Tax law is an incredibly dynamic sector, with new developments emerging constantly in recent times. Within a stretch of less than three weeks, two major international tax law events have occurred, these being namely the Fiat and Starbucks rulings, and the OECD proposal to address tax challenges from digitalisation of the economy. There is no reasonable prospect that advances in this sector shall come to a halt any time soon, as the fight against aggressive tax planning is being treated with urgency by the OECD, by the EU as well as by other supranational organisations. Governments are also being compelled to take a stance in order to mitigate as much as possible tax evasion; the publicisation of certain tax structures used by multinational enterprises (MNEs) to mitigate abusively their tax burden has caused a public outcry by people who believe that the millions of tax money being evaded could be far better used for research and development projects and to tackle the current problem of climate change.
Fiat and Starbucks Rulings
The element of sovereignty of nation states over direct taxation issues implies that they could formulate their tax systems in a way which is most beneficial to them. Within Europe, Member States’ power to devise such rules is however limited by the fundamental freedoms embraced by the EU, and as learnt recently by Fiat, by State Aid rules. The latter rules ensure that no tax measures exist which grant selective competitive advantages to certain businesses.
In the Fiat Decision delivered by the EU General Court on 24th September 2019, it was held that the decision taken against Fiat by the European Commission Directorate General for Competition had been correct. In other words, the Commission had been fully entitled to conclude that the tax ruling which had been issued by the Luxembourg tax authorities in favour of Fiat had conferred it (Fiat) with a selective advantage. This resulted in Fiat having to pay as much as €30 million in back taxes to Luxembourg.
However, the same could not be said for Starbucks. In this case, which was decided by the General Court on the same day, it was held that the Commission’s findings were not sufficient to demonstrate the existence of an economic advantage as required under EU law.
Some commentators have argued that as a result of the Starbucks ruling, the Commission has been dealt a hard blow in its efforts to limit the tax avoidance practices engaged by MNEs. Notwithstanding this analysis, Margrethe Vestager, the European Commission’s Executive Vice President, has held that she will remain determined to tackle aggressive tax planning measures which result in illegal state aid. Notably, under her tenure, Apple has been handed with a ruling to pay about €13 billion in taxes allegedly underpaid by Apple to the Irish Government. This decision is currently being appealed by both Apple and Ireland.
OECD proposal to address tax challenges from digitalisation of the economy.
The new OECD proposal, which is based on the work of the OECD/G20 Inclusive Framework on BEPS (an organisation grouping 134 countries) seeks to ensure that large and highly profitable MNEs, including digital companies pay tax wherever they have significant consumer-facing activities and achieve their profits, even if they are not physically present there. Thus, with this proposal, a new nexus is sought which rather than focusing on physical presence as is usually the norm in taxation, focuses on sales. Moreover, a new profit allocation rule is sought to be achieved, one which goes beyond but does not overthrow the current arm’s length principle (the arm’s length principle shall remain applicable in those scenarios where it works well).
One cannot say what shall happen next, which is what makes this sector so dynamic. The current main focus of the relevant supranational organisations is to limit in all possible ways the aggressive tax planning of MNEs, ensuring that the main tax principles of equity and ability-to-pay can be truly respected. The main obstacle sought to be overthrown is that of illegal tax arbitrage made possible by the fact that each nation state incorporates different tax rules. Should the countries’ sovereignty over tax issues be therefore removed? Definitely not. After all, it this same element of sovereignty that induces competitiveness between nation states in the global market. However, nation states should be willing to sacrifice a part of their control on direct tax issues, in order to tackle abusive tax planning. This can be achieved through the adoption of multilateral tax measures, and notably within the EU, this is already taking place as is evidenced by the Anti-Tax Avoidance Directive, which came in force recently.