European Commission probes “tax deals with Multinationals”

There are reports that Brussels is probing Ireland, Luxembourg and the Netherlands over their tax legislation and rulings for multinationals – is this a great surprise? Well no for a number of reasons. The Commission needs to be seen to be doing something in the G20 framework on tackling tax avoidance, to avoid being sidelined that is clear, but I think this is more, it is part of a recognition that the EU can do a number of things unilaterally to address perceptions of tax avoidance in Europe – it doesn’t need to wait for action at either G20 or OECD level. There is an appetite to review what is harmful tax competition within the EU. The FT has a couple of articles on this today.

So the EC has asked the governments to explain their system of tax rulings and give details of assurances given to several specific companies. This request, appears to have been sent to at least three EU countries, represents the opening step of an informal probe. Should the Commission find cause for concern, it could open a formal investigation and start a process that could force the states to recoup all the lost revenues.

The Hague, Dublin and Luxembourg have all been questioned over whether they are acting as tax havens, resulting in big corporations reducing their European  and more broadly worldwide tax. 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. The Dutch government has sought to steal a march by announcing that it is reviewing the substance article in its tax treaties.
Ireland, the Netherlands and Luxembourg have long been suspected of wooing multinationals through tax agreements. But Brussels’ preliminary inquiry into whether some of the tax deals are in contravention of EU state aid rules, adds political pressure. Indeed there is a growing view within the Commission that there are tools to counter some of the tax legislation and agreements which facilitate the avoidance of significant amounts of corporate tax in EU states through conduit regimes in a number of member states.

According to the FT: “Dublin rejected the findings insisting Ireland has nothing to hide. “The government is absolutely clear: talk of Ireland being a tax haven is wrong,” Richard Bruton, Ireland’s business minister, told reporters recently.

The questions from Brussels are expected to focus on how exactly national authorities make tax rulings when they evaluate multinationals’ tax returns. It is unclear whether it will address complex tax avoidance schemes deployed by multinationals, which have been nicknamed the “Double Irish” and “Dutch Sandwich”.

“The Dutch are quite skilfully trying to take the heat off themselves by saying they will do something on tax avoidance,” said James Stewart, associate professor of finance at Trinity College Dublin. “But in Ireland there is still not official acknowledgment of the problem. I think we are missing the public debate on this.””

This is a fair summary, the issue is recognised in the Netherlands,  but the Irish are in denial. It will be interesting to see what the review does about the Irish non resident company structure (see my earlier blog “Why do US Companies pay so little tax on foreign profits? Does this give them a competitive advantage?”) and in particular the amendments made in the last five years and what explanation the Irish government makes as to who asked for them and why it agreed the changes.

The recent G20 meeting demonstrated that the issue of tax avoidance and double non taxation is going to stay on the agenda. What the EC move does is illustrate that initiatives will come from a number of different players.

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