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Global tax competition and its reduction

by Frank Schnittger Fri Sep 2nd, 2016 at 12:52:52 PM EST

The Apple case has highlighted the degree to which major global corporates have been able to avoid paying any significant amount of corporate tax at all, never mind just taking advantage of relatively low headline tax rates like Ireland's 12.5% rate. In addition, even headline tax rates have been declining globally, and many countries operate complex systems of exemptions which means that the actual effective rate paid by corporates does not bear any relationship to the headline rate.

This distorts competition in a number of ways: It advantages the bigger multinational players at the expensive of smaller local businesses which cannot claim such exemptions. It encourages a race to the bottom in corporate taxation amongst countries competing for FDI. It reduces the tax take for cash strapped states seeking to maintain social services, and increases the power of wealthy corporates relative to to democratic states. It can be argued that this is the dominant engine driving the increase in global inequality more generally.

The Irish Government case is that there was no special deal for Apple. Apple merely sought and got clarification from the Revenue Commissioners that a corporate structure their lawyers were proposing was legal in Ireland and that it would be treated, for tax purposes, in the way they were advised it would be.

Apple exploited two key loopholes: Firstly, their ability, under US Tax law, to defer repatriation of profits indefinitely without payment of tax.  This enables them to lobby a future administration to reduce tax rates with the incentive that they will promise to repatriate their cash pile if that is done.

Secondly, they exploited their ability, under Irish law, to establish a Company which was effectively not tax resident in Ireland or anywhere else. When Noonan closed off that loophole last year, they had a choice: They could register their (nominal) HQ in Ireland or somewhere else with an even lower tax rate. They choose Ireland because they have considerable operations here, considerable clout with the Government, and because they were concerned that the EU would come after them if they registered it in the Cayman Islands or some other tax shelter outside the EU.  

This is common practice among global Multinationals. Diageo is tax resident in Holland even though it doesn't have much of a presence there. Luxembourg is famous for sheltering major Corporations which have little more than brass plate operations there.

One effect of their HQ and it's associated cash pile becoming tax resident in Ireland may well have been the extraordinary rise in Ireland's GDP (26%) announced a few weeks back without official explanation other than that some global corporates may have moved there assets and IP here. The other effect is that it may well reduce their tax liability in the USA when they do, eventually, repatriate their profits to the USA, as US tax law allows them to offset any taxes paid abroad against their liability in the USA. Hence the concerns expressed by the White House over the Commission finding. Effectively, any money paid in tax to Ireland is less tax revenue for the USA.

The Commission's case relates only to historic profits made while the Apple HQ was effectively not tax resident anywhere. It is effectively applying Noonan's abolition of non-tax resident Companies established under Irish law retrospectively. If it can prove that it was illegal for Ireland ever to have allowed a company to be incorporated here which was not also tax resident here, they may well have a case. I do not know what the international legal situation is regarding this, but Noonan clearly saw it as open to abuse when he abolished it last year.

Apple are feeling aggrieved because they believe they were always tax compliant and even did the decent thing last year when non-tax resident companies could no long operate in Ireland. They registered their HQ and paid tax in Ireland where a lot of their non-US operations are based. Of course those profits were generated from sales all over the world and should more properly be paid in the country where the sale took place. But then we have the whole issue of transfer pricing which can effectively ensure that all profits are made by HQ in a country of their choice.

Long term there is no substitute for an international Treaty regulating how profits should be allocated between markets. At the moment they can effectively be declared wherever they choose to locate their nominal HQ which will generally be in a low tax country or one which offers exemptions for profits made elsewhere or generous allowances for "R&D" and IP. To avoid a race to the bottom such a Treaty should also regulate what tax rates or Bands countries may apply. However there is no incentive for smaller countries to agree to this as it represents their main way of attracting major companies to their otherwise insignificant markets.

To overcome this problem current efforts by the OECD and others to regulate corporate taxation have focused on the tax base erosion effects of artificial transfer pricing rather than on the headline tax rates themselves. However this is hideously complex and requires tax authorities to delve deeply into the internal financial arrangements within companies. How do you define a non-artificial transfer price? Is it cost plus? Cost plus what? Given that pricing in a market economy is generally defined by what the market will bear, rather than the cost of production, it can be argued that any regulatory interference in internal pricing arrangements is "artificial".

