Taxation in the member states of the European Union (EU) is heterogeneous due to different tax systems and bilateral trade agreements. Looking closely at this issue helps us to better understand that “fiscal injustice” stems not only from the pressures exerted by the multinational companies but also from the member states themselves, leading to competition in tax matters. The goal? To attract the highest number of multinational companies to their territory and benefit from them, economically and socially.
For several months and years, a term has been going back and forth between the media and the academic world, recently taken up by the “Yellow Jackets” in France: “fiscal injustice”. For example, even though a bar and Starbucks sell the same goods, they are not taxed the same way. Why? Due to what researchers and economists call “the race for non-taxation.” The origin of it? The absence of regulation in the European Union and competition between member states.
According to the Global Inequality Laboratory, it is clear: the tax on large corporations and multinationals has decreased by 50% in 40 years in the EU because of tax competition. This article aims to show how multinational companies benefit from the EU’s lack of regulation and seek to pay the least possible amount of taxes. Recent cases such as LuxLeaks, the Apple/Ireland and GAFA tax will illustrate this. Hopefully, some solutions have been thought of to stop tax injustice, helping to understand why the European Union is paradoxically blocked by its own laws.
I) What is a “Multinational”?
Business? Company? Society? As Jean-Pierre Robé and Daniel Kinderman point out, there is no term in Law defining what a multinational is. The word company is not precise enough. Indeed, the term “multinational” implies both the terms “enterprise” and “company”. The latter represents an economic organization that produces goods and/or services, legally present in one or more states with at least one office. To grow internationally, a multinational will use a group of companies (corporate structure) as support for sub-subsidiaries, joint ventures, inter alia. This is complex: each subsidiary is independent with respect to its employees, its finances. Thus, the group of firms does not exist legally on its own. Yet it is this group that allows the company to exist. It leads to a paradox: there is existence by the facts but an absence in law. To fully understand what will follow, we must remember the difference between: a multinational company as an economic organization on the one hand and the (company) group as a corporate structure that allows the multinational enterprise to operate (to establish itself in the various subsidiaries) on the other hand.
It is this legal freedom that permits multinational companies to establish themselves in different member states of the EU, thanks to the single market and the doctrine of free competition. Since there is a lack of regulations when it comes to fiscal dumping, some members of the EU benefit from the freedoms while others find themselves at a disadvantage.
II) Tax Dumping: origins and consequences
“Fiscal dumping” is based on a simple concept: every member state of the European Union competes with others to attract multinationals and to benefit from them. Each country aims to be as competitive as possible, even if it is at the limit of Law. Take the example of the corporate tax rate: Hungary (9%), Ireland (12.5%) have the lowest rates in the EU. These countries are among the most likely countries to attract multinationals, unlike France with 34,4%.
The well-known strategy of incentives through low taxes is reinforced by the “tax agreements” between different countries in the world and the member states of the EU, favoring multinationals. Luxembourg, which taxes the companies at 26%, is the European country that resembles most a “tax haven”. Why? Because Luxembourg has been negotiating tax agreements with multinationals for years, granting tax reliefs that lower the rate from 26% to as little as 2.2% (report of the European Greens in January 2019). Let us look at McDonald’s. It uses ‘double non-taxation’ granted by Luxembourg: it created a branch of the group in the United States and placed his head office in Luxembourg. Since there cannot be double taxation on profits due to a 2001 agreement between the US and Luxembourg, “13 staffers generated 3.7 billion euros” in Europe between 2009 and 2013, according to McDonald’s.
Another well-known technique is “tax rulings”, used by 340 multinationals like Apple, Axa, Amazon IKEA. These are agreements made directly between multinational companies and states. The best example is the case of LuxLeaks revealed by whistleblower Antoine Deltour in November 2014, involving Apple and Ireland. The Irish tax administration had granted Apple a tax income to nearly 0%, to keep the 3664 Apple jobs in Ireland. But why do some member states of the EU have the right to conclude such agreements? This stems from the lack of competence of the EU in this area. Indeed, EU law-makers have set very few rules. One of the rules is that each European member state must levy taxes and VAT, but a minimum threshold is lacking. Thus, “free competition” allows goods, services, and capital to move freely. Each European member state is seeking to go to the lowest possible level of taxation.
A final example is the “carousel or VAT (Value Added Tax) fraud”, which resulted in a 50-billion-euro loss. Multinational’ activities remain legal, keeping their head offices in European member states, benefiting from its lack of competence. Therefore, they get either a refund of a tax that has never been paid or the amount of VAT is reduced. What are the member states doing? Often, it is already too late when they decide to act and they can no longer track the money that has evaporated or been transferred to “tax havens”. Outcome: VAT must be paid in the country of destination of the goods and not in the country where the goods arrive.
III) What solutions?
Since 2013 the European Commission has obtained more powers from the European member states to supervise these practices and especially tax rulings. A strong action from the Commission forced Ireland to claim 14.3 billion euros from Apple in 2018. France did the same with Google, which It had to pay 1 billion dollars’ tax settlement for tax evasion. However, the European Commission could not do anything against McDonald’s in September 2018 because this area of double taxation on profits lies outside its competences. The LuxLeaks scandal (November 2014) was also a challenge for the Commission because its former President, Jean-Claude Juncker, was directly involved as former Prime Minister of Luxembourg.
The European institutions must react and since the LuxLeaks scandal, the Commission asked each member state to inform it about agreements with multinational companies to be more transparent.
A second solution, decided on January 2019, deals with consulting firms, tax consultants planning financial packages or tax simulations. Now they must provide the European Commission: the name of their clients, the amount of money involved and the legal basis of their consultancies, leading to a supervision of their actions.
A third solution has been implemented since March 2019, but is controversial: it is a blacklist of 15 countries considered as “tax havens”. The European Parliament pointed out a paradox: there is no EU member state on it. By adding EU member state, this would have led to stricter control of fiscal agreements, but of course none wants to see its actions controlled.
Other solutions had been considered but failed. The reason? Still the lack of competence of the EU on taxation’ matters. First, there is the regulation’ proposal of the European Commission, adopted or not by the European Parliament and the Council of the European Union. But none of the member states wants to create obstacles and lose multinationals that generate jobs and money. Thus, the idea of a European tax on financial transactions, which could have generated 22 billion euros, is off the table for the moment. Tax harmonization, a project advocated by French Economy and Finance Minister Bruno Le Maire also failed to pass. The idea was to impose a GAFA tax (Google, Apple, Facebook, Amazon) on the corporations advertising profits, but the United States has threatened to tax European imports if this measure passes.
The European Parliament has already sharpened its position on the fiscal injustice’ challenge: maybe the reports from the Greens/EFA, S&D and EPP will put pressure on Europe’s lawmakers to change the legislative rules. Indeed, member states can veto all draft tax legislation. It would be appropriate to pass from unanimity to qualified majority voting but again the EU is blocked by its own treaties (i.e. necessity of unanimous agreement).
There could be a solution: Article 116 of the Lisbon Treaty, which allows the European Commission to pass through majority rule if a distortion of competition is “too obvious”.
Thomas Rambaud is a second-year master student, soon graduated from the Institute for European Studies.