We've recently covered the British Google tax settlement, often inaccurately reported as the David Cameron / Google settlement when the arrangement was mate between the British tax office and Google. This issue has divided European policy makers and lawyers as to how the separate European states deal with the profits from large non-European corporations, typically American. There are two sides to the argument: on the one side, these businesses are seen as successful employers bringing technological innovation to an area or country and on the other, these same multinational giant businesses have deliberately complicated internal structures so as to convolute the tax collection side of things and effectively sidestep corporate taxes. It's the latter side of things that means for some Governments and media agitators, the large multinational businesses are a relatively easy target: many countries have a budget deficit to fill.
We have seen differences between the individual European countries' treatment of corporate tax for over a decade now as well as the rate of corporate tax. Different member states have different tax regimes so as to encourage overseas investment into their particular country, with Ireland as one example where the Government has set its corporate tax rate at a deliberately low rate in order to encourage overseas investment. There are rules in place to stop one country from providing a particularly favorable set of rules to encourage businesses to operate from within its borders. We are aware of at least two investigations currently taking place by Margrethe Vestager, the European commissioner with the role of being the Eurobloc's chief tax inquisitor. One investigation is between Apple and Ireland and the other between Amazon and Luxembourg. These investigations are to determine if the host country gave unfairly preferential terms to the business in order. Companies and Governments state that they have done nothing wrong.
In the past, where Margrethe has found that existing tax arrangements have fallen foul of the European Union law, she has ordered Governments to collect back taxes from the companies concerned. Luxembourg has been ordered to recover $34 from Fiat, the Netherlands around the same from Starbucks and the Belgium Government has been told to collect over $750 million from around 35 companies. And now Margrethe may be turning her attention to the British Google deal following a letter from the Scottish National Party. A spokesman from the Eurobloc tax office said that the complaint needs to be studied to see if it warrants a formal investigation.
The difficulty for the European Union is that each individual country is able to adjust the overall tax regime to suit particular purposes - and that this right is considered national sovereignty and many individual Governments are unwilling to sign this over to Brussels. The flexibility afforded by the current rules means that individual countries are still jostling for the opportunities afforded by large American corporates, especially technology businesses, setting up store in their turf. Individual countries need to balance the wish to support a struggling economy with hard cash together with the draw of a large multinational technology corporate, where the value added to a region is not the same as tax revenue. The European Commissioner for financial affairs and taxes, Pierre Moscovici, announced a series of measures designed to close many of these so-called corporate tax loopholes around the Eurobloc - on the same day that Margrethe's office announced they were considering the Scottish National Party's letter. Pierre explained at a news conference that these loopholes contributed to a loss of almost â‚¬70 billion a year.
The issue was neatly outlined by Neal Todd, an international tax expert and partner at the Berwin Leighton Paisner: "National governments have competing objectives here. Whilst nearly all governments want multinationals in general (and U.S. tech groups in particular) to pay more tax, none of them want to change their own rules only to find that businesses simply relocate to warmer fiscal climes."
We have seen something of this happening already but on a more global scale. The tax treatment of North American companies operating in Europe has also caught the attention of officials in the United States: some members of Congress have studied how large American businesses are using mergers and acquisitions in order to relocate their headquarters to a different country and so benefit from a more favorable tax regime. These arrangements, called tax inversions by the financial media, can significantly reduce corporate tax bills and of course for a business relocating out of North America, reduces the revenue earned for the American economy.
The European Union must tread carefully. Ashley Fox, leader of the British Conservatives at the European Parliament, said this on the matter: "Globally, there is a battle raging for jobs and growth. The E.U. must ensure that its proposals do not act as a deterrent to international investment and employment."