Small EU team leads tax battle against ‘goliaths’

A small team of European Union officials is spearheading an investigation that could force some of the world’s biggest companies to pay billions of euros in avoided taxes, Reuters reports.

In an office block in one of Brussels’ less fashionable districts, the 10 Competition Directorate staff from across the bloc have spent two years poring over hundreds of deals agreed between companies and member-states’ tax authorities.

Their findings were the basis on which the European Commission, the EU’s executive arm, last week ruled that Starbucks Corp and Fiat Chrysler Automobiles NVbenefited from illegal tax deals with the Dutch and Luxembourg authorities. The EU said these deals represented unfair state aid that gave the companies an unfair advantage and ordered the countries to reclaim 20-30 million euros (US22- US$33 million) from each.

The Commission continues to investigate other rulings including one Luxembourg gave Amazon.com Inc and rulings Ireland gave Apple Inc that allowed those companies to earn billions of dollars tax free. If Commission rulings are executed, it could force a sea change for hundreds of multinationals operating in Europe, whose strategies to avoid tax have triggered public anger since the global financial crisis of 2007-2009 left governments strapped for cash.

Headed by Max Lienemeyer, who specialised in competition and trade law before joining the Commission in 2003, the team of Eurocrats has been initiating cases, scrutinising inter-company transactions, and negotiating with companies and governments, to decide whether so-called “transfer prices” allowed the companies to unfairly reduce their tax bills.

Scrutinising corporate tax arrangements is a painstaking task that is usually undertaken by experienced tax investigators.

Yet Lienemeyer’s Task Force on Tax Planning Practices is made up of mostly young officials with limited experience of corporate taxation. Seven left university in the past decade, and only two have experience of challenging big companies on their income tax bills, their profiles on online site LinkedIn show.

Lienemeyer did not respond to requests for comment. Task force members contacted by Reuters declined to comment, and referred queries to the European Commission.

The Commission declined to answer detailed questions about the task force but said it was supported by additional staff with tax and legal expertise and had all the resources it needed.

Tax experts noted that the task force’s tax audits are forging into difficult new territory for the Commission, taking on companies that employ hundreds of tax professionals and pay millions of dollars each year for external tax advice.

Lienemeyer is paid around 110,000 euros a year and his team around 80,000, a fraction of what senior tax advisers can earn, a senior EU source said.

The “small dynamic team”, as the EU describes it, also has the task of trying to prove the tax structures companies have created are a sham. Usually, when a tax agency seeks to challenge corporate tax planning, it only attacks individual transactions.

“Most transfer pricing cases that most tax authorities take on are fairly limited in their scope,” said Ray McCann, a tax adviser with New Quadrant Partners, who was previously a senior inspector specialising in cross-border tax avoidance with the UK tax authorities.

“It’s unusual to take on an entire structure because a transfer pricing investigation is enormously resource intensive…it’s a big deal,” he added.

Transfer pricing is setting prices for the transfer of goods or services from one subsidiary to another, which critics say is used to reduce tax liabilities in relatively high-tax countries. The cost should be the same as that which would have been paid had the transaction been with an unrelated company at market rates.

The countries and companies being investigated by the task force deny agreeing sweetheart tax deals in return for investment and jobs.

Natura Gracia, a competition partner at law firm Linklaters said she expected the Fiat and Starbucks cases, and any decision against Apple or Amazon, would end up in court.

She said it was difficult to predict how a case would play out because this was the first time that the Commission had used competition law to tackle alleged preferential application of income tax rules.

“It is a bit of a backdoor they are using to focus on tax avoidance,” Gracia said. “The question will be whether the European courts will endorse what the Commission has done.”

Some tax advisers said the use of competition law might make the Commission’s job easier, because it could mean the usually high bar of evidence required to prove a tax structure was unlawful may not have to be met.

However, the EU’s principal legal adviser on tax, Richard Lyal, wrote in an essay published in the Fordham International Law Journal in June that the basic principle that tax rules were broken would still need to underpin any Commission case.

“It is likely to be only in extreme cases that one can with confidence say that a particular decision reflects a misapplication of the chosen method,” he wrote.

This means that the task force faces at least as hard a challenge as inspectors like McCann faced.

However, the team has one advantage over a typical tax authority challenging corporate tax planning: it is examining cases where the companies and countries involved probably never expected to face external scrutiny.

Until now, the Commission did not investigate the way members calculated companies’ tax bills. Its move to do this is a first and its investigative team’s task is assisted by sweeping rights to force governments to hand over correspondence and notes of meetings with companies.

Companies which expect to have their tax planning challenged take great care to create a paper trail that will look good in court. Tax advisers say that if national tax authorities had expected their work to face EU scrutiny, they might have done the same.

However, minutes published by the Commission of a meeting between Apple’s tax advisor and Ireland’s Revenue Commissioners to discuss how much taxable profit Apple should report, said Apple’s advisor noted how many people Apple employed in Cork and how the company was reviewing its worldwide operations.

The EC highlighted this as an example of how non-tax factors may have played a role in deciding companies’ tax bills – something prohibited by law.

Other documents show tax authorities rapidly approved complex arrangements that eliminated tax bills, without challenge.

McCann said this kind of evidence, uncovered by the task force, was not usually available to inspectors investigating a company’s tax structuring, and that it could be decisive in court.

“If there are incriminating emails there which clearly show that everybody knew what was going on, then that’s bad,” McCann said. “If equally, there is no apparent investigation by the jurisdiction offering the tax advantages, then that’s equally bad.”