Is no place safe for large multinationals to engage in tax planning? It seems that the current mantra is “pay your fair share” — uttered over and over to industry giants. Companies such as Starbucks and IKEA, among others, have been under increased scrutiny by tax authorities, particularly in Europe.
Historically, countries such as Netherlands and Ireland offered incentives to operate there (i.e., low tax rates or dividend exemptions). Companies could create local jobs, add to the local economy and pay a little tax, under the theory that some tax revenue was better than none. Generally, these initiatives were seen as economic development programs.
However, as countries struggle economically, these same techniques have evolved into tax planning (some might say, tax avoidance) tools. And in today’s ever-connected world, it may be easier than ever to shift operations to low-taxed jurisdictions. Companies would much rather pay tax at 10% than 25% or 30%. For multibillion dollar businesses, that’s a lot of cash tax savings.
France is just the latest country to cry foul. In recent raids on both Google and McDonald’s, French authorities embarked on a probe to uncover alleged tax fraud. With respect to Google, the French are questioning how having 700 employees within the country could fail to meet the definition of “permanent establishment.” This designation would cause Google to pay tax in France. Google argues that its French employees are just involved in sales activities and that the operations are housed in Ireland (where there is a low tax rate). Under the terms of most international tax treaties, merely soliciting business in a country generally does not cause taxation.
For McDonald’s, the French are questioning its dealings in Luxemburg, asserting that the company received preferential treatment, resulting an inappropriate shift of revenue from France to Luxemburg (where it is not taxed).
As the OECD’s Base Erosion and Profit Shifting initiative enters the implementation and phase, it is clear that tax authorities around the world are focused on preserving and increasing tax revenues. While using existing laws to minimize tax might have been previously accepted as a good business practice, companies are being pressured into paying more tax.