International

Listen to the European Commission or the European Parliament, and you’ll hear from all sides that they have been working hard to tackle tax evasion by multi-national corporations (MNCs). Yet the real negotiations are taking place in Paris, at the Organisation for Economic Cooperation and Development (OECD), which brings together developed countries. One of the papers published recently by the OECD, however, reveals the fact that the rules of the European Union’s internal market in reality represent an obstacle to effective action. Nothing more has been heard about this, but it should and must be high on the European Parliament’s list of priorities.

Because this autumn decisions need to be taken in Paris, the OECD is currently producing document after document dealing with possible measures to counter tax evasion, one of which concerns taxation on subsidiaries. Say an MNC is established in the Netherlands with a subsidiary in Ireland. In the Netherlands company taxes amount to 20-25%, whereas the rate in Ireland is only 12.5%. It’s advantageous to the corporation in question to put down as much of its profit as possible to the Irish subsidiary, so that hardly any tax need be paid in the Netherlands. Revenues received by the parent firm in the form of dividends on its shares in the daughter concern will remain light, however, the assumption being that tax has already been paid by the subsidiary. This may be true, but this example shows that even were this the case it may have been at far too low a level.

Cumulation of revenues is something at which the OECD is looking, but it’s difficult to draw up precise rules. You can easily bypass this problem by stating that if a great deal of income is coming directly to the subsidiary, then extra taxes will be charged to the parent company until all revenues are cumulated and the Dutch rate paid on the total sum.

The European Court of Justice (ECJ) has moved to prevent this from being imposed on subsidiaries within the EU, however, ruling that such a policy would jeopardise freedom of establishment, which is an aspect of the internal market. Only if it can be shown that a subsidiary has been set up simply and purely for the purpose of avoiding taxes and that it has developed no economic activities of its own is any action permitted.

The OECD respects the ECJ’s jurisprudence. They do this because otherwise the EU’s member states would have the advantage of being able to argue that they were exempt from any agreement to impose additional taxes, as this was banned by Brussels. Other OECD countries, in contrast, would be obliged to do so. No MNC would want to set up shop in such a country and the EU’s member states would be handed an immediate source of attraction for corporate capital.

In short, the chances of doing anything about ensuring that MNCs start to pay real taxes are being limited by the EU itself. Freedom of establishment is an important principle of the internal market, but addressing the problem of tax evasion is surely more important still. The OECD has stated that the problem can perhaps be circumvented, as Denmark already does, by making no distinction between subsidiaries established domestically, within the EU, or beyond. This would ensure that there was no transgression of freedom of establishment and that proper taxes could be levied. It’s a nice idea but whether it would work depends on the ECJ. That’s why this issue should be placed high on the agenda of the special European Parliamentary Committee on combating tax evasion. I have yet to hear a response to this proposal, however.