EU Investigates Irish Deals with Multinationals: Does it Signal a New Era in European Taxation?
By Katie Davies, Senior Director, Advisory Services
The news that the EU has begun investigating tax deals between large multinationals and the governments of Ireland, the Netherlands, and Luxembourg made front-page headlines last month. Naturally, businesses with operations in — or plans to expand into —those countries are wondering what this will mean for them. In the short term, it will probably mean very little. In the long term, it could possibly mean a lot.
The scope of the current investigation appears to be limited to several large corporations that allegedly struck sweetheart tax deals with those national governments: among them Apple and Starbucks. The investigation, being conducted by the EU office charged with protecting competitiveness, is aimed at potential violations of the bloc’s state aid rules, which ban national governments from selectively doling out advantages like tax breaks or subsidies. The investigation comes after Apple CEO Tim Cook told a U.S. Senate committee that Apple had reached a special deal with Irish tax authorities.
Corporations that are found to have received special tax treatment would have to pay back taxes, but small and medium-sized businesses are most likely far too common to either warrant special deals from a national government or attract the attention of the EU investigation.
The investigation does not target Ireland’s low corporate tax rate or other tax arrangements available to all businesses in the targeted country, so its immediate effect should be limited to a handful of businesses. Nevertheless, it could signal a long-term shuffling of EU tax policy that would affect businesses across Europe.
In June, the G-8 pledged to tighten up tax codes that allowed companies to lower tax burdens by shifting profits overseas and to force greater transparency of corporate ownership. The initiative came hot on the heels of a scandal in which Google was allegedly misrepresenting sales made in London as sales made in Dublin to take advantage of Ireland’s advantageous tax rates.
Google’s actions allegedly broke tax laws, but they also brought about greater scrutiny of legitimate tax arrangements that high-tax countries nonetheless claim are unfairly depriving them of revenue.
Such grievances are gaining momentum, and we could be in for a period of greater coordination of tax policy across the G-8 and EU, which in turn could affect the rationale for the current structure of your EU operations.
Meanwhile, Germany is hoping to reach a deal to integrate the EU and US into a massive free trade zone by the end of 2014. The drive toward greater economic integration has the potential to be another long-term driver of greater tax coordination among developed economies.
So, if your European operations are set up to minimize tax liability, it’s not yet time to reevaluate your structure. Instead, keep an eye out for further tax reforms on the continent, and don’t let them take you by surprise.
Update: 10/16/2013: The Irish Finance Ministry announced today that it plans to change rules which businesses use to become "stateless" for tax purposes.