Can the EU tame the multi-national tax dodgers? Why Europe wants to turn the screw on the big guns

The screw is being turned on American companies that use complex structures to whittle down their tax bills. But is the latest EU probe a paper tiger or a game changer?

It was supposed to be good news. Amazon’s announcement yesterday that it would hire 1,000 staff was dressed up with the language of investment and innovation.

The move will help the online giant handle its mammoth set of orders in the run up to Christmas.

But it comes the week after the group was embroiled in a massive EU tax investigation. If found guilty, the giant could be forced to pay back hundreds of millions in unpaid revenues.

Amazon has long claimed that the skeleton crew in tax haven Luxembourg is the ‘beating heart’ of its European operations, rather than the other countries – including the UK – where it records the majority of its sales and in which it employs thousands of staff. Yesterday’s jobs announcement, paradoxically, further undermines this claim.

Britain and Germany, its two largest European markets, together account for two thirds of its international sales.

Yet its sales are processed in Luxembourg, with a ‘fee’ charged to the UK.

The company pays tax on the profits made on this fee – not on the billions and billions of pounds it makes from selling goods over the internet.

Accusations of ‘immoral’ tax practices have dogged the company for years. Two years ago it was hauled in front of MPs to explain why its tax payments in the UK were so microscopic (£4.2m last year) when its sales into Britain (a staggering £4.3bn) were so impressive. It was the culmination of a series of exposures that also saw Google and Starbucks implicated in tax-dodging.

In the wake of the furore, Britain vowed to use its leadership of the G8 countries to push for international changes to the tax laws.

But despite stern words about companies ‘smelling the coffee’ – a not entirely coded reference to Starbucks – it is not David Cameron who is tightening the net.

A Brussels Eurocrat Joaquín Almunia, who is responsible for overseeing competition across the EU, is the one leading the charge.

He has already opened major investigations into four multinational companies he suspects secured cosy tax deals with their respective countries.

The roll-call will not come as a surprise.

Starbucks, which buys its coffee through Switzerland and registers its brand rights in the Netherlands, is being investigated for its links to the Dutch tax authorities.

Apple’s links with Ireland that have led to a quarter of a century of tax dodging are also in the spotlight. Last week Luxembourg-registered Amazon was added to a list that also includes Fiat’s financing arm, also based in the Grand Duchy. Under the investigation, the European Commission (EC) will determine whether deals struck between tax authorities and the companies were legal.

In each of their designated tax destinations, whether the Netherlands or Ireland, the companies agreed with the authorities not to tax them too heavily.

Almunia claims that the tax rates offered were so generous that they actually constitute ‘state aid’, which is illegal. ‘In a time when budgets are tight, companies should not be allowed to negotiate special tax treatment,’ he said. ‘Some multinational companies are using tax strategies to reduce their tax burden, eroding the tax bases in some European states.’

In Amazon’s case the deals were struck in 2003.

For Apple the deals were done almost a quarter of a century ago.

Minutes of a 1990 meeting between Apple and the Irish revenue, released by the EU, state that an Apple tax advisor ‘confessed there was no scientific basis’ for some of the company’s figures. Nevertheless, the company was granted its tax deal, the EU alleges, and in the years since has benefited by billions in savings.

The Commission is investigating all these deals. All of the companies say they have not received special treatment by tax authorities. Powers the EC has include forcing companies to pay back taxes they would have owed.

A spokesman said: ‘The duration of state aid investigations varies from case to case, depending in particular on the complexity of the case and the cooperation by the Member State concerned.’

Almunia has already said the probe could be widened to other firms – with Google and Microsoft expected to be included.

But tax experts are split on what the implications of the investigations will be. A fine for Apple of £1bn – the amount analysts expect – would be pocket change for a company with around £100bn of cash reserves. It will take deeper change to stamp out the practice of aggressive tax avoidance.

Patrick Stevens, tax policy director at the Chartered Institute of Taxation, said: ‘They, the companies, take advantage of what was on offer from Ireland, Luxembourg and the Netherlands. But these opportunities for companies will disappear over a period of time.

‘I really believe that the countries will be stopped doing what they have done.’

He said a combined effort by the OECD to change the international tax laws would encourage nations to stop striking these tax deals.

‘But,’ he added, ‘it’s up to each country to change the laws.’