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Monday, 17 November 2014

It seems that the European Commission means business against tax evasion, fraud and illegal state aid. One of the ‘usual suspects’, when it comes to tax avoidance, The Netherlands, might get spanked over its Starbucks deal.

Last Friday, the French ‘Euro Commissioner for Economic and Financial Affairs, Taxation and Customs’, Pierre Moscovici, held a speech on behalf of the European Commission, in which he emphasized that he and his team mean business against the ubiquitous tax avoidance (or evasion) by large multinationals. In his speech Moscovici signalled the increasing worldwide hunt against tax evasion and fraud, as the tolerance for tax evaders is currently at a depth, in economic behemoths like the United States and the European Union.

This increasingly hostile stance against tax avoidance and evasion is caused by the continuing global crisis, resulting in anemic economic growth everywhere, and the fact that many (large) governments are seriously strapped for cash, due to a number of years with disappointing tax yields. Besides that, numerous law-obiding inhabitants of these countries are seriously fed up with the multinationals, which bend the rules for tax payments to their advantage, in order to pay very little or no taxes.

Here are the pertinent snippets of Moscovici’s speech (the French parts of this bilingual speech have been translated by Google Translate and have been edited by me):

Tax evasion is increasingly a global phenomenon. Cooperation with the heads of states of the world is essential to provide an effective solution to this problem. In particular, we are working in Brisbane on the development of a program, which deals with the erosion of tax bases and transfers of profits (BEPS English).

We pledge to ensure that work on the BEPS will be finalized in 2015, as planned, in order to establish a more homogeneous and justified global tax environment. Within the OECD, we helped with determination and efficiency to establish a new global standard for the exchange of information, that will ensure an unprecedented level of openness and cooperation between tax authorities worldwide.

In addition, negotiations are well underway with our 5 close European neighbours (Andorra, Liechtenstein, Monaco, San Marino and Switzerland), to ensure that the automatic exchange of information is cemented in our bilateral relationships with them.
Member States have agreed to proposed changes to the Parent-Subsidiary Directive, which will close loopholes and block a common form of tax avoidance.

The Commission is in close cooperation with the authorities of the Member States concerned to proceed in a constructive and cooperative manner in this area.

On a more general note, Commissioner Vestager’s services have asked information to various countries and she will be vigilant to enforce State aid control in a fair and justified manner. Beyond this, it is clear that we need to take a more systematic approach to the problem of corporate tax avoidance. We need to look at the root causes and consider long-lasting remedies.This includes digging into the question of how to ensure more appropriate taxation for the modern, digital economy.

With this in mind, and in line with the mandate given to me by President Juncker, I will give high priority to advancing the Common Consolidated Corporate Tax Base proposal (CCCTB). The CCCTB could fundamentally change the corporate tax environment in Europe, ensuring a closer link between taxation and economic activity and shutting off major channels of avoidance.

However, it is important to emphasize that the competence primarily lies with the Member States. This has two implications. On one hand, if the Commission can propose any initiative in the fight against tax fraud, only the Member States are entitled to vote and give their consent. Awareness and acceptance on their behalf is required for these countries to act in this direction.

On the other hand, as a consequence of the required unanimous acceptance by the Member States, carrying through this legislation may take more time than we desire. As a matter of fact, it might not even happen at all. To avoid such thing to happen, I intend to work with the European parliament in the coming years to achieve our common objectives in this priority area.

I will use every instrument at my disposal to achieve the concrete results that Europe needs and our citizens expect from us. Existing projects and new ideas, like the automatic exchange of information of tax rulings, will be fostered with strength and conviction.

Apart from the blatant expressions of self-promotion, that these speeches from high public officials always seem to contain and that I tried to remove from these snippets, this was a strong speech by Moscovici. I do believe that the European Commission is indeed involved in a serious battle against undesirable tax avoidance currently and that the Commission does its utmost to minimize fraudulent behaviour, with respect to corporate tax payments within the European Union.

