Tax Battles

U.S. Government Warns Europe Over Back Taxes

The E.U. wants to take a bite out of Apple's profits. Source: DPA, Getty Images
The E.U. wants to take a bite out of Apple's profits.
  • Why it matters

    Why it matters

    The clash between the European Union and the United States over the E.U. competition commissioner’s decision to start proceedings against member states that granted  tax advantages to certain companies could derail the trans-Atlantic trade deal.

  • Facts

    Facts

    • E.U. commissioner Margrethe Vestager has initiated proceedings against several E.U. member states, accusing them of granting illegal tax advantages to multi-national companies like Apple and Starbucks.
    • This has prompted the Netherlands to demand up to €30 million ($33.8 million) in back taxes from U.S. coffee shop chain Starbucks.
    • Technology group Apple may soon face additional claims in Ireland, which analysts estimate could even run into billions, while online retail giant Amazon could be forced to pay a substantial additional sum in Luxembourg. 
  • Audio

    Audio

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The U.S. government has warned the European Union against demanding high back taxes from American corporations such as Apple, Amazon and McDonald’s. If the European Commission takes action against more companies, the Treasury Department in Washington has warned that it can expect a “chilling effect on U.S.- E.U. cross-border investment.”

The public dispute, which involves huge sums of money, is centered on a fundamental question: Where should the profits of multinationals like Apple, Amazon and Google be taxed? Many companies take advantage of legal grey areas to transfer the bulk of their earnings to tax havens, often lured by the promise of additional benefits. Washington now fears that the U.S. Treasury could lose billions if the E.U., and possibly other places, such as China, opt for tougher taxation.

E.U. competition commissioner Margrethe Vestager has already initiated proceedings against several E.U. member states, accusing them of granting illegal tax advantages to certain companies. This has prompted the Netherlands to demand up to €30 million ($33.8 million) in back taxes from U.S. coffee shop chain Starbucks, while online retail giant Amazon could be forced to pay a substantial additional sum in Luxembourg. Technology group Apple may soon face additional claims in Ireland, which analysts estimate could even run into billions.

Unlike the E.U., the U.S. government sees these retroactive demands for tax as an infringement of new rules that were jointly agreed upon

As Ms. Vestager is showing no signs of dropping other similar proceedings, U.S. Treasury secretary Jacob Lew has complained that the European Commission is behaving like “a supranational tax authority” that is setting an “undesirable precedent.” He fears this could encourage other countries to make similar demands from American or European companies.

Washington is accusing Brussels of using competition law to grab a much larger share of taxes than it is actually entitled to. U.S. Treasury official Robert Stack wrote in a blog that American taxpayers would ultimately foot the bill if Brussels gets its way, as tax payments made abroad would reduce the amount payable in the U.S.

Unlike the E.U., the U.S. government sees these retroactive demands for tax as an infringement of new rules that were jointly agreed upon. These rules were meant to curb the excessive tax avoidance of many international companies. Heads of government of G20 countries agreed on the regulations against “base erosion and profit shifting,” or BEPS, late last year. The aim being that profits should always be taxed in the country where value has been created. Companies will have to inform the tax authorities how much they have earned and how much tax they have paid in which country, and data will be exchanged internationally between authorities. There will also be strict rules on the prices that group companies can charge each other. These rules are currently being transposed into national law in 38 industrialized and emerging countries.

The impetus for the joint initiative came from experiences such as those in Great Britain, where Starbucks made headlines in 2012 after it paid no tax despite recording sales of £397 million ($523 million) and pre-tax profits of £59.6 million. Other U.S. multinationals also conquered European markets but paid barely any tax there.

 

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Finance ministers were angered by how corporations exploited differences in tax law within the E.U., for example, by setting up European subsidiaries in low-tax countries such as Ireland, which then granted licenses to subsidiaries in E.U. countries with a higher rate of tax, such as Germany or France. That meant that large license fees were transferred from high-tax countries to Ireland, allowing the entire profit to be registered and taxed there.

Apple also had a special tax offer from Dublin, allowing it to register as a “company without a head office” – so it didn’t have to pay tax in Ireland, either. Its profits went to offshore accounts and remained tax-free. The U.S., meanwhile, still does not charge tax on profits that its corporations make abroad; while this rule has now become highly controversial even in the U.S., American political parties have been unable to agree on how cash reserves that U.S. groups hold abroad could be brought back to the country.

Sven Giegold, a member of the European Parliament for the German Green Party, has accused the U.S. of enabling corporations’ tax avoidance with its tax laws. He says profits generated abroad are systematically being invested in tax havens. Markus Ferber, another MEP and a member of the CSU, the Bavarian sister party of Germany’s Christian Democratic Union, has called for the U.S. to be “put on the blacklist of tax havens.”

Of course, Washington sees things differently. The dispute could even affect the controversial Transatlantic Trade and Investment Partnership, or TTIP, between the U.S. and the E.U. The U.S. government has until now insisted on incorporating private courts of arbitration into the agreement, where U.S. companies can take action against E.U. states. Many E.U. officials suspect this is mainly because the U.S. is hoping for more favorable judgments in future tax disputes. According to sources close to the European Commission, U.S. Trade Representative Michael Froman is working intensively on preparations for a meeting in late fall, with the aim of clarifying many unresolved questions – such as access for European companies to public contracts in the U.S. at the highest political level.

 

Till Hoppe, Donata Riedel, Ruth Berschens, Moritz Koch are all correspondents for Handelsblatt. To contact the authors: hoppe@handelsblatt.com, riedel@handelsblatt.com, berschens@handelsblatt.com and koch@handelsblatt.com

 

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