Averting ‘Taxodus’: the EU’s big assault on corporate tax

Part 2 of 6 of our European Parliament special • Maltese MEPs against the common corporat tax base • One tax to rule them all • Trouble for Malta • Luxleaks: the tide turns

MEPs last week approved a series of recommendations from the European Parliament’s special tax committee (TAXE) aimed at tackling corporate tax avoidance.

The committee was set up in February in response to the ‘LuxLeaks’ scandal that revealed Luxembourg authorities had permitted corporate tax structures that significantly reduced multinationals’ tax bills. Companies implicated in the scandal include JP Morgan, Pepsi, Ikea and Heinz.

The amount of money lost to EU member states through corporate tax avoidance each year is estimated at €1.1 trillion. Although tax avoidance is legal, companies which use complex structures to reduce their tax bills are coming under increasing scrutiny from the public and from legislators internationally, who have promised to crack down on the practices.

Following the LuxLeaks disclosures, the EU introduced regulations which obliged member states to share information about new cross-border tax rulings and existing deals within three months.

Two years ago, a Swiss court sentenced a German-born man to three years in jail for selling client data from Swiss bank Julius Baer to the German tax authorities.

The EU Commission President Jean-Claude Juncker has identified tackling corporate tax avoidance as one of the Commission’s top 10 priorities.

In this week’s vote, the European Parliament has unequivocally backed the fight against aggressive tax avoidance. However, the contents of the TAXE committee’s report have divided opinion, with some MEPs concerned about the impact on national sovereignty.

Commenting on the report, S&D group spokesperson for the special TAXE committee, Peter Simon, noted the importance of EU-wide action, saying; “We are not dealing with isolated incidents here, but rather with systematic tax dumping that is organised by, or at least tolerated by, the state.”

He continued; “The negative effects of tax avoidance by multinational companies have to be borne by all other taxpayers, including small and medium enterprises.”

Simon concluded by saying he believes the work of the TAXE committee will, “make clear what we expect from member states and the European Commission,” and that; “It must be our goal to make companies pay taxes in those countries where profits are generated.”

His S&D group colleague, Elisa Ferreira, co-author of the TAXE committee report, offered a similar opinion. She described tax avoidance as having created a “politically unbearable” situation.

Commenting on the report she said: “Today, Parliament has given the EU governments and the European Commission a clear roadmap to fight aggressive tax planning by multinationals and to change this unacceptable situation.”

However, she emphasised that, “the work is not over. We could not access some information. By setting up a new committee, we hope to complete our work and keep up the pressure so that these recommendations are translated into concrete actions.”

MEPs from the Parliament’s right wing ECR grouping rejected the report, arguing that while they believe multinational corporations should pay more tax, it should be up to member states to decide.

Specifically, they criticised the reports’ suggestion of introducing a compulsory common consolidated tax base and the definition of a minimum taxation rate.

Maltese MEPs stand united against common tax scheme

All six Maltese MEPs voted against the ‘Report on tax rulings and other measures similar in nature or effect’ presented to the European Parliament. The report received 508 votes in favour, 108 against and 85 abstentions.

Parliament agreed to introduce mandatory country-by-country reporting by multinational companies of financial data, including profits made, taxes paid and subsidies received. The resolution also advocates introducing clear definitions of “economic substance” and other determining factors of corporate tax bills.

Labour MEP Alfred Sant

In order to maintain a competitive edge, wealthy individuals and corporations are offered advantageous tax rates, using tax breaks to attract investment or hot money.

This has earned Malta a reputation as an offshore haven for all the hot money within the eurozone.

Since joining the single currency in 2008, successive governments have championed an investor-friendly economy, to the degree that other EU countries, including Germany, France, the UK and Italy, view Malta as a tax haven, similar to Luxembourg.

MEP and former Prime Minister Alfred Sant said tax competition should remain part of the limited array of decision tools available to national economies. He said the report was proposing measures that implicitly or explicitly promoted moves that would introduce tax convergence and harmonisation on an EU-wide basis.

“This goes against the interests of smaller economies of the Union, that lack the endowments of the larger economies,” Sant said.

He said the flexibility of the smaller EU economies in policy making was already constrained by the convergence in VAT rates, state aid rules, the single currency, the six pack/two pack rules applied to their budgets.

Sant added that this has led to greater structural divergences between parts of the Union.