The reality is that the globalisation of capitalism has resulted in a great concentration of wealth and capital by a few people and corporations in a few regions within a few countries, and other countries have responded by lowering their tax corporate tax rates to make their locations more attractive for global corporates and to encourage global corporates to declare their profits in their jurisdictions. This has led to a race to the bottom in corporate tax rates globally which is exacerbating the already stark inequalities in the distribution of wealth. States are being denied revenues they could otherwise use for social redistributive services.

The only solution, it seems to me, is to try negotiate a global tax Treaty which goes some way towards standardising tax bands but which gives some scope to smaller/weaker economies to set somewhat lower rates. The most egregious abuses right now do not concern countries with low corporate tax rates like Ireland's 12.5% rate, but the number of global corporates who are able to avoid paying almost any tax on their profits anywhere. A Global minimum effective rate of say 10% and the elimination of all loopholes for non-territorial entities and artificial (and open to abuse) exemptions for R&D etc. would go at least some way towards addressing this problem. The Treaty could also provide for a slow and gradual increase in this minimum rate for countries which reach agreed development goals.

Our problem is that the world is increasingly run by global corporates who are far too powerful to be effectively policed by individual nation states acting on their own. Apple can simply play off one country against another and go with the lowest bidder. The price for access to global markets has to be the submission of those corporates to minimum global standards of regulation, taxation and governance. I do not hold my breath that this will happen any time soon. One of the motivations behind Brexit is that it will enable the UK to undercut the EU on tax rates and regulatory regimes. Or at least that is what the Brexiteers think.

So the trend has been all one way - ever greater global corporate power, lower or non-existing corporate taxation and regulation, and those few institutions capable of challenging such trends - like the EU Commission - under increasing attack. The US Government has effectively been acting as an advocate on behalf of Apple in this dispute. If the EU wants to display a new sense of purpose and relevance post Brexit, getting to grips with the Apples of this world is not a bad place to start. The problem is that it may not have the competencies required to do so. Prosecuting Apple under state aid rules when the real problem is global corporate tax competition seems a stretch, at best.

Perhaps Brexit will enable a new EU Treaty to be passed which does address these problems, but only if the EU also develops its fiscal transfer powers to enable those peripheral member states to develop in a situation where they no longer have tax competition as an effective development tool. If the only way peripheral member state can compete with the central powers is through tax competition they will fight tooth and nail to retain sovereignty over taxation. The EU has to find a way to ensure a fair and equal opportunity for all member states if it is to eliminate the gaming of the system to the detriment of the whole which is what tax competition effectively represents.

Commissioner Margrethe Vestager has very much overstepped the mark and I could see calls for her resignation by the Irish Government.  Until a couple of days before the announcement, the Government were briefing that the finding would, at most, be a matter of a couple of hundred million. That would have created an awkward problem, but ultimately one for the tax nerds to sort out. Who gave them this mis-information? Did they not have some entitlement to prior notice?

For Margrethe Vestager to say, effectively, that "Hey, it's none of my business, but if any of the the other 27 member states want to see our files to see if they can grab some of the €13 Bn, they are very welcome to do so" is to declare open war on the Irish Government.  

I am very much in favour of the EU taking on a more robust role in ensuring greater corporate tax collection - provided they can secure the required competencies from member states -  but if this is the way they are going to carry on, they are doing their best to promote an Ire-exit movement in Ireland.

David McWilliams is already auditioning for the Nigel Farage role.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Sep 2nd, 2016 at 05:15:15 PM EST
She has not. I've been reading, and her case looks pretty darn ironclad.
The Irish government acted illegally in giving Apple a sweetheart deal. She nailed Apple to the wall for it, but she did so within the powers explicitly granted to her.
Maybe she's the first commissioner to be this.. effective..
 But she's not overstepping any legal lines, and as a matter of politics, if she wins.. and she will, then this will very greatly strengthen her hand, and the legitimacy of the union, simply because the optics of this move are very good with the european public.  
by Thomas on Fri Sep 2nd, 2016 at 05:53:18 PM EST
[ Parent ]
What. is. this. sweatheart. deal. you are always talking about?

