Trowers & Hamlins

Sign up

Home » Resources » Blog » EU Commission gets tough with Amazon - should State aid rules be used to stem tax avoidance?

EU Commission gets tough with Amazon - should State aid rules be used to stem tax avoidance?
Trowers Public Insight

EU Commission gets tough with Amazon - should State aid rules be used to stem tax avoidance?

The run up to the general election will be dominated by the parties' proposals for reducing the budget deficit and funding public services. Part of that debate will include competing explanations for one of the mysteries of the current economic recovery - the UK's rising GDP and falling unemployment has not increased tax receipts by as much as anticipated, leaving a bigger than expected hole in public finances.

Media coverage has focused on two possible reasons. One is that new jobs, particularly of the zero hours variety, are less well paid than those they replaced and therefore generate less income tax. The other explanation is that some global brands have so fine-tuned their tax planning that they now avoid (as much as possible) paying tax anywhere other than in countries with very low corporate tax regimes. The internet and e-commerce exacerbate the problem by affording the nimble tax planner ever greater flexibility.

Some global brands, when under the media spotlight on tax, have relied on the defence that their legal duties are maximising profit for their shareholders, rather than paying avoidable taxes. No doubt this is true, though some shareholders might wonder whether maximising profits also encompasses protecting the reputation of a brand (as a responsible corporate citizen), avoiding both consumer boycotts and the new risk of repaying substantial amounts of unlawful state aid.

Yes, State Aid is the new factor in tax avoidance. If the European Commission confirms its preliminary decision, it will require some super brands to repay hundreds of millions of Euro in avoided taxes on the grounds of unlawful state aid. Luxembourg, the Netherlands, Ireland, Amazon, Starbucks, Fiat, and Apple are all under its spotlight, others may follow.

At the heart of the EU Commission's concerns is an element of tax planning under which businesses in group structures charge each other for goods, services and loans – known as 'transfer pricing arrangements'. An astute tax planner could arrange these group transactions so that a business based in a country with relatively high corporate taxes is disproportionately left with the costs of the group, reducing its profits and its tax liabilities, while businesses in lower tax regimes are left with most of the income. The result being higher profits for the group's shareholders and lower tax receipts.

Though the EU Commission does not have competence over corporate taxes, which is for each EU member state to determine, it is responsible for ensuring that competition in the single European market is not distorted by unlawful aid from the state. The discriminatory application of business taxes can give rise to unlawful state aid.

Transfer pricing arrangements require the relevant tax authorities, such as the HMRC, to review and agree the costs and charges made between businesses in the same group. These should in principle be based on the arms-length principle. Group companies should charge each other the same as 'unconnected' businesses might be expected to. In its preliminary review the EU Commission has questioned whether Luxembourg has agreed transfer pricing arrangements with some Global Brands which do not comply with this arms-length principle. If this is confirmed, then Luxembourg would have used state resources to favour a selected business or businesses and that aid had the potential to distort competition between member states. Those favoured global brands will then be required to repay the value of that aid.

State Aid law will in itself not solve the mystery of lower tax receipts in the UK. It is primarily concerned about preventing distortions in market competition. If Luxembourg treated all of its corporate-tax payers equally it may have a defence. Also if the SNP and Northern Irish parties achieve their objective of setting lower corporation tax rates in Scotland and Northern Ireland no state aid will arise if this only affects companies in England & Wales. What the EU Commission's action does raise is the question of how countries need to co-operate to ensure global brands contribute taxes to the markets they operate in.

The issue of transfer pricing and unlawful state aid also has other less apparent public finance implications. Businesses which are owned or part owned by the public sector are likely for tax purposes to form part of their parent authority's group. They should be subject to transfer pricing requirements especially where the parent authority is selling or lending to or buying from that business. If the parent authority seeks to maximise income or minimise corporation tax liabilities through non arms-length fees and interest charges, it is in effect engaged in tax avoidance planning.Even if it manages to persuade HMRC to agree to the arrangements, it may still face challenges from disgruntled competitors, alerted by the media to Amazon's plight, who might now cry unlawful state aid.


No comments yet.

Add your comment Please login or register to comment on this post.