Abstract
Let us start with a summary. It is not generally understood that in the area of taxation important parts of the regulation of world capitalism are at stake. And the fact has escaped many that—still in the field of taxation—the only truly global rule for any length of time was introduced and signed by a host of countries in October 2014, and concerned the automatic exchange of information among fiscal authorities. While this represents a revolutionary development (as we will see later)—given that it presents some serious problems to holders of a great amount of wealth, to tax evaders and to money launderers—it is nevertheless incomplete. It does not present, in fact, any particular problem for multinationals to legally avoid paying taxes, and to subtract them from the country where the income is generated, basically keeping them for themselves. This not only causes a loss of revenue but also distorts competition in their favour. We must tackle a situation whereby companies such as Amazon, Apple and Starbucks and many others are taxed at approximately 2 % on their profits while other producers are subjected to full taxation and labour is overtaxed. Enormous losses of revenue (from tax avoidance, evasion and illegal activities) are at stake, to the tune of as much as 1000 billion euros annually, according to the previous Commission’s own estimates.
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Notes
- 1.
This chapter is based on a lecture given at the European Interparliamentary Conference Under Article 13 of the Fiscal Compact (29–30 September 2014), organized during the European Semester of Italian Presidency by the Italian Chamber of Deputies, Palazzo Montecitorio, in the section titled “The coordination of fiscal policies in Europe.” Compared to that text, this chapter was extensively remodeled, to make it less technical and more accessible to the non-specialist reader. The author is Professor of International Monetary Economics and was President of the Bicameral Commission for Tax Reform in the XIII Legislature (1996–2001) and author of the White Paper on Corporate Taxation (2007), drawn up by the Commission that bears his name.
- 2.
Recently, Algirdas Semeta, Commissioner for Taxation and Customs Union, also referred to the same number. As a reminder, the Union’s budget is approximately 150 billion euros.
- 3.
A good example of this is the taxation of holding companies. The system that benefited them for the fiscal treatment of profits and capital gain, called Participation Exemption (Pex), was gradually extended from the Benelux countries to almost all other European countries at the beginning of 2000, to prevent the relocation of their holding companies. It would have been necessary for a European initiative to have been undertaken to prevent such a change and for the pre-existing tax system (of tax credit on dividends) to have been made systemic and truly European. But that never happened, and countries were left to decide what to do on their own. However, the spread of the Pex system has not put an end to tax competition because the latter has been transferred to the domain of regulatory provisions in the legislation of some countries (for example, the UK and the Netherlands). These countries facilitate opportunistic behaviour by enabling companies established in them to effectively have their management and tax residence in a another country and, at the same time, by allowing them to lock down the ownership by adopting a sheme of increased voting rights for stable shareholders (see, for example, the case of the transfer of the Fiat headquarters to the Netherlands and the fiscal office to the UK). As a result, a greater recognition of increased voting rights of the major shareholder has spread to other European fiscal systems. It is inevitable that, in the same way, the regime of “patent box” will become more diffuse as part of the ongoing competition to attract corporations to relocate their headquarters. It allows for the imposition of an ad hoc tax (between 5 and 10 %) on profits related to the use of patents. It is also called the “innovation box” because of its apparent purpose of encouraging innovation and skilled jobs in Research and Development, while in reality it rewards the commercialization of existing patents rather than the development of new ones. Given that with competion there is no end, there are countries (such as the UK) where 100 % of the profits earned on products that fall into this regime are recognized as valid even when the holding of the patents is secondary to their production.
- 4.
The Cadbury Schweppes sentence was issued in connection with an appeal by the parent company settled in Britain against the national tax authorities. The case concerned the profits of two subsidiaries established in Ireland in order to qualify for the host’s lower rate of profits taxation. The lawsuit was filed (in 2000) against the British tax authorities which, according to the law in force in that country, obliged the parent company to compensate for the difference between taxes paid abroad and taxes that should have been paid in the UK if the company had been resident in that country. The Court (in September 2006) ruled in favour of Cadbury on the principle enshrined in the Treaties of the “freedom of establishment”, which from then on has become the principle that deprived individual national authorities of the power to limit tax competition.
- 5.
“Particularistic” was the definition used owing to the fact that it was not possible for residents to access the same regime.
- 6.
Ireland rate on profits is fixed at 12.5 %. The average tax rate on profits in Europe has being decreasing from 45 % in 1980 to 24 % in 2014, with an ever narrowing variance. The trend is contininuing.
- 7.
It impinges upon progressivity in personal taxation, because a high marginal rate on personal income tax make convenient for rich people to transform personal incomes into capital incomes.
- 8.
A graphic notation: the bullet points indicate lines of action and possible contents that are desirable for the Union to pursue.
- 9.
At the time of writing there are more than 70 signatory countries. To appreciate this milestone let us remember that it took 11 years from when the European directive on savings of 2003 was launched to close loopholes and extend the scope of application to a sufficient range of financial instruments. That directive aimed at making financial income generated elsewhere subject to taxation in the country of residence (with the exception of Luxembourg, Austria and Ireland) but its correction was long retarded owing to the presence in Europe of countries that took advantage of such loopholes.
- 10.
However we must note that since 2012 the UK has abandoned the presumption of tax avoidance for the activity of an enterprise located in a tax haven.
- 11.
But also Ikea, PepsiCo, FedEx, Procter & Gamble, Vodafone, Microsoft, and many more.
- 12.
