Europe Letter: Europe begins to take steps against aggressive corporate tax planning

Initiatives might not be good for Ireland, which found itself back in headlines

Jean-Claude Juncker: The European Commission President was prime minister of Luxembourg when most of the ’Luxembourg leaks’ tax deals were negotiated. Photograph:  Laurent Dubrule/EPA

Jean-Claude Juncker: The European Commission President was prime minister of Luxembourg when most of the ’Luxembourg leaks’ tax deals were negotiated. Photograph: Laurent Dubrule/EPA

 

The European Union’s fight against aggressive corporate tax planning steps up a gear today when the EU economics commissioner unveils a new package on corporate taxation.

The effects of the “Luxembourg leaks” scandal are still being felt. The whistleblower scandal revealed how hundreds of companies, including Irish firms such as Glanbia, slashed their tax bills through agreement with the Luxembourg tax authorities.

The scandal overshadowed the first few months of Jean-Claude Juncker’s tenure as president of the European Commission – Juncker was prime minister of Luxembourg when most of the tax deals were negotiated.

Since then (Juncker is now 15 months in the job) the commission has vowed to prioritise corporate taxation, with responsibility moving to the portfolio of the EU economics commissioner, Pierre Moscovici, for the first time.

Among the measures introduced over the past year is the proposal for a common consolidated corporate tax base (CCCTB). The idea that companies would work off a common tax base had previously failed to garner support from member states, but the European Commission hopes to gain traction with a revised proposal that defers the consolidated element.

Simultaneously, the commission’s powerful competition arm has launched a range of state-aid investigations into corporate tax deals struck by countries, including Ireland’s tax arrangements with Apple.

Competition concerns

Last year’s establishment of the European Parliament’s special committee on taxation was also significant. While the committee’s legislative impact is limited, the fact that a follow-up committee has been established will keep the spotlight on countries’ corporate tax practices.

None of this is good news for Ireland as the past week has seen its tax regime return to the international headlines.

On Monday, US company Johnson Controls, a manufacturer of car batteries and heating equipment, announced a $16 billion (€14.7 billion) merger with Tyco International, a fire protection company headquartered in Cork. The deal allows Tyco to move its domicile to Cork, creating “at least $150 million in annual tax synergies”, according to the company.

The merger is the latest example of a “tax inversion” deal epitomised by Pfizer’s takeover of Allergan last year, which allowed the company to move its headquarters to Ireland to benefit from the more favourable tax regime.

The issue of unfair tax practices is surfacing in the US presidential campaign. Hillary Clinton has called the Johnson- Tyco deal “outrageous”. A statement by her campaign team specifically criticised the company for “moving abroad to Ireland to shirk its US tax obligation”.

The awareness of unfair corporate tax practices is also unfolding beyond the US. In Britain, Google this week announced it had reached a £130 million (€171 million) settlement with HM Revenue and Customs for underpayment of taxes, following an investigation that stretched back to 2009.

Ireland is once again at the centre of this tax arrangement. For years Google has allocated most of its profits on its sales in Britain to Ireland to avail of the lower corporate tax regime. The settlement figure was denounced as derisory by many.

Following the Google announcement, Facebook this week warned of “potential tax reassessments” dating back to the start of the decade and earlier at its Irish and British subsidiaries, sparking speculation that it, too, was heading for a settlement with the British taxman.

Today’s announcement in Brussels is the latest attempt at a EU-wide approach to the practice of corporate tax planning. The initiative is expected to include proposals to ban companies from shifting profits to subsidiaries in low- tax nations, as well as a proposal to curb the practice of companies using debt interest payments to lower tax bills.

The package will not include details of the revised CCCTB, which is instead expected to be launched in the autumn. What will be significant for Ireland is whether any of the measures go beyond the standards of the OECD rules agreed last year.

As Ireland and other countries are always quick to point out, most taxation issues in the EU are sovereign matters, and any change to tax legislation needs unanimous agreement by member states. Today’s proposals represent only the first stage in the legislative process, and it will need to be agreed by all 28 EU members.

There is also a sound argument that a global challenge such as multinational taxation needs a global response, not just an EU one. Nonetheless, today’s announcement is another sign of an international political will to tackle the practice of aggressive corporate tax planning.

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