An EU Apple tax probe has been initiated by the European Union’s vice president in charge of competition policy Joaquín Almunia. The trading bloc’s top antitrust official has set out to investigate how three multinationals – Apple, Starbucks and Fiat Finance and Trade – set up tax arrangements in Ireland, the Netherlands and Luxembourg.
The aim is to determine whether the tax breaks constitute illegal state aid.
Lawmakers throughout Europe and the US hope the probe will lead to changes that close off loopholes that allow many companies, particularly US technology firms, to base their international headquarters in some EU countries in order to pay much less tax.
Ireland, 12.5% corporate tax rate
In Ireland, for example, tech giants can open up their international head office and benefit from a 12.5% corporate tax rate and take advantage of a series of government-led concessions which given them further tax breaks. US corporate tax at 35% is the highest among the advanced nations.
The European Commission says it has opened three in-depth investigations to determine whether decisions by the tax authorities in Luxembourg, the Netherlands and Ireland comply with EU legislation on state aid with regard to the taxes paid by Fiat Finance and Trade, Starbucks and Apple.
The Commission has invited the three Member States as well as third parties to submit contents to help the investigation.
Mr. Almunia said:
“In the current context of tight public budgets, it is particularly important that large multinationals pay their fair share of taxes. Under the EU’s state aid rules, national authorities cannot take measures allowing certain companies to pay less tax than they should if the tax rules of the Member State were applied in a fair and non-discriminatory way.”
Serious implications for Ireland, the Netherlands and Luxembourg
The Commission’s conclusions and the EU’s consequent ruling could damage the business models set up by the three countries.
Ireland, for example, has tens of thousands of jobs that may not have existed without its light-touch regulation and tax strategies.
The companies that set up their European or international headquarters in those countries may have done so elsewhere in the EU had those tax breaks been classed as state aid.
The Irish government emphasized yesterday that Apple did not receive selective treatment or any special tax rate deal. “We are very confident that we will successfully defend our position,” it added.
In such state aid cases the Commission is not authorized to impose any fines. However, if it finds that unfair/illegal state aid was awarded, governments can be forced to recover the money from the companies.
Part of an international campaign
European Union authorities as well as other governments around the world are trying to close the loopholes that have allowed American multinational companies to use complex tax structures to pay ridiculously small amounts of tax on their operations abroad. They are described by many lawmakers and analysts as “stateless entities”.
US lawmakers often criticize Apple, one of the most profitable, cash-rich companies in the world, for avoiding billions of taxes in the US and globally thanks to a sophisticated web of subsidiaries.
Starbucks succumbs to UK pressure
After months of intense pressure from British lawmakers and the media, Starbucks announced in April that its European headquarters would be moved from Amsterdam in the Netherlands to London. “This move will mean we pay more tax in the UK,” the company added, but did not specify how much.
In 2011 Starbucks clocked up sales of £398 million ($668 million) in the UK, but paid no corporate tax (in the UK). In 2013 the company paid £5 million ($8.4 million) UK corporate tax, the first time any UK taxes were paid since 2009.
For many years, Starbucks had managed to legally avoid paying taxes in the UK by transferring money to its Dutch sister company in royalty payments. A sister company is a subsidiary of the same parent company.
Starbucks had admitted to a UK Parliamentary Committee that a deal had been struck with the Dutch government making it attractive from a taxation point-of-view to set up its European headquarters in Amsterdam.
Starbucks has 800 stores in the UK, which is by far Starbucks’ largest European market, over half the region’s total.
During a World Economic Forum speech in Davos, Switzerland, UK Prime Minister, David Cameron said regarding multinationals that avoided paying taxes “(they should) wake up and smell the coffee, because the public who buy from them have had enough.”
US corporate tax system encourages avoidance
According to the Council on Foreign Relations, the US corporate tax system encourages its multinationals to keep their money abroad.
Nearly three decades after the United States last major tax overhaul, lawmakers across the political spectrum agree that reducing the corporate tax rate and taxing foreign profits differently would help push the tax system in the right direction.
Other advanced economies, such as the UK, have much lower corporate tax rates than the US but collect proportionally more money in taxes than the US authorities do, even as US company profits hit record highs, the Council on Foreign Relations says.
A growing number of US multinationals have been acquiring foreign companies so that they can decamp their headquarters – move them abroad – and pay less tax.
Pfizer’s recent failed attempt to take over Britain’s second largest pharmaceutical company AstraZeneca is one example of a US giant trying to move its head office abroad. Had Pfizer relocated to London its corporate tax bill would have bone down by more than $1 billion annually.
In a letter to regulators, Google informed that its $30 billion acquisition fund will stay overseas. By keeping money it has earned abroad outside the United State, Google avoids paying US corporate taxes on it.