Saturday 1 October 2016

So is corporate tax avoidance on the way out? Don't bet on it

Published 29/01/2016 | 02:30

European Economic and Financial Affairs Commissioner Pierre Moscovici. Photo: Reuters
European Economic and Financial Affairs Commissioner Pierre Moscovici. Photo: Reuters

Clamping down on global corporate tax avoidance has become the rage of late. Outraged politicians from the US and Europe, feeling the pressure from austerity-battered voters, have backed plans to close off loopholes that allow big business to legally wangle their way out of paying their fair share.

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The days of loopholes are numbered, said EU Commissioner Pierre Moscovici.

Don't count on it.

The suite of measures announced by the EU yesterday, which essentially proposes making elements of the OECD's BEPs project legally binding, have an impressive air about them.

Companies would be deterred from shifting their profits from parent companies to subsidiaries in low or no tax countries; loopholes that allow companies to use dividends or capital gains to skip taxation would be closed; and, in a bid to increase transparency, corporations will have to reveal their taxes, profits, revenues and other financial data to the authorities in all countries where they operate.

There's some understandable uncertainty about what the implications may be for companies as they adjust to the new reality.

Businesses have warned that the measures could hurt competitiveness and deter investment, amid fears that the EU is acting as a lone front-runner, in the words of one commentator, on the BEPs measures.

But what we can say with some certainty is that despite the efforts, this will not end the practice of big business trying hard to find ways to minimise their tax bill.

How could they?

A conservative estimate by the OECD of the amount of untaxed money moved by companies into tax havens is $100bn to $240bn annually.

Research shows that aggressive tax planning costs the EU between €50bn-€70bn in lost revenue a year.

There'll always be advisers on the sidelines intent on devising different ways to limit a company's tax exposure.

A case in point is the fact that just this week, Johnson Controls, a US maker of car batteries and heating and ventilation equipment, agreed to buy Irish-based Tyco International in a $16.5bn deal that will ultimately lower the former's tax bill.

By moving its headquarters to Cork, Johnson Controls would become the latest major US company to carry out a so-called 'tax-inversion', in which a US company escapes high Unites States taxes by reincorporating abroad.

Just over a month after the BEPs process was unveiled in October, drugs giant Pfizer struck a record-breaking $160bn deal to buy Allergan that would cut its global tax bill by moving its headquarters to Ireland.

That was the largest inversion deal so far.

Inversions, while entirely legal, are essentially a form of tax avoidance and a two-fingered salute to the tax authorities.

There are positives, however, in the current climate.

Slick accounting practices may continue, but a spotlight has been shone on them.

As a result of years of austerity, tax paid by major corporations is a big political issue.

The EU and OECD measures are welcome, even if their critics argue they fall short and aren't transparent enough.

Big business will likely find it more difficult to shelter profits.

Ireland is keen to highlight the fact that it is fully behind the moves, scrapping the 'Double Irish' and being one of the first to adopt the country-by-country reporting mechanism.

The Irish Tax Institute commented yesterday that change is on the way and that multinationals will be watching the measures very closely.

Perhaps so.

But that doesn't mean they won't be trying to find ways around them.

Irish Independent

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