The most dangerous conclusion to draw from Margrethe Vestager’s decisions on the tax arrangements of multinational companies would be that the world has changed.
Starbucks, purveyor of free wifi and frothy lattes, may seem like a corporate embodiment of the modern age. Apple and Amazon, whose tax arrangements are under similar scrutiny, are flagships of the internet economy. But that does not make Vestager’s decisions to challenge tax arrangements intrinsically modern. The giveaway ought to be the presence of Fiat, the Italian carmaker — auto manufacturing being a quintessentially 20th-century activity.
Discount, therefore, any suggestion of a breakthrough, or a landmark decision, much less of a change of thinking. What the European Commission did Wednesday is consistent with its slow and hamstrung action over the past two decades.
If there was a breakthrough, it came with the establishment in 1997 by the EU’s finance ministers of a code of conduct on business taxation.
That code of conduct included an agreement that member countries should assess whether their tax measures constituted harmful competition. It took into account, among other things: “Whether advantages are granted even without any real economic activity and substantial economic presence within the Member State offering such tax advantages, or whether the rules for profit determination in respect of activities within a multinational group of companies departs from internationally accepted principles, notably the rules agreed upon within the OECD, or whether the tax measures lack transparency, including where legal provisions are relaxed at administrative level in a non-transparent way.”
However, as everyone learned from the furor over tax rulings that erupted last year — including the disclosures known as Luxleaks — several member countries have still not complied with that code of conduct. The 1997 code had contained provisions on “standstill” (a commitment by each member state not to introduce new tax measures that breached its provisions) and “rollback” (a commitment to review existing rules).
At the time, no irony was intended, but with the benefit of hindsight one can see that “stand still and roll back” was prophetic.
Just as the theory of what ought to be done is long established, so is the practice of tax authorities making overly generous arrangements with multinational corporations.
The cases the Commission has been investigating are not fresh out of the tax lawyer’s briefcase. Although Fiat’s arrangement with Luxembourg — an agreement on advance pricing — was made in autumn 2012, Starbucks obtained its ruling from the Dutch tax authority in 2008. In the Apple case, still under discussion, the existing arrangement dates from 2007, and was itself a revision of a ruling made in 1991. Amazon received a ruling from Luxembourg in November 2003, and the arrangement has remained in force ever since.
The longevity of those arrangements is itself a clue to some member countries’ lack of appetite for enforcing basic tax rules.
For example, a central plank of such arrangements is how to price transfers of goods and services within a multinational (which might otherwise be manipulated to lower tax liabilities by overstating costs in high-tax countries and shifting revenue to low-tax countries). In principle, the price is to be compared with what would be the case if the transfers were between independent companies charging market rates.
That a tax authority would go more than ten years without reviewing such an arrangement to see whether market rates or circumstances have changed suggests that the comparison is, like the resulting tax bill, a fiction.
The length of time that these questionable tax rulings have endured has given rise to ironic consequences. Most obvious is that Jean-Claude Juncker now sits atop a European Commission that is trying to dismantle cozy arrangements made between the Luxembourg government that he once headed and those multinationals that were enticed to base themselves for tax purposes in Luxembourg.
Delicious though some find this irony, it should not blind them to the truth that the tax investigations were launched under the previous Commission, by Joaquín Almunia, Vestager’s predecessor as competition chief.
No one should give credit to Juncker for being a sinner that has repented. Nor to Vestager for launching a new crusade. This Commission, like its predecessors, is fighting the same ploddingly inadequate fight against tax avoidance by multinationals, with whom member states are colluding, with the same inadequate weapon of state aid enforcement.
Others have flagged up that in June 2013, Frans Timmermans, who was then the foreign minister of the Netherlands, and is now the first vice president of the Commission, received a statement from the Commission on the Starbucks case, informing him of the Commission’s objections. More to the point Timmermans was Europe minister in the Dutch government in 2008 and was supposedly co-ordinating all European policy when the Dutch tax authority gave its tax ruling to Starbucks. His party leader, Wouter Bos, was the finance minister at the time.
But any assessment of shameless poachers turned gamekeepers should reserve space for Guy Verhofstadt, prime minister of Belgium from 1999 to 2008.
The liberal group in the European Parliament, ALDE, which Verhofstadt now heads, was swift in welcoming Vestager’s announcements about Starbucks and Fiat. Unaccountably, it included no mention of Verhofstadt’s history on the wrong side of harmful tax competition, which is only slightly shorter than Juncker’s. Throughout the first decade of the 21st century, Verhofstadt’s governments, with his liberal colleague Didier Reynders as finance minister, resisted attempts to end sweetheart tax arrangements intended to help multinationals.
The Commission ruled in 2003 that fiscal incentives for foreign companies that set up “co-ordination centers” in Belgium constituted illegal state aid (going back on a previous favorable assessment given in 1984). The Verhofstadt government appealed against the ruling, and then put in place a replacement regime.
The struggle is not over. The Commission is currently investigating Belgium’s excessive profits scheme.
When the Commission ruled that Belgian co-ordination centers constituted illegal state aid, it also ruled against the international financing activities in the Netherlands and the foreign income scheme in Ireland. Yet the Commission’s struggle against successor arrangements in the Netherlands and Ireland also continues.
Indeed, a brief contemplation of the history would tell anyone that the EU’s fiscal state aid rules are a very blunt instrument for combating tax avoidance through transfer pricing.
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Nevertheless, the European fiscal landscape has altered in two significant steps over the course of the past two decades since that false dawn of the code of conduct.
Firstly, government leaders around the world have belatedly realized that unbridled tax competition benefits companies but deprives themselves of revenues. As capital and the proceeds of commerce become ever more mobile — in a world dominated by multinational players like Amazon, Apple and Google — they must either rely on the goodwill of those companies (which would be naïve) or increase international co-ordination.
The work brokered by the OECD on base erosion and profit shifting, to which the G7 and now the G20 have signed up, is potentially a game-changer. It is in the EU’s collective interest to follow up on implementation of the OECD guidelines. Whatever the dire warnings of some Euroskeptics, that need not entail commitment to harmonizing tax rates.
The second significant shift, related to the first, is the greater public attention to what companies are paying by way of tax. The Starbucks ruling was brought to light in 2012 in a U.K. parliamentary hearing. Multinational companies are being forced into the open, sometimes, as in the case of Luxleaks and its aftermath, reluctantly. Public outcry is being mobilized against both lax governments and wily companies.
The orderly response would be greater transparency through exchange of information between national tax authorities. An agreement reached on October 6 by the EU’s finance ministers to notify tax rulings to other EU states is a step in that direction.
However, the sad and slow history of fiscal state aid cases suggests that some member states will fall short on both compliance and enforcement. In taxation, as in so much other EU business, national governments see their own immediate self-interest much more clearly than they see a longer-term common interest.
Tim King writes POLITICO‘s Brussels Sketch.