Will multinationals’ hunger for tax benefits prevail?

Elena Escalante Block |

Multinationals have taken advantage of tax benefits for a long time. Leading the fight against multinationals, Margrethe Vestager, Vice-President of the European Commission and DG-Competition Commissioner, has been referred to as “Silicon Valley’s dragon slayer”. The idea that large companies can finally be held accountable by Vestager has gained her a worldwide reputation as a “watchdog” for tech giants. However, both Vestager and the European Commission have suffered serious backlash as their tax related decisions were at times negatively received by member states and multinationals alike. Now, with US president Joe Biden’s arrival into politics, Vestager might have gained an ally in her fight against multinationals in Europe.

Margrethe Vestager giving a speech

With Joe Biden’s arrival into politics, Vestager might have gained an ally in her fight against tax evasion in Europe. Photo: EC-Commissioner Margrethe Vestager, Jennifer Jacquemart, 2017

Large multinationals have used numerous schemes to avoid paying taxes in various EU countries. This was made possible by EU Member states having differing legislation and national policies for dealing with taxation. Countries like The Netherlands, Ireland, Luxembourg, and Cyprus are among the world’s 15 worst corporate tax havens. Ireland, for instance has a tax arrangement coined the “Double Irish”. This arrangement allows companies to shift taxable income from within Ireland to another Irish-registered firm in an offshore tax haven. In turn, these practices harm fair competition in the European Union.

The Commission’s quest against tax ruling malpractices

The Commission, or more specifically, The Directorate General for Competition (DG-Comp) is in charge of establishing and implementing competition policy for the European Union. Since 2013, DG-Comp has made tax-ruling practices of member states involving the investment of large multinationals an important part of their investigations. The Commission set up tax measures aimed to assess public allegations on member states giving favourable tax treatments to certain companies. Since 2014, the Commission’s new tax force has made decisions on several cases: UK Tax scheme for multinationals (Controlled Foreign Company rules), alleged aid by Luxembourg to McDonald’s, ENGIE, Amazon and Fiat, state aid implemented by Ireland to Apple, Excess Profit exemption in Belgium, and aid in favour of Starbucks in the Netherlands. There are also other ongoing investigations against Ikea and Nike in the Netherlands and Huhtamäki in Luxembourg.

Margrethe Vestager’s fight against tax malpractices as Vice-President of the Commission and as DG-Competition Commissioner has gained her the reputation of “dragon slayer” or “giant killer”. While many might see her as a champion against large multinationals, the pursuit against these multinationals has also caused awkward tensions between the Commission and certain member states.

Indeed, as my doctoral research has shown, appeals brought by member states against tax rulings tend to be accompanied by claims seeking to delegitimise the Commission’s decision and authority. For example, the appeal by the Irish government against the Commission’s decision with respect to Apple was accompanied by claims disregarding the tax rulings as “politically motivated.” Irish governmental officials, Apple representatives, and some competition experts blamed the Commission for making Ireland an example on its new quest against tax practices.

 It is clear the approach [towards Apple] is politically motivated and the huge headline-grabbing number and endless rounds of interviews are designed to maximise PR impact for the commission at a time when some member states are losing faith in EU institutions – Liza Lovdahl-Gormsen, Competition Law Researcher,  Irish Times February 2017

 Members of the Irish government justified their appeal by suggesting the Commission’s decision was purely politically motivated as well as going against their country’s sovereignty. However, this perception that the Commission is politically motivated could become harder to sell in the future for both Ireland and multinationals involved in state aid cases. This comes as newly elected US president Joe Biden might be a promising ally in the battle against large multinationals.

Biden’s arrival and push for a global minimum tax rate

In June 2020, Vestager had already pushed for a global consensus on digital tax. However, former President Trump threatened to put tariffs on champagne, Roquefort cheese and other products if the digital tax proposal went ahead. This caused France’s President Macron to postpone talks for a year. Now, under the current Biden administration, a push for taxing the biggest 100 companies that have benefited from globalisation has begun.

The Biden administration has recently made mentions of leading a major change to global tax rules. US Secretary of the Treasury Janet Yellen stated that the US wants to pursue a 21% minimum tax rate to US multinationals abroad. This is part of a global minimum corporate tax rate that according to Yellen “can stop the race to the bottom”.

However, this might eliminate the tax advantage that certain EU member states such as Ireland have. Currently, Ireland attracts multinationals and US investments by having a 12.5% corporate tax rate, compared to rates over 30% for other countries such as France or Germany. In 2020, this allowed the country to earn 11.8 billion euros from corporate taxes (most of which are coming from US firms), representing one-fifth of total revenues for the country. A global taxation rate that potentially makes Ireland less attractive to foreign investors would thus have a substantial impact on the Irish economy. Indeed, Irish officials are already aware of the potential impact that a globally enforced tax rate could have on their nation.

Team Vestager-Biden is highly likely to stand united against international tax avoidance.  As the US government has changed its position on international tax policy, it seems that a consensus for a global minimum corporate tax rate is finally underway. This would make it more difficult for multinationals to take advantage of existing loopholes in the international system, making their hunger for obtaining tax benefits harder to prevail in the future. This would be a necessary and welcomed shift towards stopping tax evasion practices across Europe and the world.