EU focus on tax avoidance may deflect direct heat from Ireland

The "Lux leaks" scandal may have cast a shadow over Jean-Claude Juncker's first months as European Commission president, but its real significance will be how it impacts the EU's position on corporate tax.

Some contend the scale of aggressive tax planning revealed by the Lux leaks scandal takes the heat off Ireland, suggesting the commission is unlikely to open any new cases against Ireland without examining the 340-plus Luxembourg cases revealed by the International Consortium of Investigative Journalists.

Conversely, the exposé – and the tax rulings revealed on Tuesday by The Irish Times and other newspapers – has given unprecedented political momentum to the fight against corporate tax avoidance.

While Juncker has insisted he did nothing wrong as prime minister of Luxembourg, pointing out the tax rulings offered were legal, he has moved to make corporate tax avoidance a key priority.

Within 10 days of taking office, he announced proposals to tackle tax avoidance. These include a directive on the automatic exchange of information on tax rulings to be unveiled early next year. Essentially an extension of the recently agreed automatic exchange of information ruling on individuals’ bank accounts, the directive would oblige all countries to publish comfort letters they offer to companies.

Tax harmonisation

Juncker has pledged to revive the common consolidated corporate tax base. In addition, economics and finance commissioner

Pierre Moscovici

has been tasked with pursuing tax harmonisation. He has talked of a “sea change” in tax, describing it as “the priority, if not the essential priority of the next few years”.

The European Commission’s competition division is continuing its investigation into Ireland, the Netherlands and Luxembourg’s tax deals with four multinational companies, and has embarked on information-gathering about tax deals and patent boxes in up to 10 other states.

The finance ministers of France, Germany and Italy, the euro zone’s three largest economies, wrote to Moscovici last week, urging the commission to do more to combat aggressive tax planning and criticising the “lack of tax harmonisation” in the EU.

In short, the EU response to Lux leaks has been unambiguous. Corporate tax, which fell off the agenda, is back on.

These developments are concerning for Ireland as it fights to defend its right to maintain its corporate tax regime. Irish officials stress that the ability to determine tax rates is a sovereign issue and falls outside the remit of the EU. Any tax decisions at EU level require unanimity from member states, meaning that Ireland, or any other country, can block proposals.

However, the development of the financial transactions tax (FTT) shows how tax-related matters can circumvent the unanimity rule. The FTT, agreed last year, is progressing through the EU process in a system called “enhanced co-operation” which allows a subset of EU countries to move forward with a proposal. Eleven countries are adopting the proposal which will impose a tax on certain financial transactions.

Enhanced co-operation

But the idea of any of the Juncker proposals proceeding through enhanced co-operation would be counter-productive – the whole premise of combating tax avoidance is that all countries should be on an equal footing. The prospect of member states opting out would make such a proposal wholly inadequate in dealing with global tax avoidance.

While the commission is likely to bring forward proposals on taxation, it is unlikely they will make it through the lengthy EU legislative process. Nonetheless, the commission has other tools. The competition division is a powerful body, and its inquiry into four tax rulings offered by Ireland, the Netherlands and Luxembourg represents a new front in the fight against corporate tax avoidance by the EU. The new competition commissioner, former Danish finance minister Margrethe Vestager, has said a decision on the Apple case is expected by the second quarter of next year. Minister for Finance Michael Noonan said last month he is confident the case will be dropped.

The commission’s inquiries into “patent boxes” – devices that allow companies gain tax relief from profits derived from intellectual property or patented activity – could represent the next wave in the clampdown on corporate tax avoidance. An investigation into patent boxes, for example, could shift the focus away from countries such as Ireland.

In the meantime, the Government will be waiting for the outcome of the commission’s investigation into Ireland’s relationship with Apple in the first half of next year. This is likely to have a significant impact on tax rulings within the EU.