Vestager’s new front on corporate tax avoidance

The tax arrangements of multinational companies have rarely been out of the headlines over the past three years. Taxpayers have both marvelled at the cunning schemes that permit corporations to avoid paying their dues where they do business; and fumed at the impact their sleight of hand has on the amounts national treasuries collect.

Now the European Commission has hit back at some high profile practitioners of this fiscal vanishing trick. Yesterday the competition commissioner, Margrethe Vestager, said that schemes concocted by two multinationals in different EU member states — Fiat in Luxembourg and Starbucks in the Netherlands — are illegal. The commission wants each company to pay between €20m and €30m to the authorities in those countries to cover improperly unpaid tax.

The decisions open a new front in the battle against tax avoidance by multinationals. Traditionally the commission’s locus in such questions has been limited. Corporate taxation is a matter reserved to national governments, where it should remain.

Brussels has been able to step in because of the rules governing the single market. These take a dim view of national jurisdictions tailoring special inducements to encourage companies to locate operations on their soil. The cases involving Fiat and Starbucks focus on transfer pricing regimes, which allow companies to shift profits from one jurisdiction to another. The commission maintains that the authorities showed undue latitude in allowing them to pile up profits in low-tax countries. As this is illegal state aid, Brussels has the right to unpick the deals and force restitution.

The companies and jurisdictions involved will doubtless challenge the commission’s findings. Staunch defenders of tax sovereignty will be dismayed at the precedent. But Brussels is right to look at the question of profit shifting. Sharp practice should be uncovered, whether blessed by national law or not. The very fact of the commission’s intervention may help to deter similar infractions in future.

Brussels can only help so far. The commission rulings are an imperfect mechanism for tackling the problem. This week’s precedents create new uncertainties for companies. They expose national tax rulings to challenge, meaning these no longer create “safe harbours” for business. But they do not sharpen the fuzzy boundary where legitimate planning ends and unacceptable avoidance begins.

Much of the problem lies in the tax system itself. It remains very easy to shuffle income off to low-tax jurisdictions through intra-group debt financing or the transfer pricing of such intangibles as intellectual property.

Neutralising the appeal of these arbitrages is not easy. But the commission is rightly implementing rules demanding greater tax transparency of companies. In future they will have to reveal much more about their profits and taxes on a country-by-country basis.

Most companies that exploit national differences to minimise their tax bills would prefer to keep such matters secret. Aggressive tax planning, even if legal, is hard to defend to the public, especially when times are hard.

Of course, disclosure will not end the culture of avoidance. That can only happen if bosses take a more responsible approach to tax, and politicians find a better system for linking the amounts companies pay to economic activity.

The legal and political barriers to the latter solution are vast. It will take time to overcome them. In the meantime, shaming, transparency and an activist Brussels may be the best tools the frustrated taxpayer has to hand.