In recent months, there have been several reports by journalists into the tax affairs of multinational corporations resulting in public anger and accusations of tax avoidance. Huge political and public pressure has even led to the statement by the managing director of Starbucks UK that ‘Starbucks will not claim tax deductions for royalties and standard intercompany charges’ and that it ‘commits to paying a significant amount of tax during 2013 and 2014 regardless of whether the company is profitable during these years’. In line with these developments, Barclays recently announced it is shutting down its tax planning department in the UK. Below, we discuss these recent developments by asking five questions about aggressive tax planning relevant for CFOs, tax directors and managing directors of multinational corporations.
- What is causing the worldwide public upheaval about aggressive tax planning?
As a result of tax planning structures, the effective corporate tax rate of some multinational corporations are believed to be as little as 5%, whereas the effective tax rate for smaller corporations may be four to six times higher. In times where governments across the globe are forced to make significant cuts to their budgets due to the financial crisis, it is considered immoral and unethical for multinational corporations to use aggressive tax planning structures. In addition, multinational corporations are also blamed for denying critical and necessary tax revenues to some of the world’s poorest countries, which is demonstrated by the recent accusation of UK food giant, Associated British Foods, by activist group Action Aid. Not surprisingly, the social acceptance of aggressive tax planning is at an all time low, resulting in public protest against multinational corporations.
- Is ‘aggressive tax planning’ illegal?
No, there is nothing illegal about aggressive tax planning by multinational corporations. Aggressive tax planning can be defined as reducing the effective tax liability by using specific technicalities of a tax system or by using mismatches between two or more tax systems. Examples of aggressive tax planning are the double deductions of the same losses (i.e. in two jurisdictions) and double non-taxation, where income is not taxed in one jurisdiction and exempt in another jurisdiction. However, in spite of the fact that this cannot be considered illegal, there is an ethical component to this. Rather than what is legally acceptable, there is an increasing focus on what is morally acceptable. In this respect, the attitude of British Members of Parliament is in our view both confusing as well as illustrative. On the one hand they are changing the UK tax law with the purpose of making it more attractive for multinational corporations, but on the other hand they are calling to combat aggressive tax planning by such corporations who do exactly what Members of Parliament wish, i.e. making use of attractive jurisdictions, albeit outside of the UK.
- What is the role of the Netherlands in aggressive tax planning?
The Netherlands is traditionally an attractive and competitive jurisdiction in the field of international taxation. As an open economy, the Netherlands has always given priority to a transparent and stable tax system, which is flexible enough to anticipate the rapidly changing requirements of international economic flows. Consequently, the Netherlands is among the most attractive jurisdictions for foreign investors seeking to expand in Europe and beyond. Companies operating in the Netherlands benefit from various tax advantages, including the 25% Dutch corporate income tax rate, which is well below the average in the EU, the so-called Participation Exemption exempting profits and capital gains arising from (domestic and foreign) participations, and the possibility of obtaining certainty in advance by way of Advance Tax Rulings or Advance Pricing Agreements. Finally, its extensive treaty network, in combination with the absence of withholding taxes on interest and royalties, makes the Netherlands an ideal jurisdiction for holding and financing activities.
These tax advantages are now in the growing discourse on tax evasion. This results not only in pressure from public opinion but also from local politicians urging the Dutch government to react to the aggressive tax planning practices of multinationals and to join Germany and the UK in combatting aggressive tax planning by multinationals.
In this respect, it is important to note that the Dutch Minister of Finance did not give in to the pressure and responded by stating that it is not up to the Netherlands to solve the problem unilaterally. Aggressive tax planning should be regarded as an international problem which, therefore, requires an international approach. Not to mention that unilateral actions would be harmful to the position of the Netherlands as a competitive and attractive jurisdiction. One of the main forms of aggressive tax planning stems from mismatches in national tax regimes and it is therefore legitimate to benefit from these mismatches.
With respect to other forms of cross-border tax planning, such as the use of intermediate companies to reduce withholding taxes and profit shifting and mismatches in national tax regimes, existing tax laws and treaties provide adequate tools to counter any abuse, according to the Ministry of Finance.
The most important message that can be drawn from the statement of the Ministry of Finance is that the existing position of multinational corporations with presence in the Netherlands is not harmed in any way. The Netherlands thus remains an attractive and competitive jurisdiction for multinational corporations.
- What is the meaning of the OECD report on Base Erosion and Profit Shifting?
The OECD report on Base Erosion and Profit Shifting is a response to the call of the Ministers of Finance of Germany, France and the UK upon their colleagues in the G20 to combat aggressive tax planning. An interesting detail in this respect is the role of the UK, that claimed in 2010 that their aim is “to create the most competitive tax regime in the G20, while protecting the manufacturing industries”.
The report identifies six pressure points in the international tax system:
- Hybrid structures and instruments
- Treaty treatment of remote commerce
- Tax treatment of related-party financial transactions
- Transfer pricing
- Anti-avoidance measures
- Harmful preferential regimes
The focus of the report is to provide an objective description of Base Erosion and Profit Shifting and it stays away from blaming and finger pointing. However, the report does acknowledge that an international approach is required to battle tax evasion. In our view, one should not underestimate the impact of the report; it could very well be seen as yet another confirmation towards the general public that aggressive tax planning is taking place on a wide scale and that it should be battled one way or another.
- Should multinational corporations be concerned about their tax planning structures and is it still possible to minimise corporate income tax without suffering reputational damage?
That depends. It cannot be excluded that other multinational corporations will also be accused of aggressive tax planning when their tax planning structures become known to the public. The example of Starbucks demonstrates that fighting back is very difficult, which is caused by a lack of specific tax knowledge by the general public and a clear definition of what constitutes a moral tax obligation. It may help if a multinational corporation can demonstrate that other significant contributions to society are being made, such as sponsoring charities, creating employment opportunities in certain jurisdictions, investing in infrastructure and operating facilities as well as in education facilities.
For certain multinational corporations it will remain possible to minimise their corporate tax burden, but there will be an increasing role for ‘moral tax planning’, requiring a certain degree of ‘moral substance’ in tax planning structures. In our view, a robust dialogue is necessary to define ‘moral tax planning’ in order to provide guidance for corporations that will not put them in the firing line again.
For further information please contact
Head of Tax Technical Office
T +31 6 1292 8834