Europe cracks down on tax dodgers
Directive follows a series of high-profile tax cases involving Google, Apple and others.
Rampant corporate tax dodging and sweetheart deals that cheat governments and skew markets, have prompted the European Commission to unveil a new directive Thursday.
The proposed legislation follows a quick succession of tax rulings, settlements and investigations across Europe, involving household names like Apple, Google, McDonald’s and Starbucks. The future law would bring the European Union in line with proposals from the Organization of Economic Cooperation and Development and be a critical step toward harmonizing certain tax policies within the EU.
The Commission is targeting “taxpayers [that] act against the actual purpose of the law, taking advantage of disparities between national tax systems, to reduce their tax bill,” according to a draft of the Anti-Tax Avoidance Directive obtained by POLITICO. The European Parliamentary Research Service estimates corporate tax dodging costs the bloc €50 billion to €70 billion every year.
moscovici tax plan
Pierre Moscovici, Commissioner for economic and financial affairs | Julien Warnard/EPA
Pierre Moscovici, the Commissioner for tax policy, is also expected to revive a proposal for a common consolidated corporate tax base in the second half of the year. This would allow companies in the EU to comply with just one system for calculating taxable income, rather than different rules in each country. It was previously blocked by member countries, which may be more amenable now.
“The tide is clearly turning when it comes to corporate tax avoidance,” Moscovici said Saturday by email. “There is growing consensus that the aggressive tax planning measures used by some large multinationals must end.”
Case in point: Google agreed Friday to pay a decade of back taxes in the U.K. totaling £130 million and pay higher taxes going forward. The deal stems from an 2009 investigation into Google’s tax affairs. In 2013, the company paid £20.5 million (€27 million) in taxes on revenues of $5.6 billion (€5.2 billion) in the U.K., the company’s second-largest market after the U.S.
The settlement appears to undermine the testimony of Google’s senior director for public policy, Nicklas Lundblad. He defended Google’s tax structure before the European Parliament in November, saying it was completely compliant with applicable law and that the company uses tax incentives in a transparent way.
“There was a dispute over whether Google got their interpretation [of U.K. tax rules] right,” said Richard Murphy, professor of international political economics at City University London and a director at Tax Research. “Google has been understating its tax liabilities, although it did nothing illegal.”
He argued the “tiny” settlement “undermines the credibility of the U.K. tax system” by appearing to allow Google to pay taxes on only a share of its U.K. revenues.
The deal “sends a signal to the world that the U.K. is not going to follow the [new] OECD principles,” said Murphy. Those guidelines advocate allocating profits between countries according to revenues and forcing companies to declare a taxable presence where they are active.
Google says the company has always complied with tax law, and that the evidence given to the Parliament in November was and remains accurate.
“The way multinational companies are taxed has been debated for many years and the international tax system is changing as a result,” the company said after its deal with British tax authorities.
Tove Maria Ryding, policy and advocacy manager at Eurodad, an advocacy on tax and debt issues, said the settlement looked like just another sweetheart deal.
This may be the first of several deals Google is hammering out. Italy’s tax authority is reportedly investigating the California company’s Italian profits and taxes, while France has slapped the company with a tax bill reported to be between €500 million and €1 billion.
“We discussed the normalization of Google’s (tax) situation, as is happening in several countries,” Emmanuel Macron, the French economy minister, told journalists Friday after his meeting in Davos, Switzerland, with Eric Schmidt, the executive chairman of Google’s parent company Alphabet.
For years, the French government has been trying to make Google pay more taxes, arguing the firm generates more profit in the country than it declares.
Apple is pursuing a similar strategy. Last month, the iPhone-maker said it will pay Italy €318 million in back taxes.
In many cases, however, national governments are complicit, willing to forego tax revenue in exchange for the jobs and synergies these companies bring within their borders.
That’s where the Commission has stepped in.
Two weeks ago, the Commission ruled Belgium’s international tax system was unfair and ordered the government to claw back €700 million from about 35 companies, most of them European. Last month, the Commission announced a sweeping probe into the taxes of McDonald’s. That followed its demand in October that Luxembourg and The Netherlands collect up to €30 million each in unpaid taxes from Fiat Chrysler Automobiles and Starbucks, respectively.
Now, everyone is waiting for the big shoe to drop: the Commission’s decision about Apple’s tax strategy in Ireland which could cost it as much as €8 billion. Apple’s Chief Executive Tim Cook even made a surprise visit to Brussels last week for a “private meeting” with Competition Commissioner Margrethe Vestager.
Both sides declined to comment. A decision is expected early this year.
