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EU fights corporate goliaths on tax avoidance

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Tuesday, November 3, 2015

By Tom Bergin & Foo Yun Chee

Reuters (*)

Small team faces huge paper trail and high legal hurdles to stop sweetheart deals

LONDON/BRUSSELS — A small team of European Union officials is spearheading an investigation that could force some of the world’s biggest companies to pay billions of euros in avoided taxes.

In an office block in one of Brussels’ less fashionable districts, the 10 Competition Directorate staff from across the bloc have spent two years poring over hundreds of deals agreed between companies and member-states’ tax authorities.

Their findings were the basis on which the European Commission, the EU’s executive arm, last week ruled that Starbucks and Fiat Chrysler benefited from illegal tax deals with the Dutch and Luxembourg authorities. The Commission continues to investigate other rulings including one Luxembourg gave and rulings Ireland gave Apple, that allowed those companies to earn billions of dollars tax free.

If Commission rulings are executed, it could force a sea change for hundreds of multinationals operating in Europe, whose strategies to avoid tax have triggered public anger since the global financial crisis of 2007-2009 left governments strapped for cash.

Headed by Max Lienemeyer, who specialized in competition and trade law before joining the Commission in 2003, the team of Eurocrats has been initiating cases, scrutinizing inter-company transactions, and negotiating with companies and governments, to decide whether so-called “transfer prices” allowed the companies to unfairly reduce their tax bills.

Scrutinizing corporate tax arrangements is a painstaking task that is usually undertaken by experienced tax investigators.

Yet Lienemeyer’s Task Force on Tax Planning Practices is made up of mostly young officials with limited experience of corporate taxation. Seven left university in the past decade, and only two have experience of challenging big companies on their income tax bills.

Tax experts noted that the task force’s tax audits are forging into difficult new territory for the Commission, taking on companies that employ hundreds of tax professionals and pay millions of dollars each year for external tax advice.

Lienemeyer is paid around 110,000 euros a year and his team around 80,000, a fraction of what senior tax advisers can earn, a senior EU source said.

“It’s unusual to take on an entire structure because a transfer pricing investigation is enormously resource intensive... it’s a big deal,” said Ray McCann, a tax adviser with New Quadrant Partners, who was previously a senior inspector specializing in cross-border tax avoidance with the UK tax authorities.

Unexpected scrutiny

The team has one advantage over a typical tax authority challenging corporate tax planning: it is examining cases where the companies and countries involved probably never expected to face external scrutiny.

Until now, the Commission did not investigate the way members calculated companies’ tax bills. Its move to do this is a first and its investigative team’s task is assisted by sweeping rights to force governments to hand over correspondence and notes of meetings with companies.

Companies which expect to have their tax planning challenged take great care to create a paper trail that will look good in court. Tax advisers say that if national tax authorities had expected their work to face EU scrutiny, they might have done the same.

However, minutes published by the Commission of a meeting between Apple’s tax advisor and Ireland’s Revenue Commissioners to discuss how much taxable profit Apple should report, said Apple’s advisor noted how many people Apple employed in Cork and how the company was reviewing its worldwide operations.

The EC highlighted this as an example of how non-tax factors may have played a role in deciding companies’ tax bills — something prohibited by law.

Other documents show tax authorities rapidly approved complex arrangements that eliminated tax bills, without challenge.

McCann said this kind of evidence, uncovered by the task force, was not usually available to inspectors investigating a company’s tax structuring, and that it could be decisive in court.

“If there are incriminating emails there which clearly show that everybody knew what was going on, then that’s bad,” McCann said. If equally, there is no apparent investigation by the jurisdiction offering the tax advantages, then that’s equally bad.”