Crackdown

Europe’s Tax Hunter Strikes Again

  • Why it matters

    Why it matters

    French energy group Engie may have to pay hundreds of millions of euros in back taxes, but European Union lawmakers are struggling to come up with comprehensive reforms to avoid future tax dodging.

  • Facts

    Facts

    • The case is the latest in the European Commission’s crusade against tax avoidance, as part of which it has been conducting investigations since 2013. Seven lawsuits have been brought so far.
    • The commission has been hampered in its plans to implement comprehensive tax reforms, which require the unanimous approval of all 28 member states.
    • The G20 bloc of leading economic nations agreed in 2015 on new rules against tax evasion strategies known as base erosion and profit shifting, which are currently being transposed into law in 38 countries.
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    Audio

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Luxembourg, Luxembourg City, Neumunster Abbey and St Michaels Church
Luxembourg City, focal point of E.U. investigations into companies' tax evasion. Source: Getty Images

U.S. giants like Apple, Starbucks, McDonald’s and Google have already had their rude awakening to Europe’s competition watchdog. Commissioner Margrethe Vestager, the E.U.’s top bloodhound when it comes to tax evaders, has now set her sights on a French company. And once more, the track leads to Luxembourg.

France’s fifth-largest company, utility Engie, is accused of having dodged at least €300 million in corporate taxes by employing a complex system of subsidiaries and taking advantage of an tax agreement brokered with the government of Luxembourg – a state notorious for its lax tax regulations and staunch banking secrecy.

In the United States, Ms. Vestager became infamous over the last year, with President Barack Obama accusing her of anti-American sentiments and Treasury Secretary Jack Lew describing her crackdown on U.S. companies as “disproportionate.”

Ms. Vestager has so far initiated seven lawsuits, in some cases with spectacular results: at the end of August she ruled that Apple would have to pay €13 billion in back taxes to the Irish tax office. Both Apple and Ireland are appealing.

The battle is part of a wider initiative by the European Commission to implement fair corporate taxation across the continent. E.U. competition law is its sharpest weapon in this fight, since it obliges countries to treat all companies equally. E.U. competition watchdogs started to look into the potential preferential treatment of individual companies in 2013. Ms. Vestager in December 2014 demanded E.U. member states provide her with details on advance tax agreements they had reached with companies.

The case involving France’s Engie, formerly known as GDF Suez, is the fourth time Ms. Vestager has initiated proceedings against Luxembourg for suspected illegal tax subsidies – all the more impressive given that her boss, European Commission President Jean-Claude Juncker, spearheaded many of these special tax rulings during his long tenure as Luxembourg prime minister.

06 p8 Bypassing the Tax Office-01

According to Ms. Vestager, a native of Denmark who took on her current role in 2014, Engie entered into several advance agreements with the tax authorities of Luxembourg in September 2008. These “appear to contravene the national tax legislation and to have allowed GDF Suez to pay fewer taxes than other companies,” Ms. Vestager said.

This is likely an understatement: European Commission documents show the group paid no tax at all on profits of €1.1 billion ($1.17 billion) between 2011 and 2015. The E.U. competition commissioner has not yet said whether Engie will be required to pay back taxes to Luxembourg, but the decision seems likely in view of the presented evidence.

Ms. Vestager’s track record should be seen as a shot across the bow for corporate tax dodgers. In January last year, Ms. Vestager forced three dozen international groups in Belgium to pay around €700 million in back taxes. A few months earlier, as the result of nearly two years of investigations, European competition regulators concluded that the Netherlands and Luxembourg had granted selective tax privileges to Starbucks and Fiat.. Each of the companies was ordered to pay up to €30 million in additional taxes. Proceedings are still ongoing against McDonald’s and Amazon in connection with possible tax subsidies.

Ms. Vestager’s track record is a shot across the bows for corporate tax dodgers.

While Ms. Vestager is cracking down on tax evasion, her colleague Pierre Moscovici, the E.U. commissioner in charge of European economic and financial affairs, is trying to tighten corporate tax rules across the 28-nation European Union. His task has turned out to be much more difficult than that of Ms. Vestager, who can make decisions independently and if necessary against the will of the E.U. member states. Any new tax laws proposed by Mr. Moscovici require the unanimous approval of all 28 governments.

While he has succeeded in introducing an obligation for E.U. countries to share information on advance tax agreements with companies, other plans for fairer taxation have been met with staunch resistance. These include a requirement for companies to disclose their taxes and profits in each country, a move fiercely opposed by German Finance Minister Wolfgang Schäuble, and a plan to create a blacklist for all tax havens outside the European Union, which the United Kingdom in particular objected to.

The commission is also trying to harmonize the base rate for corporation taxes across the E.U. in an attempt to crack down on exceptional circumstances and loopholes. But those plans have met objections from the usual suspects, with Luxembourg and Ireland – two states that have kept their tax rates low – expressing concern. Without their approval, the “Common Consolidated Corporate Tax Base” (CCCTB) cannot come into effect.

Two decades ago, in 1997, E.U. finance ministers formally agreed to put an end to “damaging tax competition” within the European Union and to introduce a “code of conduct.” But a working group set up to ensure compliance with these rules has since accomplished next to nothing, unable to achieve a quorum. In need of a consensus, proposals to classify particular tax regulations as unfair were axed by states trying to preserve their tax havens. That includes Luxembourg under its former prime minister – and current E.U. Commission President – Jean-Claude Juncker.

Mr. Schäuble’s attempts to replace the decision process with a majority vote and a bid to broaden the working group’s mandate have so far been unfruitful. Ironically, Mr. Schäuble has found more success tackling the issue in international bodies, spearheading a deal reached among the Group of 20 bloc of leading economies to confront tax evasion.

As E.U.-wide decision bodies are being demoted to toothless tigers in the fight against tax evasion, the scope only widens for Ms. Vestager, the E.U.’s sole credible threat to tax avoiders.

 

Ruth Berschens is the Handelsblatt’s bureau chief in Brussles, Donata Riedel is a Handelsblatt correspondent based in Berlin. To contact the authors: riedel@handelsblatt.com and berschens@handelsblatt.com

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