EU Investigation Puts Corporate Tax Evasion Under Scrutiny

Joaquín Almunia.  Photo: Flickr.com/Friends of Europe

Joaquín Almunia.
Photo: Flickr.com/Friends of Europe

Apple, Starbucks and Fiat have come under close scrutiny in an investigation by the European Commission over a possible loophole they believe the companies have been exploiting to slash their corporate taxes. The European Commission has launched tax investigations in various EU countries in the past, but this is the first time that specific multinational companies have been targeted.

The investigation was launched by the EU Commission’s Vice President and competition regulator Joaquin Almunia, after media reports alleged that these companies received significant tax reductions by way of “tax rulings” issued by national tax authorities. Almunia believes these companies could be receiving preferential treatment.

Tax rulings in themselves are not problematic or illegal – they are issued by governments to specific companies to clarify how their corporate tax will be calculated or to specify if special tax provisions will be used. However, tax rulings may be disguised to provide selective advantage to specific companies, which is against EU law.

In this case, Almunia believes the tax deals Apple, Starbucks, and Fiat have in Ireland, the Netherlands, and Luxembourg, respectively, could be illegal. “We have reason to believe at this stage that indeed in these specific cases the national authorities have (failed) to tax part of these multinationals’ profits,” said the European Commission competition regulator, Joaquin Almunia at a press conference in Brussels. “When public budgets are tight and citizens are asked to make efforts to deal with the consequences of the (financial) crisis, it cannot be accepted that large multinationals do not pay their fair share of taxes.”

The EU has taken a much harder stance against corporate tax avoidance after reports of how corporations like Amazon and Google used similar loopholes to greatly reduce their taxes in Europe. The companies came under heavy criticism for making huge profits while neglecting to make a decent contribution to the public budget.

The investigation is also looking at the companies’ transfer pricing arrangements. A multinational corporation can save a great deal on taxes by transferring its profits, recorded in high tax jurisdictions where they are generated, to another country, which has much lower corporate taxes. Representatives from the Dutch and Irish governments have said they are confident that they have not broken any tax rules, though a spokesman from the Luxembourg Finance Ministry declined to comment to Reuters.

Similarly, Starbucks and Apple have stated that they have not been receiving any favorable treatment from their respective countries.

Last year, Apple’s tax strategies helped it achieve an annual tax rate of just 3.7% on its non-US income, according to Apple’s annual report. In 2013 the US Senate found a loophole where an Apple subsidiary called Apple Operations International, which is incorporated in Ireland, paid zero corporate income tax because the unit does not have tax residence anywhere. The net income of the subsidiary made up 30% of Apple’s total worldwide profit from 2009-2011.

Apple also used transfer pricing to move income generated in the US to Ireland by selling certain intellectual property rights and negotiating a 2% corporate tax deal with the Irish government, according to Bloomberg.

Speaking to Reuters, Sheila Killian, assistant Dean in the Accounting & Finance department of the University of Limerick, Ireland, said the naming of individual companies represented a more aggressive stance from the Commission.”

“It’s upping the ante from the EU’s point of view,” she said.

According to Reuters, “Chas Roy-Chowdhury, Head of Taxation, at accounting group ACCA, said that scenario was unlikely. It was more likely, he said, that the Commission would issue an unflattering report which might encourage the three countries to take a stiffer line with multinationals in future.”

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