That Chairman of the European Commission Jean Claude Juncker has been the highest official of Europe’s most infamous tax haven Luxembourg for 18 years and that he could and should have known about the countless tax-rulings set in his country, makes him very vulnerable for criticism from the press and the government representatives in the European Council. This particular circumstance will undoubtedly lead to him putting his full focus on the battle of the commission against tax evasion.

On the other hand: as Moscovici already explains, tax avoidance and tax-rulings, which are blatantly distorting the competition and the level playing field for business, are first and foremost questions of national competences (see red and bold text) of the member-states within the European Union.

Delegation of national tax competences towards the European Union and the introduction of draconian anti tax avoidance legislation require unanimity among the member states. Especially the countries with the most favorable tax-rulings for large corporations, like Luxembourg, The Netherlands and Ireland are not very likely candidates to give these competences away easily.

Still, the European Commission wanted to show that it’s got teeth last week, with respect to the corporate tax regulation. One of the usual suspects for tax avoidance (and perhaps even evasion), The Netherlands, received a serious salvo from the European Commission for its ‘sponsorship’ of American coffee behemoth Starbucks.

The ways this company could shift its profits and sales numbers within the European Union, thanks to extremely favourable Dutch tax-rulings, gave the Commission and some other member states a serious eyesore.

They were stunned that the American coffee company, with billions of dollars in profits, could end with a tax payment of close-to-nought. These Dutch rulings likely will be treated as illegal state support, by the European Commission.

Brussels has confronted the Netherlands over sweetheart tax deals by alleging the country artificially lowered Starbucks’ tax bill through a complex, irrational and inappropriate corporate structure.

In a 40-page letter outlining preliminary conclusions from a probe into Starbucks’ Dutch tax deal, the European Commission alleged that the US coffee chain paid less tax than it should have done under Dutch law, labelling it a form of favourable treatment that amounts to an illicit state subsidy.

The Netherlands’ tax ruling is one of four in-depth investigations being carried out by the commission, at a time when Jean-Claude Juncker, its new president, is under fire for widespread tax avoidance in Luxembourg during his 18 years as its premier. Other tax rulings, or so-called comfort letters, under scrutiny include Ireland’s arrangements with Apple and Luxembourg’s clearance of structures used by Fiat and Amazon. The commission is empowered to order countries to recoup any illegal aid.

An in-depth state aid investigation into the Starbucks ruling was launched in the summer and the commission’s letter to the Dutch authorities, published on Friday, details its main allegations. The letter is addressed to Frans Timmermans, the former Dutch foreign minister who has since become commission vice-president.

“At this stage, the commission considers that the measure at issue appears to constitute a reduction of charges that should normally be borne by the entities concerned in the course of their business, and should therefore be considered as operating aid,” the letter said. “According to the commission practice, such aid cannot be considered compatible with the internal market.”

The Netherlands and Starbucks will be pulled into the political storm over sweetheart tax deals on Friday as the European Commission confronts Amsterdam for allegedly subsidising the coffee group’s tax bill.

From my point of view, I wish the Commission success in its battle against tax evasion and avoidance, fraud and illegal state aid: in my country, as well as anywhere else in Europe.

In the case of The Netherlands, the advantages of these tax rulings for the country itself are very limited, in my humble opinion. The companies, that profit from these tax rulings, open in most cases so-called letterbox companies in The Netherlands and rarely genuine headoffices, which bring real economic activity and hundreds of real jobs for Dutch people.

The additional jobs in The Netherlands, which are created as a consequence of such tax rulings, probably amount to a few thousand at the most: mostly jobs for legal representatives and tax experts. These are highly qualified and well-remunerated jobs, but they do very little for general unemployment in The Netherlands. 

On top of that, these tax rulings give an enormous blow to the confidence of Dutch citizens and SME entrepreneurs in their government; they wonder why they have to pay the jackpot, when it comes to taxes, while these ‘fat cat’ corporations pay close-to-nought in taxes?! That is a question that I – and probably the European Commission – share with them.

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