Agreements are made through the so-called tax ruling or advance pricing agreement (APA), a transaction tax agreement, where companies ask in advance what their taxation will be upon their relocation. “Normal” taxation rates are then applied (which do not result in “harmful competition”—for example, 25 % in the Netherlands), but the abatement of the tax base or other provisions reduce dramatically the taxable profits.
- 13.
Such a tax exists in Italy, for example, although it is only 5 % for countries that have subscribed to a convention and is 30 % for the others. In each of the tax havens within the Union there are no withholding taxes on payments for intangibles.
- 14.
A British survey highlights that since its arrival in Britain in 1988, Starbucks paid until 2012 cumulatively taxes for 11.5 million euros against sales of 4.5 billion euros.
- 15.
Ordering a book worth 50 euro, for instance, generates an integrated taxable profit of 1.5 cents. Amazon has eight mega warehouses in Great Britain and 6000 employees; It has a large number of employees in France, and Germany, but the bulk of the profits go to its Luxembourg headquarter where it has 200 employees.
- 16.
This was raised in the US Senate’s inquiry into Apple. Explaining which legal loopholes make it possible implies to going into technical details. In a nutshell, companies in Ireland are considered foreign companies if their effective management is abroad. At the same time, they are also considered foreign companies for the fiscal administration of the US if they are legally established outside national borders. Moreover, in Ireland they are not obliged to publish their financial statement if they are unincorporated (as Apple’s subsidiaries are). In major European markets, Apple fixes (from Ireland) wholesale prices to subsidiaries in order to limit the profits taxed locally. In 2011, for example, Apple declared local losses of the local holding company in Germany and France and paid taxes for 10.5 million euros in the UK on sales worth more than 1.3 billion euros.
- 17.
This paper was already written (the report to the European Parliaments is dated 30 September 2014) when, a month later, the Junker case broke (Prime Minister of Luxemburg for 15 years) on the secret agreements signed by his country with many multinational companies to obtain settlement in exchange for the remission of taxes. So far, only agreements brokered by the consulting firm Pricewaterhouse Coopers have emerged. If I was fully aware of the existence of such practices how was it possible that they were not known to other political leaders in Europe? Perhaps they have not stopped this practice because tax competition is beneficial? Moreover, how could it have escaped the European Parliament’s notice that Junker had been for decades Luxembourg Prime Minister?
- 18.
The digital economy represents 5 % of GDP in Western countries and is rapidly growing. It is plausible to assume it will reach double-digit levels soon.
- 19.
The first tranche of taxation goes to the state where the company operates with a stable organization (in practice, the local head company in the area). The state in which the parent company operates upstream applies the second tranche according to its own criteria, and so on, recognizing what has already been paid in income taxes in those countries with which it has signed a treaty against double taxation. Today, the principle of Home State Taxation is undermined not only by the management of transfer pricing in internal trade of conglomerates, but also by the fact that in the digital economy a stable organization in the country of sales is not necessary. However, the new EU rules on indirect taxes, VAT, (which came into force in 2015) states that companies that sell, online, certain services (and with a sales turnover exceeding certain thresholds) should identify themselves in every EU consumer country.
- 20.
The solution put forward for Italy provides a withholding tax of 25 % for online sales, unless the seller establishes a stable organization in the country, in which case it would be taxed on an ordinary basis.
- 21.
Italy has agreed with Apple a payment of 318 mln euros out of an initial request of 979 mln for profits generated in the country in the years 2008–14. As part of the agreement, Apple will establish a stable organization. The weapon that was wielded to convince the company to end litigation was the threat of a criminal investigation. At present, other cases are open with Google, Amazon, Twitter and a few other giants. In the UK, the case against Google has been closed with the payment of a modest sum of 130 million pounds for the period 2005–15. The UK has approved a levy of 25 % on sales as a tax on (imputed) profits obtained by multinationals within the national boundaries (and applicable to those operating without stable organizations and through offshore branches). It is called the Diverted Profit Tax. See Chap. 7 for more details.
- 22.
At the moment only the investigations of Fiat (Luxembour) and Starbucks(Netherland) have been completed and the host countries forced to “retrieve” almost 30 mln euros in each case. The last case that has been opened involves MacDonald. As we go to press Margrethe Vestager, the EU’s competition commissioner, announced on 3 September 2016 that Apple must return 13 billion euros to the Irish government for taxes on profits due for the period 1991–2007. These taxes were avoided thanks to the preferential treatment offered by the Irish government but considered by the EU as a state aid. Both Apple and the Irish government have appealed.
- 23.
It has to be singled out that, within the BEPS project, Europe has expressed an intention to limit the fiscal recognition for interest paid by a foreign branch to its parent company. This would check the convenience for ad hoc budget adjustments aimed at shifting taxable income from a high-tax country towards a low-tax one. Yet the intention of introducing a kind of exit tax for productive activities or assets transferred abroad for fiscal reasons belongs to the same objective of curbing special practices. It might be asked whether this chasing of each of the devices that firms use for fiscal planning is better than having a fiscal harmonization of tax rates on profits. See the following chapter by Russo on the BEPS project.
- 24.
Under international pressure, Ireland has proposed to approve a legislation that would set the profit tax rate charged under its patent box scheme at 6.25 % (half of the ordinary rate of 12.5 %), and which would be applicable only to intellectual products coming from research carried out in the country. So far a great deal of research has been carried out abroad, as in the case of Google.
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Biasco, S. (2016). The Damages of Fiscal Competition in Europe and Alternatives to Anarchy. In: Boccia, F., Leonardi, R. (eds) The Challenge of the Digital Economy. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-43690-6_2
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