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01/10/2016

After Apple, EU may focus on companies closer to home

Euro & Finance

After Apple, EU may focus on companies closer to home

Margrethe Vestager

[Jorge Valero]

Multinational companies can expect the European Commission to press on with a crackdown on sweetheart tax deals after handing Apple a breathtaking demand for €13 billion, officials and experts said on Wednesday (31 August).

But Competition Commissioner Margrethe Vestager may be tempted to train her fire on European companies after a string of investigations of US global giants that, especially after Tuesday’s Apple verdict, has enraged the United States.

“I have been concerned that it reflected an attempt to reach in to the US tax base to tax income that ought to be taxed in the United States,” US Treasury Secretary Jack Lew said on Wednesday.

“We think that it undermines the environment in Europe for international business because it creates uncertainty that ultimately will not be good for the European economy,” Lew said at an event hosted by the Brookings Institution in Washington.

The order to the iPhone maker to pay back taxes to Ireland on the grounds that Dublin illegally favoured Apple with a tax regime that amounted to a competition-distorting subsidy was the biggest of 38 decisions by Vestager since the Commission began probing some 1,000 companies in up to 23 EU states in 2013.

Another US firm, coffee chain Starbucks was ordered to repay up to €30 million to the Netherlands and a unit of Italy’s Fiat must hand a similar sum to Luxembourg. In a separate case involving 35 firms in Belgium, many were not identified but some were also from the United States.

The Apple row is the latest spat between Brussels and Washington over company regulation. Earlier this month, the Treasury issued a detailed legal argument that the EU Commission’s approach went against European laws.

Outstanding cases

The Commission will not say when a decision is likely on two outstanding cases involving two more US firms, Amazon and McDonald’s, both in Luxembourg.

Set alongside a series of high-profile antitrust probes into Google and Vestager has a case to answer on charges of anti-American activity – albeit one that she strenuously denies.

Nonetheless, people involved in competition law in Europe, many of whom declined to speak on the record for this story, reckon the Commission may choose a company closer to home for any major new inquiry.

“It is quite obvious that the Commission will not be able to investigate 1,000 tax rulings. It will only go after manifest violations,” said Georg Berrisch, partner at law firm Baker Botts, who noted the fertile ground the Commission may have in evidence turned up in 2014 by leaked data from Luxembourg.

“It will have to pick and choose a few cases, maybe look into European companies. Luxleaks mentioned several European companies having tax deals with Luxembourg,” Berrisch said.

Vestager, arguably the most powerful official in the EU due to her individual power to rule on competition cases across the 28-nation bloc, makes no secret of her reliance on others at times to provide the evidence that can justify her inquiries.

For all the fury in Washington over Apple, that and the other current cases were all launched on the back of revelations provided by a US Senate subcommittee inquiry into taxation.

Brussels Apple tax ruling reverberates across the Atlantic

The European Commission’s demand for Apple to pay back a record 13 billion euros in back taxes in Ireland has triggered warnings that it could damage transatlantic economic ties. Others in Washington, however, used the case to call for an international tax system to ensure revenues are paid where they are due.

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Deterrent

It is unclear how many companies may face back tax demands in the end. Given limited resources, officials and observers said, the Commission’s competition directorate is likely to focus on a fairly small number in the expectation that success – still to be tested in court – can deter others from going to extremes in reducing their global tax burdens.

Jonas Koponen at law firm Linklaters called the massive tax demand for Apple a wake-up call for others to be wary of how political institutions, not just in Europe, were responding to popular pressure to gather more taxes from rich corporations and the danger that posed of legal turmoil and reputational damage.

“The amounts at stake may intensify the political pressures both within the EU and from outside the EU,” he said.

“Companies must now more than ever carefully assess whether any agreements or rulings they receive from national tax authorities are compliant with state aid principles.”

It was a point inferred by Vestager herself. Asked at a news conference on Tuesday whether it was fair to penalise a company which “felt that they were abiding by the rules” in agreeing a tax regime for its profits with Irish government, the straight-talking Dane said some should listen to their feelings more.

“If my effective tax rate would be 0.05% falling to 0.005%,” she said, “I would have felt that maybe I should have a second look at my tax bill.”

Background

In the wake of LuxLeaks and Panama Papers revelations, the European Commission launched a crack down on tax avoidance, aiming at multinational companies like Google, Amazon, and Apple.

The Anti-Tax Avoidance Package, tabled in January 2016, included a proposal for member states to share tax-related information about subsidiary firms of global companies and to publish the profits they make and the taxes they pay in each EU country they operate in.

Tax avoidance and aggressive tax planning is estimated to cost EU member states up to €70 billion a year in lost revenues.

But several EU countries raised concerns about some of the measures proposed, particularly on rules aimed at deterring companies from shifting profits to low-tax countries and aimed at forcing them to pay taxes on dividends and other profits made in tax-free countries.

Smaller countries, such as Luxembourg, Ireland and Belgium, were among the most critical. Unanimous support from the EU 28 required to pass legislation on tax matters.

Member states fail to reach deal to tackle company tax avoidance

European Union finance ministers failed on Wednesday (25 May) to agree new rules to counter tax avoidance and deferred until June a possible deal on clamping down on schemes by multinational companies to disproportionately reduce tax bills.

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