Apple set up a non-tax resident company in Ireland.  At the time anyone could do it, and many did. I don't agree with it, and am glad Noonan abolished that provision last year.  But that does not give Vestager the power to make that abolition retro-active for 20 odd years.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Sep 2nd, 2016 at 06:06:05 PM EST
[ Parent ]
... Name one. No, actually, name a dozen. If this stunt had been universally available, just about no company would have been paying corporate tax in Ireland. Which, you know, they kind of did. Thus: special treatment.
by Thomas on Fri Sep 2nd, 2016 at 06:20:38 PM EST
[ Parent ]
All companies, including Apple, pay tax on their activities in Ireland. Some have also based their European or Non-US HQ's here and may or may not book their international sales through those those HQ's.

Since the abolition of non-tax resident companies registered here, those sales will now also be subject to corporation tax here.  Some may have shifted their sales HQs out of this jurisdiction when non-tax residency status was no longer available.  

WE DO NOT KNOW precisely what companies have adopted what arrangements, as these arrangements are deemed commercially sensitive and highly confidential. But given that most rely on tax advice from the big 5 accountancy firms, I would suspect many have adopted similar arrangements.

You are simply making an assumption that this practice wasn't widespread.  Personally I would be very surprised if it wasn't. Even the Commission only investigated Apple and no other Company, SO THEY DO NOT KNOW how widespread the practice was.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Sep 2nd, 2016 at 06:38:23 PM EST
[ Parent ]
At the time anyone could do it, and many did.

Well, how many? and who? That would be interesting to know. Is there any way to find out?
by Bernard on Fri Sep 2nd, 2016 at 06:52:55 PM EST
[ Parent ]
European Union states want to know!

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Sep 2nd, 2016 at 11:52:56 PM EST
[ Parent ]
Is there any way to find out?

Dutch Sandwich
Double Irish arrangement

by det on Sat Sep 3rd, 2016 at 01:00:13 AM EST
[ Parent ]
Read this:
If this was standard, then apple is not involation of the competetiveness directive - instead, they would be in violation of the EU transfer pricing mechanism, which most emphatically does not apply to stateless entities, and would owe back taxes not at the Irish rate, but at the rate where their goods were sold. Which would come to 60 billion, not 19.

Once apple catches on they'll likely drop the appeal.

by Thomas on Sun Sep 4th, 2016 at 01:18:40 PM EST
[ Parent ]
A correspondent notes: "What would be really amusing would be if the 28 decide that their individual back tax liabilities add up to more than €13bn, since Vestager has told them to recover the amounts from Ireland, not from Apple..."

Under what Treaty does Ireland act as a tax collector for other member states?  She is really making this up as she goes along without any reference to her actual competencies. Going after Apple may make the Commission feel more relevant and popular in Europe, but screwing around National Governments, especially weak ones, is going to destroy whatever goodwill the EU still has faster than anyone can imagine. This is the sort of dictatorship by bureaucrats the Brexiteers warned of - and one which I always took to be a somewhat unfair caricature.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Sep 2nd, 2016 at 05:31:12 PM EST
I remember discussions here where the effective corp tax rate in France and Germany was often very far below the headline rate for large (native?) corporates.

EU corporation tax reform needs to be paired with the development of a proper fiscal and industrial policy EU wide. (Which isn't going to happen under current theological strictures.)

by Colman (colman at eurotrib.com) on Sat Sep 3rd, 2016 at 09:50:45 AM EST
There are tax reduction mechanism, such as R&D tax credit. To be able to take fully advantage of these, a business needs to have a specialist doing this full-time.

In practice, only bigger businesses can afford this and get their effective tax rates reduced, leaving the smaller outfit paying full rate.

