European Commission's battle on inquiry into possible tax deals misuse
Just as Northern Ireland prepares for authority to set our own rate of corporation tax, the European Commission is starting an investigation into the possible misuse of company taxation deals and concessions in all the 28 EU member states.
The new commission president, Jean-Claude Juncker, and his Danish Competition Commissioner, Margretha Vestager, have taken the initiative after serious public questioning of the company taxation decisions particularly in Luxembourg. Have taxation decisions created legally unacceptable tax reductions for big international businesses which are unfair assistance or unacceptable State Aid?
Critically for Northern Ireland and other competing EU regions, there is an interest in the different ways in which governments can enhance the attractiveness of 'their' locations. The 12.5% rate of company tax is but one issue.
Even between Northern Ireland and the Republic of Ireland, the relative incentives to attract new investment are more than the simple comparison of corporate tax rates. The scale of tax allowances for capital spending, for research and development, and for patents or royalties have a potential to distort the impact of other fiscal incentives. Under the proposed UK rules, Northern Ireland will continue to implement the UK scale of allowances which may differ from those allowed by the Irish tax code. The impact of one major distorting feature has been acknowledged in the recent agreement by the Irish authorities that the tax reducing (or avoiding) 'double Irish' corporate structure, which created a device for some businesses to transfer profits into a non-taxable subsidiary, would not be available to any new developments. However, the system will continue for eligible existing businesses.The EU-wide question of the acceptable use of fiscal incentives is back on to the agenda of the EU Commission. Because of complaints about aspects of the fiscal policies of some member states, the new commission has asked all 28 states for details of tax deals made since 2010.
The commission is looking for any new company tax rules or concessions, whether generally applicable or designed to support an individual business, that distort competition. In recent months, the commission is reported to have been looking into deals made for businesses in Luxembourg, Ireland, Netherlands, Cyprus, Malta, Belgium and the UK. The enquiries are examining generic national rules and also at deals affecting individual companies.
Companies such as Amazon, Starbucks and Apple have attracted attention, often because effective taxation seems unusually modest.
This EU-wide enquiry will not necessarily gain full support from member states. More recently, initially, the Luxembourg authorities have been defensive in response to publicity that at least 548 tax rulings in Luxembourg have helped multi-national companies with a Luxembourg registration. The big international accounting firms all have expertise on these services.
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The efforts by the EU to make national corporate tax arrangements more acceptable, or less objectionable, may take different forms.
The EU Commission is likely to win support for two inter-related steps.
First, there should be no secret deals directly between a business and one government which grants special unspecified concessions. Second, all businesses in a country should be treated equally in the assessment of company taxation. Secrecy and special concessions attract suspicion and hostility.
That may be the easier part of the reform. More difficult, will be seeking EU-wide rules, or harmonisation, on tax allowances. Differences in the tax treatment of inter-company royalty payments or inter-company loans and equity capital can open the door to financial arrangements that earn royalties or interest in low tax regimes and affect financial structures.
The introduction of a separate local corporation tax rate will be significant but it is only part of a much more complex financially competitive world.