Tax Troubles

In a Tight Spot

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Ireland is a friendly place to invest.
  • Why it matters

    Why it matters

    Global companies have long been able to game the tax system by shifting profits to other countries. New efforts by the European Union and OECD could put an end to that.

  • Facts


    • Sophisticated tax models called base erosion and profit shifting have allowed multinational corporations to drastically reduce their tax burdens.
    • The OECD will develop new global rules for fair tax competition by late 2015.
    • The European Commission has found that Ireland may have broken competition rules in a tax deal it offered to Apple in 1991.
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When Germany’s finance minister and his British counterpart launched an international initiative two years ago to confront the (legal) tax avoidance practices of multinational companies, their effort was met with little more than a sympathetic smile in corporate tax departments.

At the time, it seemed certain that the world’s 20 largest industrialized nations and emerging economies would never manage to agree on common standards for fair tax competition.

What a fundamental miscalculation! The G-20’s finance ministers quickly reached an agreement, pledging to no longer tolerate the sophisticated tax models known as base erosion and profit-shifting, or BEPS. These are methods that have enabled Apple, Google and other global companies to reduce their tax burden to almost zero.

Companies that succumbed to Ireland’s enticements are now suffering the consequences of shifting their profits to the Emerald Isle to save taxes, using tools like intragroup pricing and license fees. That is because Ireland is in a tight spot.

On the one side is the Organization for Economic Co-operation and Development, or OECD, which will develop new rules for fair competition by late 2015. On the other is the European Commission, which has discovered that it can also take advantage of existing competition law in the single market.

Companies that succumbed to Ireland's enticements are now suffering the consequences of shifting their profits to the Emerald Isle.

If the Commission now treats the Irish tax advantages as prohibited subsidies for corporations, that could eventually spell the end of “Double Irish” and other tricks that have been legal until now. The imposition of fines would not be out of the question, both on the companies involved and on the Irish government.

The European Commission is clearly trying to appeal to the Irish government, which has been very hesitant to get involved in the BEPS debate. The new Commission, under President Jean-Claude Juncker, is doing everything in its power to stop cross-border tax schemes in the European Union.

If successful, the European Union could become a pioneer for an international OECD standard in tax competition.

The G-20’s goal of regulating tax breaks and how they are applied will not eliminate the competition but will make it fairer. Ireland will still be permitted to have low tax rates, but complete exemption from taxation through non-transparent detours will soon become a thing of the past.


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