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European Commission Vs. United States Multinational Corporations

European_Commission.svgWhen multinationals from the United States were looking for places to base their corporate headquarters in Europe, they were looking for the most business advantageous countries. For years the countries of Belgium, Ireland, Luxembourg and the Netherlands in particular, offered special consideration for foreign companies known as tax rulings. These financial privileges provided legal ways to reduce and in some cases eliminate, all tax liability in the host country. This whole regime is now under attack, by central authorities and is being pursued through the auspices of the European Commission (EC).

Incumbent President Juncker of the European Comission

Incumbent President Juncker of the European Comission

In October of this year, the finance ministers of the European Union (EU) reached an agreement on the automatic exchange of information on cross border tax rulings. This will assist all 28 member states to detect what is now being deemed as illegal tax practices by foreign corporations.

The EC is moving to make the new rules into a national law before the end of 2016, so it will come into full effect beginning already in 2017. The objective is to remove all individual country discretion on what information and how much will be shared.

The end result is to move towards a system of greater coordination, which will begin to limit the unfair advantage that some nations have in tax policy. In the opinion of European officials, the present system permits some multinationals to have a competitive benefit over their rivals in the industry.

Floor 13 of the Berlaymont, Commission's meeting room

Floor 13 of the Berlaymont, Commission’s meeting room

That the rules on taxation are changing is within the rights of individual countries and the EU at large, in itself is not controversial. What is the issue of contention is the present policy to take action retroactively. Under pressure from major corporations and business interests, the finance ministers did decide to reduce the enforcement time from a decade to just five years. It does reduce the imposition of past tax liability considerably.

This step has already come under harsh criticism from the European Parliament. Alain Lamassoure, the chairman of the Tax Rulings Committee, considers the time limitation to be absurd. He supports cross border tax rulings that will go back for at least ten years.

The implementation of a new EU wide law by 2017 makes tax evasion far more problematic. It will command a major review of multinationals who conduct operations or are moving corporate headquarters, within the borders of the member nations.download (4)

There are ongoing investigations on numerous foreign companies including some well known American ones. These would include Apple which is based in Ireland, Amazon and FiatChrysler which are located in Luxembourg and Starbucks in the Netherlands.

The time limitation for back taxes favors those corporations that began operations in Europe much earlier than others.

Amazon.com-Logo.svgFor example, Amazon which was granted a favorable tax ruling in 2003. The subsidiary of the company known as EU Sarl, records most of Amazon’s European profits. Under a past ruling which is still in force, EU Sarl pays a tax-deductible royalty to a limited liability partnership (LLP) set up in Luxembourg. The catch is the LLP is not subject to taxation within the Grand Duchy. So Amazon can record profits legally in the country and not pay taxes on any of those profits.download (3)

According to the EC, this transfer of money for tax purposes violates EU state aid rules. For them it is an issue of fairness, according to the rules of competition in normal business practices. For those member states that have benefited from the previous rules, there is opposition to the coming harmonization of tax policy. They have kept corporate taxation low, as a means to stimulate growth within their domestic economies.

Starbucks Logo

Starbucks Logo

Rulings were handed down in late October of this year, that both FiatChrysler and Starbucks would pay fines totaling $21.2 million USD (United States dollar) and $31.8 million USD respectively. Their tax agreements were seen to be illegal instances of state aid. The Starbucks tax liability was focused mostly on the pricing of coffee beans. The FiatChrysler case involved interest rates charged on inter-company loans.

Earlier this month, the EC announced an investigation for supposed illegal activity by McDonald’s. The company is being accused of using a maneuver, to reduce taxes on royalties its franchisees paid to the company. The American based company, is just the latest in the growing list of companies that are under scrutiny.

McDonald's Corporation is one of the most recognizable corporations in the world.

McDonald’s Corporation is one of the most recognizable corporations in the world.

McDonald’s as most of the other corporations under examination have been caught in the web of transfer pricing. It refers to the prices established for the exchange of goods and services between two related companies. Often they are international subsidiaries of the same multinational corporation. Taxation is minimized by locating deductions in high tax countries and reporting income in lower tax ones.

Present tax laws assert inter-company transactions should occur at market based prices. This arbitrary standard, allows for the ready movement of corporate assets within various holdings of the multinational. Disputes are therefore quite commonplace between company officials and tax authorities. It is difficult to judge such cases especially when it involves intellectual property, that is not freely available on the open market and is only exchanged within the corporation itself.

Bass Brewery's logo became the first image to be registered as a trademark in the UK, in 1876.

Bass Brewery’s logo became the first image to be registered as a trademark in the UK, in 1876.

It is therefore, difficult to arrive at a standard valuation of intellectual property. Patents, brand names and specific abilities of various companies, present a challenge to individuals in formulating tax liabilities. The legal cases being created against these various firms, are based on the unequal treatment individual corporations received to the disadvantage of actual or potential competitors.

It is the interpretation of tax law and the retro-activity of the EC, that have a number of governments and numerous corporations up in arms. The rulings being issued now, are using what would of previously been considered as inappropriate criteria.

In a twist of irony, the governments that permitted these special considerations are now charged with collecting taxes due and the penalties imposed. In the end, they get to pocket the proceeds. These same governments may appeal the decision, but if they lose in court they still get to keep the money.

It matters enormously whether the funds collected are classified as back taxes or fines. If they are categorized as delinquent or underpaid taxes, the payments can be used as a tax deduction in the United States. This ultimately makes the American taxpayer, the final payee of the whole affair. So far none of the rulings have gone back beyond 2008, but there is no guarantee at this point that they will not in the future. There is no real statute of limitations on tax avoidance.

The "Registered Trade mark" logo

The “Registered Trade mark” logo

The Competition Directorate of the EC is now reviewing near 300 agreements and previous tax rulings, that were made between individual countries within the EC and numerous multinational corporations.

Elsewhere but particularly in the United States, there are claims that only high profile companies with deep pockets are being targeted . The Treasury Department in the United States is concerned on the number of American companies that are being targeted. The Congress of the United States is now becoming more than interested, in what criteria is being used in the imposition of the penalties.

As popular as these corporate tax assessments are to the European public, the expanding scope of the EC in the way it is changing the rules after the fact, has angered corporate leaders and government officials in a growing list of countries. If the EC has announced that new rules were going to be put in place in the future, there would be little that the affected companies could complain about. Accepted rule of law in business, short of outright fraud, made retroactive tax policy mostly out of bounds.

The number of multinationals under investigation continues to grow, but it is the most well known corporations that make the news. There is the danger that the EC tax practices, will now spread to other countries most notably Canada and the United States.

Numerous American states for example have entered into various agreements over the years, to entice European companies to locate factories and operations within their borders. Will there now begin a retaliatory action within the borders of the United States and elsewhere? If there is an escalation, it will only bring another burden on trade and investment in an already declining global economy.

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