“Reducing the tax flexibility of such economies would further increase these disparities, which is unfair, dysfunctional and unacceptable,” he said.

While rallying behind measures uniquely designed to promote full transparency in national tax treatments, Sant said “the report fails to provide a tight definition of fair tax competition, mainly because it is slanted towards a situation in which tax should be harmonised across the EU.”

The three Nationalist Party MEPs within the European Popular Party also voted en bloc against the report with David Casa, Roberta Metsola, and Therese Comodini Cachia expressing their strong reservations while stressing their firm belief in tax transparency and the fight against tax fraud.

“But in our view that does not mean the mandatory introduction of a Common Consolidated Corporate Tax Base (CCCTB).

“The EU is not a homogeneous area and not all regions in the EU face the same economic realities, be it for their domestic market size, geographical realities or resources,” the three MEPs said in a statement issued Wednesday afternoon.

They added that while the report did contain useful points on transparency, which they supported, ”we are of the view that questions of tax of the nature of CCCTB must remain an issue of national competence since they reflect the different economies of Member States.”

“We are convinced that a one-size-fits all approach is not the right way forward for Europe as inevitably it would be the EU’s smaller economies, such as Malta, that would bear the disproportionate brunt of such policies.”

One tax to rule them all

The European Commission has long sought to harmonise national corporate tax systems, claiming that this will contribute to its goal of creating more growth and jobs in Europe and boosting the competitiveness of EU companies.

Currently, there are 28 different systems in Europe for calculating a company’s taxable earnings.

The Commission claims that creating a single tax base will encourage cross-border activities and investments.

The idea of a common consolidated corporate tax base (CCCTB) was initially voiced in a 2001 communication but progress has been slow due to member states’ reluctance to allow the Commission to encroach upon their national sovereignty in this area.

A first report on the CCCTB was issued in April 2006. The Commission followed up a year later with a communication outlining the remaining steps to be taken to establish a single tax base for European companies by 2010.

But the plan has since been stuck in the pipeline due to opposition from at least seven member states, which fear losing their sovereignty over national tax. When the first progress report was debated in 2006, 12 countries were in favour and seven – Ireland, the UK, Lithuania, Latvia, Slovakia, Malta and Cyprus – were against. The rest were still undecided.

Trouble for Malta?

Malta is an increasingly attractive tax regime which attracts lots of foreign companies setting up subsidiaries on the island, so that they can book profits they made in one EU member state, over here and claim a hefty 6/7ths refund on dividends.

This has made the island an important financial services centre that also calls for more accountants, auditors and lawyers to render their services.

In order to maintain a competitive edge, Malta offers wealthy individuals and corporations advantageous tax rates, using tax breaks to attract investment or hot money, which could originate from criminal activities.

But what makes Malta so attractive?

Malta shrugged off its reputation as a fiscal paradise by adopting a “full-imputation” tax system where corporate profits are taxed at 35%.

But companies incorporated outside Malta are considered resident in Malta only if the management and control of the company is exercised in Malta.

The statutory rate of tax for corporations is 35% and when dividends are distributed to shareholders out of the company’s taxed profits, it carries an imputation credit on the tax that has already been paid by the company. After the tax refund, a shareholder’s tax burden decreases to 0% - 5%.

Under Malta’s tax law all income coming from a company that qualifies as a “participatory holding” company also qualifies for a full refund of the taxes paid by the company, when distributions are paid back to the company’s shareholders.

Malta’s Green Party has warned that Germany, France and Italy are pressing the EU to tighten restrictions on tax havens, after they sent a joint letter to Commissioner Pierre Moscovici calling him to rein in “aggressive tax planning” and “profit shifting” by companies.

Alternattiva Demokratika chairperson Arnold Cassola, a former secretary-general of the European Greens, said: “In view of the request for Jean-Claude Juncker to take strong measures by December 2015 against unfair competition in the EU, which is deemed by many to constitute illegal state aid, is the Maltese government prepared to diversify from the present fiscal policies in Malta?”

LuxLeaks: the tide turns

A 2014 international investigation into tax deals struck with Luxembourg uncovered the multi-billion dollar tax secrets of some of the world’s largest multinational corporations.

A cache of almost 28,000 pages of leaked tax agreements, returns and other sensitive papers relating to over 1,000 businesses paints a damning picture of an EU state which is quietly rubber-stamping tax avoidance on an industrial scale.

