The European Commission has tax policy in its sights

By Economics Correspondent Sean Whelan

The Brussels Economic Forum was on earlier this week: I was there hoping to hear ideas on how to refloat the European economy.

Meanwhile across the road, the European Commission opened a new front on Ireland’s corporate tax system.

Or rather, it is investigating not the tax system per se, but whether Apple Computer got a sweetheart deal from the Irish Government that meant it didn’t have to pay as much tax as other companies in Ireland.

The Government says bring it on: they won’t find anything. And they say they are co-operating fully with the investigation.

Joaquim Almunia, the Competition Commissioner, says the same thing – Ireland has been very co-operative and handed over all the information requested.

On the basis of that information, the Commission is going ahead with a full investigation into Apple’s Irish tax affairs.

But Ireland wasn’t alone.

The Netherlands is also being investigated for allegedly giving Starbucks Coffee chain a special tax deal. The Authorities in The Hague are also co-operating with the Commission.

But Luxembourg – the third country named – isn’t co-operating with the Commission inquiry into the tax arrangements of a Fiat finance subsidiary.

Indeed Mr Almunia said the information Luxembourg supplied was far short of what was required and was of poor quality.

So he is taking an infringement proceeding in the European Court of Justice to sanction them.

That’s not all.

He said there are some more preliminary inquiries into some other countries – he named Belgium and the UK – for the way it taxes Gibraltar based companies.

I understand four countries, including these two, are likely to be named in another round of in-depth inquiries into alleged special tax deals.

What the Commission is looking at are tax rulings – described by Mr Almunia as “like a letter of comfort” that tax authorities issue to taxpayers before they start filing tax returns.

Obviously he is talking about the kind of letter that big multinational companies get – the sort that spend a small fortune on tax planning, in order to save a large fortune in tax payments.

The question for the Commission is whether any of these tax rulings to specific companies amounted to special treatment. In other words, were these particular companies given some exemption from the general tax rules that was of benefit only to those companies?

If they got such a special deal, this could amount to state aid, which is effectively banned under most circumstances by articles 107 and 108 of the EU treaties.

This is supposed to help keep the playing field as level as possible by limiting the amount of help governments can give to companies (corporate welfare, some call it).

In the EU single market, the Commission is given strong powers to police the system, the idea being to make it as fair as possible for all the players.

If one company gets a special deal from a government to pay less tax than another company in the same country, then the playing field isn’t level, the competition is not fair. Mr Almunia said he took on this case “ex officio”, on the initiative of the Commission – not on the basis of a complaint filed.

But the eruption of political rage that followed Apple’s appearance in front of Senators Levin and McCain in Washington in April 2013, when the CEO Mr Cook claimed Apple had a special deal in Ireland, was obviously the trigger.

And Mr Almunia insists this is not the first time the Commission has taken a state aid case aimed at tax deals, citing actions by his predecessors Karel Van Miert and Mario Monti dating back to 1998.

“This is not the first time, and it will not be the last time”, he said.

So who is in trouble on this – the Governments or the companies?

Mr Almunia said the Commission always takes state aid cases against states “as they are our partners in making these rules”.

And the sanctions?

The commissioner said the aim of the process is to “eliminate the legislation” that allowed an unfair tax ruling to be made. This would appear to mean that the Commission would be happy if the Government scrapped any law that allows them to cut sweetheart deals with favoured companies – if such a law was found to exist.

But there is also the possibility of “recovery” – making the company pay back some or all of the money that should have been due in tax if it had been treated like everyone else. This is a long, hard legal route to follow.

But it does exist.

These in depth investigations will take some time, and be very complex.

In the meantime, the OECD BEPS process (base erosion and profit shifting) – the main global forum that will lead to changes to the international corporate tax system – is moving ever faster.

First conclusions are expected to be agreed by G20 leaders at their summit in September. The Irish Department of Finance wants to hear what the public thinks of the Corporate tax system, and a public consultation is now under way (see the department website for details, but be quick – it ends in July).

It’s quite likely that by the time the Commission issues its rulings, the BEPS process will already have led to decisive changes to the global corporate tax system, and that Ireland will have made its own changes to stay in touch with the new realities – and maybe even get ahead of the game.

Certainly the policy approach has been one of positive active engagement with the OECD. Michael Noonan likes to talk of the three R’s of corporate tax – rate, regime and reputation.

While the 12.5% rate won’t change – it’s now as much a part of national identity as shamrock and St Patrick – the regime certainly will, in order to enhance the reputation of the country as a place to do business.

Mr Almunia also gave a little more information on another investigation on tax affairs the Commission is undertaking – that into so-called “Patent Boxes”.

These are arrangements that allow earnings from certain types of intellectual property to be taxed at a lower rate than general corporate earnings.

Nine EU states are in the frame for this investigation, including Britain.

The Combination of the patent box and the recently announced 20% corporation tax rate is seen by many tax professionals as making Britain more attractive than Ireland as a base for high tech investment.

The Commission wants to see if the way these patent boxes – and their associated tax rulings – work amounts to state aid.

Needless to say, I am sitting in a Starbucks cafe in Brussels, writing this on an Apple device as I await my flight back to Ireland.