Issue link: https://maltatoday.uberflip.com/i/608340
maltatoday, SUNDAY, 29 NOVEMBER 2015 17 Inside the EP Inside the EP A 2014 international investigation into tax deals struck with Luxembourg uncovered the multi-billion dollar tax secrets of some of the world's largest multinational corporations. A cache of almost 28,000 pages of leaked tax agreements, returns and other sensitive papers relating to over 1,000 businesses paints a damning picture of an EU state which is quietly rubber-stamping tax avoidance on an industrial scale. The documents show that major companies have used complex webs of internal loans and interest payments which have slashed the companies' global tax bills. These arrangements, signed off by the Grand Duchy, are perfectly legal. The unprecedented investigation showed how some 340 companies from around the world arranged specially-designed corporate structures with the Luxembourg authorities. The businesses include corporations such as Pepsi, Ikea, Accenture, Burberry, Procter & Gamble, Heinz, JP Morgan and FedEx. Leaked papers relating to the Coach handbag firm, drugs group Abbott Laboratories, Amazon, Deutsche Bank and Australian financial group Macquarie are also included. The companies channeled hundreds of billions of euros through Luxembourg and saved billions of euros in taxes. Some firms have enjoyed effective tax rates of less than 1 percent on the profits they've shuffled into Luxembourg. PricewaterhouseCoopers has helped multinational companies obtain at least 548 tax rulings in Luxembourg from 2002 to 2010. These legal secret deals feature complex financial structures designed to create drastic tax reductions. The rulings provide written assurance that companies' tax-saving plans will be viewed favorably by Luxembourg authorities. Many of the tax deals exploited international tax mismatches that allowed companies to avoid taxes both in Luxembourg and elsewhere through the use of so-called hybrid loans. Starbucks and Fiat Chrysler tax deals 'illegal' In October 2015, Starbucks and Fiat Chrysler were ordered to pay back up to €30 million in taxes after European tax breaks were ruled illegal. The move is part of a Brussels crackdown on private tax deals some member states strike with large multinationals. Commission officials are looking at similar deals secured by Amazon in Luxembourg and Apple in Ireland. The European commission ruled that sweetheart tax deals struck in private between Starbucks and Dutch tax officials five years ago and between Fiat Chrysler and Luxembourg's tax authorities were unlawful state aid. But the two countries disagreed with the Commission and Starbucks said it would appeal against the decision. "Tax rulings that artificially reduce a company's tax burden are not in line with EU state aid rules. They are illegal. I hope that, with today's decisions, this message will be heard by member state governments and companies alike," European competition commissioner Margrethe Vestager said. "All companies, big or small, multinational or not, should pay their fair share of tax," she added. Although "comfort letters" or tax rulings by governments are legal, the arrangements with Starbucks and Fiat Chrysler "do not reflect economic reality", the Commission said. In particular, it said the firms used so-called "transfer pricing arrangements" between subsidiaries that let Starbucks shift profits abroad, and Fiat pay taxes on "underestimated profits". The Commission said taxable profits for Fiat's Luxembourg unit could have been 20 times higher under normal market conditions. "Our decisions today show that artificial and complex methods endorsed by tax rulings cannot mask the actual profits of a company, which must be properly and fully taxed," Vestager said. Fiat's Luxembourg unit paid "not even" €400,000 in corporate tax last year and Starbucks' Dutch subsidiary less than €600,000, she added. Fiat's Luxembourg deal, which was brokered in 2012, was made when current European Commission chief Jean-Claude Juncker was prime minister of the country. Juncker came under pressure last year over claims that about 340 global companies were granted tax avoidance deals during his 18-year tenure in Luxembourg. The Dutch government said it was "surprised" by the decision and that it was convinced its arrangement with Starbucks was in line with international standards. A Starbucks spokesman said: "Starbucks shares the concerns expressed by the Netherlands government that there are significant errors in the decision, and we plan to appeal, since we followed the Dutch and OECD rules available to anyone." The Luxembourg Ministry of Finance said the Commission had "used unprecedented criteria in establishing the alleged state aid". "Luxembourg disagrees with the conclusions reached by the European Commission in the Fiat Finance and Trade case and reserves all its rights," it said. The country "will use appropriate due diligence to analyse the decision of the Commission as well as its legal rationale," it added. Fiat Chrysler denied receiving any illegal state aid from Luxembourg. Poverty campaign organisation ActionAid said the Commission's ruling was "just the tip of the iceberg when it comes to corporate tax breaks". "ActionAid estimates that developing countries lose at least $138bn per year to special tax breaks," said Anders Dahlbeck, ActionAid's tax justice policy adviser. "These sweetheart deals in Europe and developing countries are part of a race to the bottom on tax which hits the poorest hardest and leaves healthcare, schools and other key public services starved of resources," he said. LuxLeaks: the tide turns The European Commission has long sought to harmonise national corporate tax systems, claiming that this will contribute to its goal of creating more growth and jobs in Europe and boosting the competitiveness of EU companies. Currently, there are 28 different systems in Europe for calculating a company's taxable earnings. The Commission claims that creating a single tax base will encourage cross-border activities and investments. The idea of a common consolidated corporate tax base (CCCTB) was initially voiced in a 2001 communication but progress has been slow due to member states' reluctance to allow the Commission to encroach upon their national sovereignty in this area. A first report on the CCCTB was issued in April 2006. The Commission followed up a year later with a communication outlining the remaining steps to be taken to establish a single tax base for European companies by 2010. But the plan has since been stuck in the pipeline due to opposition from at least seven member states, which fear losing their sovereignty over national tax. When the first progress report was debated in 2006, 12 countries were in favour and seven – Ireland, the UK, Lithuania, Latvia, Slovakia, Malta and Cyprus – were against. The rest were still undecided. Malta is an increasingly attractive tax regime which attracts lots of foreign companies setting up subsidiaries on the island, so that they can book profits they made in one EU member state, over here and claim a hefty 6/7ths refund on dividends. This has made the island an important financial services centre that also calls for more accountants, auditors and lawyers to render their services. In order to maintain a competitive edge, Malta offers wealthy individuals and corporations advantageous tax rates, using tax breaks to attract investment or hot money, which could originate from criminal activities. But what makes Malta so attractive? Malta shrugged off its reputation as a fiscal paradise by adopting a "full-imputation" tax system where corporate profits are taxed at 35%. But companies incorporated outside Malta are considered resident in Malta only if the management and control of the company is exercised in Malta. The statutory rate of tax for corporations is 35% and when dividends are distributed to shareholders out of the company's taxed profits, it carries an imputation credit on the tax that has already been paid by the company. After the tax refund, a shareholder's tax burden decreases to 0% - 5%. Under Malta's tax law all income coming from a company that qualifies as a "participatory holding" company also qualifies for a full refund of the taxes paid by the company, when distributions are paid back to the company's shareholders. Malta's Green Party has warned that Germany, France and Italy are pressing the EU to tighten restrictions on tax havens, after they sent a joint letter to Commissioner Pierre Moscovici calling him to rein in "aggressive tax planning" and "profit shifting" by companies. Alternattiva Demokratika chairperson Arnold Cassola, a former secretary-general of the European Greens, said: "In view of the request for Jean-Claude Juncker to take strong measures by December 2015 against unfair competition in the EU, which is deemed by many to constitute illegal state aid, is the Maltese government prepared to diversify from the present fiscal policies in Malta?" One tax to rule them all Trouble for Malta?