September 11, 2013 8:57 pm
Brussels probes multinationals’ tax deals
Brussels is probing Ireland, Luxembourg and the Netherlands over their tax deals with multinationals paving the way potentially for a formal investigation intoillegal sweeteners.
Europe’s top competition authority has asked the governments to explain their system of tax rulings and give details of assurances given to several specific companies – including Apple and Starbucks – according to people who have seen the request.
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IN BRUSSELS
The move threatens to open a new front in the global clampdown on tax evasion through enforcing the EU’s state aid rules – a unique regime that bans serious distortions of competition through tax breaks to favoured private groups.
This request, sent to at least three EU countries, represents the opening step of an informal probe and does not mean the European Commission has identified wrongdoing. But even this preliminary move has rattled officials in some of the capitals targeted.
Should the Commission find cause for concern, it will open a formal investigation and start a process that could force the states to recoup all the lost revenues from any unlawful sweetheart deals. A Commission spokesperson said: “At the moment, we are simply gathering information on tax rulings.”
The Hague, Dublin and Luxembourg have all beenforced to combat claims that they are acting as tax havens, giving big corporations a base to reduce their tax bill worldwide. The rulings under scrutiny give assurances to companies – sometimes in advance of a decision to relocate – over how their tax affairs will be treated.
The government in Luxembourg declined to comment. The Irish Ministry of Finance said it was not aware of a formal EU state aid inquiry but said it received queries from the Commission “from time to time” on a range of issues including tax.
A US Senate committee recently singled out Ireland for acting as a conduit for Apple’s earnings so it could sidestep large tax payments around the world. The report claimed Dublin allowed Apple to apply a corporation tax of 2 per cent or less, well short of the usual 12.5 per cent rate. Ireland strongly rejects allegations of a “special deal”.
Starbucks, meanwhile, came under fire last year in Britain for allegedly slashing its UK tax bill by vesting its intellectual property in its Dutch subsidiary, which then charged hefty royalties to its other subsidiaries, allowing the British unit to show little or no taxable profit.
In parliamentary hearings, Starbucks claimed it could not reveal whether its Dutch tax ruling involved a tax break because of confidentiality rules. The Dutch government says this is false, and that while its tax authority is bound by confidentiality, Starbucks is free to make the ruling public if it wishes.
Although many tax authorities make upfront agreements with companies on how their revenues will be treated, Luxembourg has faced criticism for going further than most. Companies often pay very low tax rates in spite of a relatively high corporate tax rate of 29 per cent.
The EU questionnaire lands at a sensitive political moment for The Hague. The Dutch parliament’s finance committee is holding a hearing on Thursday on the country’s “letterbox companies”, shell companies that multinationals establish in the Netherlands to exploit financial advantages including the tax rulings.
In a bid to assuage critics, the Dutch government this month unveiled a tax avoidance crackdown that included a promise to share proactively tax rulings with other national authorities, especially when companies may not qualify for tax cuts under bilateral treaties.
Additional reporting by Vanessa Houlder in London
Going abroad for a tax holiday
Three examples of how laws in Ireland, Luxembourg and the Netherlands help multinational companies reduce potentially huge tax bills.
Ireland (‘double Irish’): This structure relies on two Irish incorporated companies. The first company, which is generally tax resident in Ireland, pays royalties to use intellectual property, which generates expenses that reduce the amount of tax paid in Ireland. The other company, typically incorporated in Ireland but not tax resident in the country, collects the royalties in a tax haven such as Bermuda or the Caymans, thereby avoiding Irish taxes.
Luxembourg (tax on interest income): A Cayman Islands company could lend money interest-free to a Luxembourg subsidiary which then lends the money on to another operating company elsewhere. The notional interest the Luxembourg company is paying on its loan is set off against the interest it is receiving from the operating company. That results in a very low effective tax rate on the interest, far lower than the headline tax rate of 29 per cent.
Netherlands (hybrid structure): A US multinational forms a Dutch limited partnership and a corporation which are both treated in quite different ways by the US and Dutch tax systems. The result is that if the partnership makes a loan or licenses intellectual property to the corporation, little or no current tax is paid in either the Netherlands or the US.
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