What Is The Likely Impact of EU Corporate Tax Rulings?

For the world’s biggest businesses – many of them from the U.S. – the European Commission has been something of an adversary in recent years. The situation around corporate tax has caused President Obama to decry Europe’s actions as protectionism, and the current U.S. Treasury Secretary has called the tax precedents “disturbing” in their implications for American business.

The trend began with the famous Microsoft v Commission case in 2007, in which the software giant was forced to offer Windows users a choice of internet browsers. But current competition commissioner Margarethe Vestager has taken the baton and run considerably further with it. Proceedings have been filed against the likes of Apple, Amazon, McDonalds, Starbucks and Fiat in regards to tax arrangements and monopolisation, and more may be on the way.

The rulings have unanimously fallen against the businesses involved, and the fines have been heavy. But even the €9bn in back taxes levied against Apple is a relatively small dent in its global coffers. The implications however could affect a broader swathe of businesses, as well as economies across the continent.

One of the immediate reactions is that large businesses have considered relocating. While many ponder escaping the UK following the Brexit vote, McDonald’s are now looking to shift some of their operations from Luxembourg to Britain, in order to stay on the right side of EU law. With Apple’s appeal to its fine pending, they and others may consider a similar course of action.

In this scenario, the business-friendliness of the UK could be a major boon. This would stand particularly true after Brexit, where the ability to avoid EU competition rulings and other precedents might counteract the drawbacks of leaving. This will be particularly true if the UK manages to retain unified product standards and other affectations that would make it a viable base for selling within Europe.

For the EU, and particularly Vestager, this is partly a moral crusade. But it also has a political bent. The EU is keen not just to regulate banks and companies more closely, but also to spread its wealth more evenly between member states. While a Europe-wide rate of corporate income tax has been resisted, efforts to equalise tax across countries are still seen as feasible.

EU Competition Commissioner Margrethe Vestager

EU Competition Commissioner Margrethe Vestager

Given the massive revenues of banks and the reliance of several countries on U.S. business, there will be some desire not to alienate them entirely. But there’s also an appreciation that businesses cannot avoid dealing with the EU. This ability to put its foot down has led to other gains on the behalf of consumers, if not businesses, such as slashing data roaming charges.

The impetus for change to corporate tax rules is unlikely to reach many small businesses, at least not initially. There is an extent to which these businesses are being made examples of, although the grounds for the cases are entirely legitimate. But the anti-competition rulings could have a huge effect on the sectors in which these companies dominate, and change the landscape of many individual economies.

The case against Google was brought by a couple whose own search business was excluded from Google’s search rankings, who were joined by several plaintiffs with similar experiences. Should the company be forced to put all services on a level footing with its own, we could see a whole suite of map services, video platforms, and even other search engines.

It may also have ramifications further afield. President Trump has made it an early priority to encourage U.S. businesses to return home, and has targeted corporation tax as well as America’s unique territorial tax law among his preferred solutions.

While his motives differ from Europe’s – he primarily wants the U.S. to make more corporate tax revenue – it may be in his best interests to collaborate with the EU in order to prevent the abuse of tax systems. This could ultimately result in a global tax reshuffle, and a greater impetus from the EU to drive innovation, in order to make up for the loss in revenue from expat companies.

Ultimately the business world will await the rulings with interest, and no small amount of trepidation. While the immediate consequences may be unpleasant for big business, the results elsewhere may be interesting. And with each competition commissioner only serving a five year term, there’s a chance that this impetus for changes to corporate tax laws will eventually disappear.

 

If you require tax advice or other financial services for your business, don’t hesitate to contact us.

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