Multinational companies have made such extensive use of Ireland to funnel royalties – a common way to shift profits and avoid tax – that these payments averaged 23 per cent of the country's annual gross domestic product between 2010 and 2015, according to a European Commission report seen by the Financial Times.
The scale of the net royalty payments channelled through Ireland contrasts sharply with the average in the EU as a whole, where such payments are a fraction of one per cent of the bloc’s annual GDP.
Brussels has highlighted Ireland’s role in channelling royalties as part of evidence it will present on Wednesday that tax rules in seven member states – Belgium, Cyprus, Hungary, Ireland, Luxembourg, Malta and the Netherlands – could have enabled multinational companies to cut their tax bills aggressively.
The tax planning practices "undermine fairness and the level playing field in our internal market, and they increase the burden on EU taxpayers", said Pierre Moscovici, EU tax commissioner. "While we recognise the steps some of these member states have taken to adapt their tax model recently, clearly more needs to be done."
The commission report analyses economic data from EU member states to identify rules that could enable aggressive tax avoidance by companies. But it stops short of accusing member states of enabling tax avoidance. Instead, it aims to kick-start national and bloc-level tax reform.
Royalty payments made by one subsidiary of a company to another – typically in return for use of patents or other intellectual property – are a common way to shift profits from high tax to low-tax jurisdictions. Paying interest on intercompany loans and sending dividends to group companies are two other methods used.
Member states have created a range of incentives over time to entice global companies to set up subsidiaries in their countries to create jobs and growth. However, differences between jurisdictions have enabled companies to exploit gaps in the rules to cut their bills.
Companies say that they comply with all laws and pay the taxes legally required and that their company structures fulfil their obligation to maximise shareholder value by minimising tax costs.
However, politicians have come under increasing pressure to boost the taxes collected from multinational companies. The EU is working with other big economies to crack down on tax avoidance.
In addition, the EU has established new rules and reporting requirements and worked with member states to close some loopholes.
Mr Moscovici is expected to propose a new EU approach to taxing digital companies before the end of the month. It will set out a short-term fix as well as fundamental reform. To take effect, the proposal would need a green light from the European Parliament and the unanimous approval of member states.
Representatives from Booking.com, Google, Spotify, Amazon and Netflix will meet Mr Moscovici on Wednesday to discuss taxation.
Margrethe Vestager, the EU competition commissioner, has also ordered payment of back taxes from individual companies – including Apple, Amazon, Fiat and Starbucks – whose tax deals were so favourable that they constituted illegal state aid. – Copyright The Financial Times Limited 2018