No need to be "native", mind you (the EU would have thrown the book long ago): all big companies, French, German and others can "invest" in a full-time tax accountant.

by Bernard on Sat Sep 3rd, 2016 at 09:00:37 PM EST
[ Parent ]
R&D tax credit is a major fraud vehicle - and regrettably the current government stated soon after the elections that no company would be investigated from suspicion of R&D subsidy fraud alone (this would only get looked into if you were also suspected of another fraud).

I know of a consulting business (for obvious reason I cannot name them here) that was getting around 10% of its revenue in R&D subsidies (not 10% untaxable - 10% of the revenue was received from the subsidy - we are talking millions of euros per year). Of course they did no R&D whatsoever. But they were paying a legal practice to present some of the consulting work as eligible.
Essentially anything that was not resource augmentation was deemed R1D because, you see, since you tailor the way to do it to the client's needs, that means it is a new service/product every time, so you researched and developed. By this reckoning the people who fitted my kitchen should have claimed it on R&D...

Management was paying itself so ridiculously highly that the company would have had negative results in all but one year without this scam - and I have it from several sources that this was far from a unique case. So the R&D tax credit is turning fraudsters from the failed businessmen they should be into millionaires (or maybe billionaires in some cases) on public money.
It is not, however, doing very much for research...

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Sun Sep 4th, 2016 at 07:10:20 AM EST
[ Parent ]
It's not only this: some big businesses, knowing that their smaller subcontractors have started claiming R&D tax credit, have demanded for this tax credit to be subtracted from their subcontracting work invoices, in practice pocketing their contractor's tax credits.

Trump is not alone in stiffing contractors.

by Bernard on Sun Sep 4th, 2016 at 12:21:50 PM EST
[ Parent ]
Starbucks, Amazon pay less tax than a sausage stand, Austria says | Reuters
Multinationals like coffee chain Starbucks (SBUX.O) and online retailer Amazon (AMZN.O) pay less tax in Austria than one of the country's tiny sausage stands, the republic's center-left chancellor lamented in an interview published on Friday.

Chancellor Christian Kern, head of the Social Democrats and of the centrist coalition government, also criticized internet giants Google (GOOGL.O) and Facebook (FB.O), saying that if they paid more tax subsidies for print media could increase.

"Every Viennese cafe, every sausage stand pays more tax in Austria than a multinational corporation," Kern was quoted as saying in an interview with newspaper Der Standard, invoking two potent symbols of the Austrian capital's food culture.

"That goes for Starbucks, Amazon and other companies," he said, praising the European Commission's ruling this week that Apple (AAPL.O) should pay up to 13 billion euros ($14.5 billion) in taxes plus interest to Ireland because a special scheme to route profits through that country was illegal state aid.

by Bernard on Sat Sep 3rd, 2016 at 08:55:33 PM EST
This is an amazingly informative thread!

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Sep 4th, 2016 at 01:28:26 PM EST
[ Parent ]
Once again unprosecuted fraud becomes the de facto business model. Everyone who can is forced to engage in this same activity in order to survive and fraud drives out honest business practices. This seems to be the hall mark of Neo-liberal policies and has certainly been the case for the US financial sector for several decades.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Sep 4th, 2016 at 01:41:19 PM EST
[ Parent ]
The US Business Round Table has sent a menacing letter to the 28 EU heads of government, and an assortment of other people, concerning the Commission's Apple ruling :
German Federal Minister of Finance Dr. Wolfgang Schäuble
President of the European Council Donald Tusk
President of the European Commission Jean-Claude Juncker
European Commissioner for Competition Margrethe Vestager

However, none of these people have any direct influence on the ruling : the last word on the matter belongs to the European Court of Justice.

Meanwhile, Japan has taken a slice of Apple for avoided taxes (mere hundreds of millions).

And Vestager has a pipeline of cases, including Amazon and McDonalds. Yum yum.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Mon Sep 19th, 2016 at 11:29:38 AM EST
 From the Business Rountable letter:
I urge you to work with your colleagues to overturn this decision and seek an end to the use of state aid investigations that override the ability of your country and other EU member states to determine and interpret their own tax laws.

Interesting how this fits in with the US push for all in process "trade agreements" being pushed by the Obama admistration.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Sep 19th, 2016 at 02:33:25 PM EST
[ Parent ]

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