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Europe’s tax issue

November 19, 2012

Published in ‘New Europe’, 18-24 November 2012, pages 1 & 3

Europe tax issueViagra may be upping people’s sexual lives, but it’s not bringing any money to the UK’s ‘Her Majesty’s Revenue and Customs.’ Neither does ‘Lipitor,’ the best-selling drug on the UK market. The reason is that Pfizer, the pharmaceuticals giant which produces these drugs may well post a £ 1.8 billion turnover in this country, but pays no income taxes at all.

Same goes for other international companies, such as Starbucks, Amazon, or Google. The issue is considered serious enough, to convene the Parliament’s ‘Public Accounts Committee’ to investigate on how such multinationals take advantage of the tax legislation, and show little or no profits, shifting the tax burden to the shoulders of the courageous middle-class people.

The problem is not only limited to the UK; France has a similar issue with Apple, Amazon and Google. The latter is under investigation by the ‘Direction Générale des Finances Publiques’ for tax noncompliance, and faces a potential fine of 1 billion in tax due and penalties. In fact, Google (which denies the accusations), is nicely operating in France and gets revenue from its ads’ sales to French companies, but books the contracts with French clients in the so accommodative and low corporate tax land of Ireland. This way, Google claims that business was conducted outside France,  and thus it has no tax liability in this country. The figures speak for themselves: for 2011, reported revenue from potentially highly taxed French operations was only € 138 million, while revenue from the low-tax Irish-booked contracts amounted to 12.4 billion.

The recipe is well known: for companies producing and selling goods (like Pfizer) it’s called ‘transfer pricing;’ for companies selling services (like Amazon or Google) it’s even easier, as it comes down to the simple ‘booking’ of the business in another subsidiary of the same group. Transfer pricing means buying the goods at a high price from a company of the same group located in a low-tax jurisdiction or paying very high royalties to a group licensing subsidiary, owner of the patents and registered in an offshore centre.

In all cases, the group’s profits are transferred from the high-tax to the low-tax countryin Google’s case, Ireland. From there, the monies transit through various ‘tax optimization channels’ (for example, a Netherlands ‘BV’ or ‘NV’ called an ‘intermediate holding’), to reach their final destination, usually an offshore centre like Bermuda, where they stay safe and tax-free, waiting to be reinvested somewhere else in the world.

This mainstream tax avoidance scheme may be complemented by several refinements, well known to tax specialists, as well as tax authorities, under the rather esoteric names of: thin capitalization, tax treaty shopping, wrappers etc. And although specific legislation has been enacted to prevent the use of such schemes and limit tax avoidance, large international companies don’t really seem to be affected. Otherwise, how could one justify the colossal amounts of corporate profits gathered in the various tax heavens, especially the ‘tropical islands?’ See, for example, Tax Justice Network’s July 2012 Report ‘The Price of Offshore Revisited.’

And now, the real problem: in these times of hardship and recession, when most European countries are struggling to squeeze their deficits by cutting welfare expenses and increasing taxes, is it socially and morally tolerable that individuals and small companies alone bear the whole cost of adapting to the ‘New Normal?’ Is it acceptable to let large international companies carry on playing their tax evasion or ‘tax optimization’ game?

Which leads us to the following question: even if European governments were really willing to act, how could they do it, technically speaking, given the present disparity of tax rates, regimes, and conceptions within the European Union? And what chances of success do the so advertized fiscal and banking unions have in such a heterogeneous tax landscape?

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