make 2016 “the year of tax reform”. One of the key features of this renewed push to tackle the American internet giants has been a package of reforms – known as the common consolidated corporate tax base – which, should they be approved, would remove the temptation for international firms to artificially divert income from one country to another. However, under the auspices of the CCCTB, Member States would still be free to set their own corporate tax rates.

Picking holes

Given the vast sums of money involved, it was only a matter of time before legislators in Europe moved to close the loopholes which have allowed companies to base themselves in low tax centres. It is imperative from a Member State’s perspective, as well from the point of view of the Commission itself, that companies are made accountable, and pay fair tax in the countries in which they operate. But the EU and the Member States must be vigilant and dynamic in the enforcement of the new package, to ensure other loopholes are not found and exploited.

True reform in international taxation will require all of the EU’s 28 Member States to approve the rules, which may be problematic. When the new draft rules are presented on 12 April, they will probably meet with considerable opposition from some national governments. Given that the new rules would be affected by amending one of two existing directives, they could, in theory, be passed by 16 of the 28 Member States. The European tax situation could be a volatile area moving forward, and with concerns continuing to rumble around Britain’s place in the EU, with a referendum due this year, differences of opinion are likely.

The question of corporate taxation in Europe is clearly vexing for both companies and regulators alike. Finding a fair and equitable balance will be no easy task.

© Financier Worldwide


Richard Summerfield

©2001-2016 Financier Worldwide Ltd. All rights reserved.