European Commission: Does Apple, Starbucks and Fiat really pay their taxes?

Press conference by Joaquín Almunia, Vice-President of the EC, on the investigation of the EC on transfer pricing arrangements on corporate taxation of 3 companies (EC Audiovisual Services)

Press conference by Joaquín Almunia, Vice-President of the EC, on the investigation of the EC on transfer pricing arrangements on corporate taxation of 3 companies (EC Audiovisual Services)

The European Commission (EC) decided two days ago to conduct an investigation which will focus on the tax affairs of Apple, Starbucks and Fiat Finance and Trade in Ireland, the Netherlands and Luxembourg respectively. Basically, EC’s purpose is to examine if the tax authorities of the aforementioned countries are in line with the rules of European Union on state aid and whether the three multinational enterprises (MNE) have paid the correct amount of corporate income tax or not.

Transfer pricing: a way to avoid taxes

One of the methods to help enterprises “play” with their income statements is called transfer pricing. It refers to prices set for goods or services by a subsidiary of a corporate group to another subsidiary of the same corporate group. This practically means that a company can transfer profits to one of its subsidiaries in another country in order to take advantage of lower corporate income taxable basis. Consequently the company pays less money by being applied to a more favourable taxable basis. However this practice apart from common is also legal but to the extent it complies with the EU rules on state aid.

Preliminary results show possible guilt

The EC, before claiming the above, has done a research which at first showed that it is probable that the EU counties involved have underestimated the taxable profit and let the respective MNEs go without paying the right amount of taxes. The money not paid influenced the government’s budgets negatively. Commission’s Vice President in charge of competition policy Joaquín Almunia had to say on this: “In the current context of tight public budgets, it is particularly important that large multinationals pay their fair share of taxes. Under the EU’s state aid rules, national authorities cannot take measures allowing certain companies to pay less tax than they should if the tax rules of the Member State were applied in a fair and non-discriminatory way”.

Ireland: a case from the past

It is old news that the US tech “giant” has been favoured by the Irish government with regards to its income tax rate. Last year’s US Senate report revealed a deal which implied a “beneficial” (for Apple) tax rate of only 2% by Ireland to Apple’s local subsidiaries. Of course Ireland denied this, as they do now against the EC, stating that the same corporate tax rate is applied to each and every firm. It should be mentioned also here that Ireland’s tax authorities have provided all the so far necessary information to the Commission’s officials. However, it is not only Apple’s case that should be investigated but other MNEs like Google which also has subsidiaries in Ireland.

Starbucks deal and Luxembourg’s lack of collaboration

Starbucks stated at a previous investigation that it had received a “favourable” agreement with the Netherlands which let them benefit from low tax rate. The EC mentioned that the Netherlands gave them all the information needed and Eric Wiebes, the Dutch finance secretary, said that he is confident the outcome of the investigation will show compliance with the EU rules. However, the EC didn’t have the full cooperation of Luxembourg. The tax authorities provided the Commission with only a limited amount of information that was asked and the representative of Luxembourg Finance Ministry refused to make any comment on this.

EC’s efforts on competitiveness

Will the EC be able to achieve a more competitive environment for companies within the EU or just pretending to help? Will these investigations have a worthwhile impact? Algirdas Šemeta, Commissioner for Taxation said on Wednesday’s meeting: “Fair tax competition is essential for the integrity of the Single Market, for the fiscal sustainability of our Member States, and for a level-playing field between our businesses. Our social and economic model relies on it, so we must do all we can to defend it”. Even if it seems that he shows great concern, the situation doesn’t change for the better.

Could it be because multinationals still have the power to influence governments and make loads of money?

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