Is Europe the best Offshore (low tax) destination?

By Peter Spiegel
January 27, 2016

The Financial Times Brussels briefing.

“Even the €1.25bn tax grab is not all it seems. More than half that money is not actually wanted by Luxembourg, Belgium or the Netherlands (all three are expected to appeal). Ireland will definitely fight like a polecat through the courts to make sure Apple does not give it a euro of extra tax.”

For the first time since the so-called LuxLeaks scandal broke more than a year ago – where documents leaked showing hundreds of multinationals had received extremely favourable tax treatment in Luxembourg – the issue of corporate tax avoidance has suddenly moved back into the spotlight thanks to actions taken by both London and Brussels to begin clawing back millions in allegedly underpaid taxes.

Today, Pierre Moscovici, the former French finance minister who now oversees tax issues for the European Commission, is due to unveil the latest in a series of measures aimed at cracking down on “sweetheart” tax deals. Mr Moscovici’s task today will be as much political as financial, since his boss Jean-Claude Juncker was Luxembourg prime minister when the LuxLeaks deals were struck and has suffered some political damage as a result.

Alex Barker, who long covered corporate tax issues for the FT Brussels bureau, has tallied up the windfall for treasuries thus far and asks whether the headline numbers, which seem big, are actually that big at all:

The long suffering European taxman is looking for redress. Over the past three months alone roughly €1.25bn has been clawed back from multinationals across the EU, led by the European Commission’s series of cases brought against companies in Belgium, Luxembourg and the Netherlands, which Mr Moscovici will no doubt tout today. It all sounds impressive. But scratch the surface and an enduring truth becomes clear: tax collectors are usually more hampered by European politics than helped.  

First for the payback. It started with the cases brought by Margrethe Vestager, the Brussels competition chief, against Fiat and Starbucks in October, calling for Luxembourg and the Netherlands to recoup a modest €60m of unpaid taxes. That was trumped in January by her order to Belgium to to recover €700m from 35 multinationals. Once the Irish elections are over, the big fish, Apple, moves back into the commission’s sights. If Ms Vestager pulls that trigger, the multi-billion euro order would likely dwarf past records.  

Then there are the national initiatives. From France to Italy to the UK, taxmen have been nipping at the heels of big (mainly US) multinationals that have engaged in aggressive tax planning. In December, Apple settled a €318m tax bill with Italy, and just this week Google agreed to pay £130m to the UK (a deal that appears to have turned into a political liability for George Osborne, the UK chancellor). France is holding out for even more (watch this space).

Mr Moscovici is hoping EU countries will join forces to stop multinationasl exploiting gaps in cross-border rules to channel profits to subsidiaries in low-tax countries (sometimes within the EU). They draw on years of work to tackle profit shifting by the OECD. The trouble is EU tax policy is almost impossible to agree. Unanimity is required and rarely achieved. While all countries give lip service to tax reform, plenty will jealously guard their unique advantages for business, even if that means collectively the EU tax-take is hurt.

Even the €1.25bn tax grab is not all it seems. More than half that money is not actually wanted by Luxembourg, Belgium or the Netherlands (all three are expected to appeal). Ireland will definitely fight like a polecat through the courts to make sure Apple does not give it a euro of extra tax. Dublin doesn’t want multinationals to think Brussels can undermine its corporate tax regime, which offers one of the lowest headline rates in the developed world.

The terms of Google’s deal with the UK are also telling. Far from applaud Mr Osborne, the settlement has managed to unite an unlikely chorus of critics — John McDonnell, the Labour shadow chancellor, called it “an unholy alliance between myself, The Sun, the mayor of London and even Number 10”. A parliamentary inquiry is already launched into why Mr Osborne failed to get more. Critics charge it is exactly the kind of sweetheart deal that Europe is trying to stop. Google’s deal falls short, for instance, of Mr Moscovici’s ideal tax model.  

And then there is Washington. On Monday, Johnson Controls proposed a $20bn tie-up with Tyco that would move the US manufacturer’s domicile to Ireland and heats-up the “tax inversion” debate in the US Congress – and the presidential campaign. The combination of more such deals and unhappiness over Europe tilting at American corporate champions may be enough to turn the tide, leading to a lower US rate or “amnesty” granted to US companies to repatriate profits. And then, of course, the big winner of the Great European Tax Grab won’t be Europe, but the US Internal Revenue Service.​

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