Fighting Over Tax Revenue in Europe

There’s been a burst of news recently about how multinational companies (“MNCs”) use corporate structures (and of course the transfer pricing that goes with it) to reduce their tax bills. Starbucks, Apple, and most recently Amazon have all been getting lots of unwelcome press about their European tax planning strategies.

This is nothing new, of course. But there does seem to be a slightly different flavor to the criticism this time around. In the current round of attention it seems that national tax administrations are coming under as much scrutiny as the companies involved, with certain countries being accused of essentially colluding with MNCs to facilitate their tax minimization. Last week we learned that the EU has commenced an anti-competition investigation against Luxembourg related to the tax treatment that the country applies to MNCs.  And this week it was announced that Ireland will, under pressure, revise its tax regulations to eliminate one type of corporate structure that MNCs can use to reduce their tax liabilities.  The Economist reports:

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BONO may front one of the world’s most popular rock bands, but the U2 singer did not earn many new fans when he recently defended Ireland’s controversial tax policies, which are widely seen as helping multinationals to avoid paying their fair share. Even Ireland’s government seems to be having doubts. On October 14th it announced plans to close the country’s biggest loophole, the “Double Irish”.

The Double Irish allows companies to shift their profits from high-tax countries to havens… Users can thereby cut their effective tax rate—perfectly legally—far below Ireland’s already low 12.5% rate, in some cases down to less than 2%…

From January all new companies domiciled in Ireland will also have to be tax-residents there, making the Double Irish impossible. Ireland is acting under pressure from America, the European Commission and the OECD, which are working on multilateral reform of international tax rules to curb avoidance.

On one level focusing attention on the countries involved, rather than MNCs, makes perfect sense.  After all, MNCs are simply doing the best that they can for their owners, given each country’s tax rules as they are written. (The degree of involvement that MNCs have in the writing of those tax rules is an interesting but separate question that we’ll have to leave for another time.) So if you think that MNCs should pay higher taxes, you really should be directing your criticism at the creators and administrators of tax regulations, not the taxpayers.

But why now?  And why does the attention seem to be falling not on those stereotypical sunny, shorts-wearing, palm tree-fringed, tropical island tax havens, but instead on respectable (if rather more gloomy, weather-wise) northern European nations like the Netherlands, Luxembourg, and Ireland?

I think a couple of factors are contributing to this.  First of all, I don’t think it’s a coincidence that the countries in question are EU members. In case you hadn’t noticed, the EU has been going through a bit of an economic rough patch over the past few years. The eurozone financial crisis that began in earnest in 2010 has highlighted and contributed to dramatic differences in economic performance and budget policy between EU member nations. Suspicion and resentment between European countries over economic and financial issues has probably never been greater since before the second world war.

But more specifically, I think that the troubled economic landscape in Europe over the past several years has brought to the forefront something that usually lies unseen in the background, but which transfer pricing practitioners are constantly reminded of: the world’s major countries are engaged in a constant, usually quiet battle with each other for tax revenue from MNCs.  It’s not quite true that MNC tax payments are a zero sum game, but as a first approximation that idea captures how tax administrations view the problem.  Each MNC has a pie of global tax payments. And each tax administration wants to capture as large a slice of that pie as they can.

So as many European countries feel the accumulated burden of years of economic and financial struggle, it’s not surprising that they have become more aggressive with each other in their battles over the share of the tax revenue they can claim from the world’s largest MNCs. I think this phenomenon will help keep the pressure on the participants in the OECD BEPS project to make sure that the new rules that come out of those negotiations are quite strict. And I’m sure we haven’t heard the last of how Europe’s low-tax jurisdictions help the world’s MNCs to reduce their overall tax bills.

A New Arena for Transfer Pricing Disputes

You may have seen last week’s news that the tax treatment of Amazon by the country of Luxembourg is being examined by the European Commission as a possible violation of EU competition rules.This follows the opening of similar investigations by the EU into the tax arrangements of Apple, Starbucks, and Fiat.

This is interesting for a variety of reasons.  First of all, this marks one of the first times that transfer pricing arrangements are being actively and specifically scrutinized not by any national tax authority, but by a multinational body with no direct financial stake in the outcome.  Secondly, the tax authorities of Ireland and Luxembourg — i.e., the tax authorities that stand to gain tax revenue if the EU rules against the companies in each case — are actually in the position of defending those companies, even though if they lose the legal battle with the EU, they stand to gain billions of dollars in tax revenue.

But perhaps the most fascinating aspect of this development is that transfer pricing is now being explicitly and directly addressed as an aspect of competition policy, rather than simply as a tax matter. The Economist put it thus (subscription required):

[T]he European Commission has been exploring those dark recesses to establish whether multinationals’ arrangements with tax-friendly Ireland, Luxembourg and the Netherlands amount to illegal subsidies. For the three companies targeted so far (Apple, Fiat and Starbucks), and for the many others that routinely engage in complex tax-planning, the probes have taken the crackdown on cheeky tax avoidance into uncomfortable new territory…

Citing minutes of meetings between Apple’s tax advisers and officials, the commission suggests they reached a quid pro quo in which the company was allowed to shelter profits from tax in return for maintaining jobs. The suspected mechanism was “transfer pricing” agreements that deviated from international accounting guidelines, which require transactions between group subsidiaries to be priced at market rates. The costs attributable to one Irish subsidiary appear to have been “reverse-engineered” to arrive at a certain level of taxable income with “no economic basis”, says the commission.

These investigations and the resulting legal fallout could have substantial implications well beyond the companies and countries in question. If transfer pricing arrangements become subject to anti-competition investigations in addition to scrutiny from tax authorities, the regulatory landscape suddenly has the potential to look very different from what we’re used to.  Stay tuned.

Welcome

Welcome to the website of MINA Economics. My name is Kash Mansori, and I’m an economist who has been thinking, reading, and writing about transfer pricing for over 15 years. My firm provides economic consulting services to clients around the world; we specialize in solving economic problems and providing analyses and documentation for transfer pricing, valuation, international supply chain management, and related business economics purposes.

In addition to performing directly client-related work, I also spend a lot of time keeping up with the field of transfer pricing more generally. While that’s an eye-glazing proposition to most sensible people, it so happens that I actually like this stuff and find it interesting.  And that’s why I thought it might be helpful for me share my understanding and perspective to interested readers through this blog.

My intention is to develop this blog into a useful resource for transfer pricing information and analysis for economists, transfer pricing practitioners, corporate management, and tax specialists.  Some of the information on here will about be things that I’ve come across or read (so you don’t have to), while other posts will be intended more for my colleagues in the consulting profession, as a way to help advance our understanding and ability to help solve the problems confronting many of our clients.

Content to be provided here will include:

  • News about significant policy developments related to transfer pricing and international taxation;
  • Summaries of and links to interesting articles written by transfer pricing professionals;
  • Occasional primers on various aspects of transfer pricing that the consumers of transfer pricing consulting services might find useful;
  • Analysis of trends, techniques, and other recent developments in the field;
  • And who knows what else…?

New posts should be available several times per month, so feel free to check back from time to time for the latest news and analysis.  And please note that feedback is encouraged; you’re welcome to comment on specific articles or posts, or to simply contact me directly with questions or suggestions.  I’ll even take requests, so if there’s an issue in transfer pricing that you would like me to explore in this blog, just let me know.  In the meantime… enjoy!