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Foreign investment or tax righteousness?

June 21, 2014

Published in ‘New Europe’ Print and Digital Editions

Foreign investmentIf you think that life is complicated, you might want to take a look at tax matters and think again. For instance, let’s take this line of seemingly unrelated events: US medical devices giant Medronic acquires British company Coviden and relocates to Ireland; Apple, Startbucks and Fiat are formally under EU investigation for tax evasion; so are Ireland and the Netherlands for offering them tax advantages; the UK vows to become the most attractive destination for foreign investment in Europe; OECD publishes its report for fighting corporate tax evasion through ‘profit shifting’ techniques. Are these random facts or are they somehow connected? Let’s take things from the beginning.

Medronic’s case in not a unique example; quite on the contrary, it’s only the last in a series of large American companies trying to move out of the US in order to benefit from lower corporate taxes, and bypass the worldwide taxation US system. Acquisition of a foreign company and relocation is typically called an ‘Inversion,’ and aims at shielding international income from the high 35 percent US corporate tax rate. Recently, more than 40 US companies relocated abroad through inversion schemes, and more are preparing to do the same. US Congress and the Obama administration are worried by this wave of departure and are seeking ways to prevent companies from ‘navigating a loophole in America’s tax system’ as Senator Ron Wyden states.

On the other side of the Atlantic, last week, the European Commission formally announced the opening of an investigation against Apple, Fiat and Starbucks for tax evasion by using structures in different European countries to minimize taxation. Apple had already been in the limelight in the US, where the Senate found that the company paid just 2 percent in taxes on its $ 74 billion income made from its international operations. Now, the EU Commission is looking at Apple’s ‘special arrangements’ with Irish tax authorities on the method of calculation of taxable profit allocated to its Irish branches which are handling roughly 65 percent of its global income. Starbucks is routinely shifting royalty and other intellectual property income from the UK to the Netherlands, another ‘tax friendly’ to multinationals EU country. Similar enquiries were held two years ago by the UK Parliament on pharmaceuticals manufacturer Pfizer and other large companies for shifting profits from their British operations to other low-tax European countries.

The use of tax-friendly countries, such as Ireland and the Netherlands, is nothing new; on the contrary, setting up operations in these countries and using transfer pricing arrangements, or establishing empty shell companies to divert royalty income, has been common practice among multinationals— a scheme known as the ‘Double Irish and Dutch Sandwich’ is particularly popular among tax directors. But what’s new in this Commission’s investigation is that apart from companies, the EU member states that offer tax facilities are also the object of enquiry for their tax heaven status, and for presumably distorting competition under Article 107(1) of the Treaty.

It is worth noting here that the UK itself, which is so eager to enquire into the tax advantages of other EU member states and their use by multinational companies for tax evasion, has in 2013 amended its own tax legislation to make it attractive to multinationals, especially regarding corporate taxation rate and the participation exemption. As a result, according to a major world accounting firm, as many as 60 multinational companies are in the process of relocating to the UK, which is becoming Europe’s most attractive place for foreign investment according to its own stated objective.

To get the full picture in this delicate tax matter, we shouldn’t forget that the G20, the world’s ‘government,’ has assigned the task of elaborating rules to prevent Tax Base Erosion and Profit Shifting, (a ‘bureaucratic’ term for what we’ve just described in this article) to the Organization of Economic Cooperation and Development (OECD). “Base erosion constitutes a serious risk to tax revenues, tax sovereignty and tax fairness for OECD member countries and non-members alike” is the opening sentence of the Organization’s resulting 2013 Report, to the principles of which all its members, (including those that are offering tax advantages through the back door), are in theory committed to abide.

What comes out of these seemingly unrelated events is that all of them are in fact related, as the knots of the same system. All countries despise loosing tax revenues through corporate tax avoidance, particularly ‘in the current context of tight public budgets’ to use the words of EU commissioner Joaquin Almunia. At the same time, most, if not all, are trying hard to attract foreign investment by offering tax advantages or by conceding special arrangements to multinational companies. There is a huge contradiction here, within the European Union and beyond. At some point, a clear decision must be made: what’s better, foreign investment or tax righteousness?


From → Views & Opinions

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