EUROPEAN COMMISION VS. U.S. MULTINATIONAL CORPORATIONS

When 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).

The Finance Ministers of the European Union (EU) have reached an agreement on the automatic exchange of information on cross border tax rulings. This assists all EU 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.

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 EU Finance Ministers  have decided to reduce the enforcement time from a decade to just five years. It does reduce the imposition of past tax liability considerably.

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.

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. 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 (Apple, Starbucks, Fiat (now Fiat Chrysler Automobiles), Amazon.

Numerous American states 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 economy.

The view from Washington

The U.S. Department of the Treasury (“U.S. Treasury Department”) shares the European Commission’s (“Commission”) concern with tax avoidance by multinational firms. The international community, including the European Union (“EU”) and its Member States, has long recognized the need to address this issue multilaterally. For more than two decades, the U.S. Treasury Department has worked closely as part of the international community to achieve a collective solution to this global problem.  These investigations, if continued, have considerable implications for the United States— for the U.S. government directly and for U.S. companies—in the form of potential lost tax revenue and increased barriers to cross-border investment. Critically, these investigations also undermine the multilateral progress made towards reducing tax avoidance.

•  The Commission’s Approach Is New and Departs from Prior EU Case Law and Commission Decisions. The Commission has advanced several previously unarticulated theories as to why its Member States’ generally available tax rulings may constitute impermissible State aid in particular cases. Such a change in course, which has required the Commission to second-guess Member State income tax determinations, was an unforeseeable departure from the status quo.
• The Commission Should Not Seek Retroactive Recoveries Under Its New Approach. The Commission is seeking to recover amounts related to tax years prior to the announcement of this new approach—in effect seeking retroactive recoveries. Because the Commission’s approach departs from prior practice, it should not be applied retroactively. Indeed, it would be inconsistent with EU legal principles to do so. Moreover, imposing retroactive recoveries would undermine the G20’s efforts to improve tax certainty and set an undesirable precedent for tax authorities in other countries.
•  The Commission’s New Approach Is Inconsistent with International Norms and Undermines the International Tax System. The OECD Transfer Pricing Guidelines (“OECD TP Guidelines”) are widely used by tax authorities to ensure consistent application of the “arm’s length principle,” which generally governs transfer pricing determinations. Rather than adhere to the OECD TP Guidelines, the Commission asserts it is employing a different arm’s length principle that is derived from EU treaty law. The Commission’s actions undermine the international consensus on transfer pricing standards, call into question the ability of Member States to honor their bilateral tax treaties, and undermine the progress made under the OECD/G20 Base Erosion and Profit Shifting (“BEPS”) project.