Corporate tax professionals around the world have been dealing with a steadily growing threat of lawsuits and public shaming at the hands of government authorities who accuse them of not paying their fair share of taxes.
In case you missed it, the writing has officially been spray-painted on the walls of government corridors around the world: tax authorities are coming for big business, even if it means stirring new conflict with one another. The latest and most visible example of this, of course, has been the European Commission ruling against Apple this past August, which found that Ireland granted undue tax benefits of up to €13 ($14.5) billion to Apple.
As the Apple/Ireland controversy wages on, with both Apple and Ireland aggressively appealing the European Commission’s decision, it’s become clear that the corporate tax war I forecasted in January is indeed underway. The big question is not whether Apple will win or lose its appeal or how much money in back-taxes Ireland stands to collect; it’s what are the ramifications for corporations and government tax authorities of this global tax warfare?
Corporate tax professionals around the world have been dealing with a steadily growing threat of lawsuits and public shaming at the hands of government authorities who accuse them of not paying their fair share of taxes. The tactics have come in many shapes and sizes, ranging from outright government rulings like the one we just saw with Apple in Ireland, to more generalized, worldwide reform initiatives like the Organisation for Economic Cooperation and Development (OECD) Base Erosion and Profit Shifting (BEPS) project.
Ironically, as political candidates on both sides of the aisle continue to debate the best ways to stimulate business growth, virtually every new tax initiative launched by a major government authority has included a focus on finding fault in the business practices of large corporations. The list reads like a menu of worst-case-scenarios for tax departments: U.S. Anti-Tax Inversion Rules, UK Permanent Establishment rules, the ‘Amazon Tax,’ the Foreign Account Tax Compliance Act (FATCA).
While all of these initiatives may have been launched with the best of intentions, the end-result is not always increased tax revenue or fewer numbers of tax inversions. The one consistently predictable outcome, however, is public conflict.
As a case in point, look no further than the whitepaper issued by the U.S. Department of the Treasury immediately following the European Commission ruling against Apple. Highlighting a series of “concerns” with the European Commission’s approach in the case, the paper explains:
“The Commission has advanced several previously unarticulated theories as to why its Member States’ generally available tax rulings may constitute impermissible State aid in particular cases. Such a change in course, which has required the Commission to second-guess Member State income tax determinations, was an unforeseeable departure from the status quo… The Commission’s actions undermine the international consensus on transfer pricing standards, call into question the ability of Member States to honor their bilateral tax treaties, and undermine the progress made under the OECD/G20 Base Erosion and Profit Shifting (“BEPS”) project.”
For those of you keeping score, this means that the U.S. Treasury, the same organization that recently implemented its own controversial anti-inversion rules, is concerned that the manner in which their European counterparts are dealing with same problem is inconsistent with the multilateral standards that U.S. and European authorities have been working toward.
Put simply, the U.S. is accusing the European Commission of going rogue on corporate tax enforcement.
This is an important development. Precisely at the time when tax and finance authorities around the world have pledged their commitment to work together on global corporate tax reform through initiatives like the OECD’s BEPS project, the U.S. Treasury is signaling that it is unhappy with the overly aggressive approach the European Commission has taken in the Apple case.
Now, the story becomes bigger than just a company or group of companies – it’s about the global economy.
That’s because the U.S. government could stand to lose a big chunk of corporate tax revenue if the European Commission were to start enforcing tax law through its antitrust arm in the manner it has just done with Apple.
You see, if Apple suddenly owes €13 billion more in taxes in Ireland, it must now owe €13 billion less somewhere else. The exact math behind all of this is very complicated and requires a detailed analysis of transfer pricing practices at the individual company level, but to understand the concept at a basic level, picture Apple’s total global revenue as a pizza.
When the company pays corporate taxes, it is responsible for reporting the whole pizza to the IRS. If two slices of that pizza were generated in Europe, Apple would claim a foreign tax credit on those two slices so that they would not be double-taxed in Europe and the U.S. If Europe suddenly said Apple really owed tax on three slices instead of two, the pizza wouldn’t get any larger; the tax revenue would have to come from somewhere else. In the case of Apple, that somewhere else was most likely the U.S.
This is a concept that is not lost on the U.S. Treasury department. It’s also one that makes it almost impossible for multinational corporations to navigate global tax codes without stepping into a minefield of complex and often conflicting standards.
Now, add to that complexity the costs to companies involved with public relations and legal battles over whether or not they are paying their fair share of taxes, and the financial impact of constant tax conflict becomes truly staggering. Companies I’ve spoken with say they are planning to double the amount of time they currently spend on controversy resolution as a result of BEPS alone. This is not a recipe for a thriving, global economy.
Yet the steady march of large corporations before government hearings continues. Among the companies most likely to show up on the hit list next are McDonald’s, Ikea, and Google – all of which have already faced inquiries throughout Europe. It is no accident, of course, that they also happen to be wildly popular companies which – when they are accused of unfair tax practices – make big headlines.
And that’s really what this new world order of global tax reform has become: a game of whack-a-mole with the tax code that intermittently targets specific components of tax law or specific types of companies, but stops short of fixing the problem for good.
Companies caught under the swinging mallet will be bruised, but as long as there are still inconsistencies in global taxation, they will find new ways to optimize profit for their shareholders. And the cycle continues.
The whole affair is illustrative of the huge challenges confronting businesses as they try to navigate corporate tax and the significant impediment to growth these hurdles can present. The problem is that every major tax reform proposal that has been introduced over the past few years contains just enough substance to create controversy and costly administrative burdens, but not enough to affect meaningful reform that allows businesses to stay competitive without also adopting aggressive tax strategies.
If tax authorities around the world really want to stop corporate tax avoidance and foster business growth, they’ll stop chasing headline examples of companies changing their corporate structures to optimize tax and start implementing reforms that allow businesses to compete on a level playing field.
This article also appeared in Forbes.
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