The documents show that major companies have used complex webs of internal loans and interest payments which have slashed the companies’ global tax bills. These arrangements, signed off by the Grand Duchy, are perfectly legal.

The unprecedented investigation showed how some 340 companies from around the world arranged specially-designed corporate structures with the Luxembourg authorities. The businesses include corporations such as Pepsi, Ikea, Accenture, Burberry, Procter & Gamble, Heinz, JP Morgan and FedEx. Leaked papers relating to the Coach handbag firm, drugs group Abbott Laboratories, Amazon, Deutsche Bank and Australian financial group Macquarie are also included.

The companies channeled hundreds of billions of euros through Luxembourg and saved billions of euros in taxes. Some firms have enjoyed effective tax rates of less than 1 percent on the profits they’ve shuffled into Luxembourg.

PricewaterhouseCoopers has helped multinational companies obtain at least 548 tax rulings in Luxembourg from 2002 to 2010. These legal secret deals feature complex financial structures designed to create drastic tax reductions. The rulings provide written assurance that companies’ tax-saving plans will be viewed favorably by Luxembourg authorities. 

Many of the tax deals exploited international tax mismatches that allowed companies to avoid taxes both in Luxembourg and elsewhere through the use of so-called hybrid loans. 

Starbucks and Fiat Chrysler tax deals ‘illegal’

In October 2015, Starbucks and Fiat Chrysler were ordered to pay back up to €30 million in taxes after European tax breaks were ruled illegal.

The move is part of a Brussels crackdown on private tax deals some member states strike with large multinationals. Commission officials are looking at similar deals secured by Amazon in Luxembourg and Apple in Ireland.

The European commission ruled that sweetheart tax deals struck in private between Starbucks and Dutch tax officials five years ago and between Fiat Chrysler and Luxembourg’s tax authorities were unlawful state aid.

But the two countries disagreed with the Commission and Starbucks said it would appeal against the decision.

“Tax rulings that artificially reduce a company’s tax burden are not in line with EU state aid rules. They are illegal. I hope that, with today’s decisions, this message will be heard by member state governments and companies alike,” European competition commissioner Margrethe Vestager said.

“All companies, big or small, multinational or not, should pay their fair share of tax,” she added.

Although “comfort letters” or tax rulings by governments are legal, the arrangements with Starbucks and Fiat Chrysler “do not reflect economic reality”, the Commission said.

In particular, it said the firms used so-called “transfer pricing arrangements” between subsidiaries that let Starbucks shift profits abroad, and Fiat pay taxes on “underestimated profits”.

The Commission said taxable profits for Fiat’s Luxembourg unit could have been 20 times higher under normal market conditions.

“Our decisions today show that artificial and complex methods endorsed by tax rulings cannot mask the actual profits of a company, which must be properly and fully taxed,” Vestager said.

Fiat’s Luxembourg unit paid “not even” €400,000 in corporate tax last year and Starbucks’ Dutch subsidiary less than €600,000, she added.

Fiat’s Luxembourg deal, which was brokered in 2012, was made when current European Commission chief Jean-Claude Juncker was prime minister of the country.

Juncker came under pressure last year over claims that about 340 global companies were granted tax avoidance deals during his 18-year tenure in Luxembourg.

The Dutch government said it was “surprised” by the decision and that it was convinced its arrangement with Starbucks was in line with international standards.

A Starbucks spokesman said: “Starbucks shares the concerns expressed by the Netherlands government that there are significant errors in the decision, and we plan to appeal, since we followed the Dutch and OECD rules available to anyone.”

The Luxembourg Ministry of Finance said the Commission had “used unprecedented criteria in establishing the alleged state aid”.

“Luxembourg disagrees with the conclusions reached by the European Commission in the Fiat Finance and Trade case and reserves all its rights,” it said.

The country “will use appropriate due diligence to analyse the decision of the Commission as well as its legal rationale,” it added.

Fiat Chrysler denied receiving any illegal state aid from Luxembourg.

Poverty campaign organisation ActionAid said the Commission’s ruling was “just the tip of the iceberg when it comes to corporate tax breaks”.

“ActionAid estimates that developing countries lose at least $138bn per year to special tax breaks,” said Anders Dahlbeck, ActionAid’s tax justice policy adviser.

“These sweetheart deals in Europe and developing countries are part of a race to the bottom on tax which hits the poorest hardest and leaves healthcare, schools and other key public services starved of resources,” he said.