Copenhagen Business School, 9 September 2016
"Check against delivery"
Introduction: Why fair taxation matters
Ladies and gentlemen
Most of us pay our taxes. Some with more enthusiasm than others. Still, we pay because we know that a civilised society, where no one is left behind, depends on it.
But we do expect taxation to be fair. That those who have the most will contribute the most. And that no one, however wealthy or powerful they may be, will be able to avoid paying their share.
For me, that issue of fairness is the most important message from our enforcement of state aid rules in tax cases and it is my duty as Commissioner for competition to make sure that the rules apply in a fair manner to any company that does business in the EU's single market- regardless of size, sector or nationality.
Last week, the Commission ordered Ireland to recover up to 13 billion Euros, plus interest, in unpaid tax from Apple.
Like for other tax state aid decisions addressed to Luxembourg, the Netherlands and to Belgium adopted by the Commission over the last year, this decision asking Apple to pay back the special tax benefits that it got, is based on facts. My job is enforcing the rules and removing the distortion created by the advantage that a company got by paying much less tax.
That sort of special tax treatment, like any other types of selective unfair advantage, makes it hard for companies that do pay their share to compete on equal terms. And that's what our decision is all about: restoring fair competition.
But fair taxation is about much more than that. It's also about everyone making their contribution to society. To the infrastructure and the public services that make our world a decent place to live. And if some companies don't pay their share, we all lose out.
Look at base erosion and profit shifting. These are strategies which some companies use to shift their profits from the countries where they are really made, to other places where those companies do hardly any business, but where tax rates are very low.
The OECD estimates that those strategies cost national governments up to 240 billion US dollars a year. And every cent of that needs to be made up in another way. By increasing the taxes that the rest of us have to pay. Or by cutting back on the public services that we rely on.
In other words, a strong society depends on fair taxation. It's an issue that belongs at the very top of our agenda, not just in Europe but throughout the world.
International cooperation to close loopholes
And that's exactly where it is at the moment.
At this week’s G20, leaders repeated their commitment to working together for fair taxation. It's a commitment that has already produced important results.
Last year, the G20 endorsed recommendations on base erosion and profit shifting, which will make it much harder for companies to avoid paying tax where they make profits. More than 100 different countries and jurisdictions are working together, through the OECD’s Inclusive Framework, to put these recommendations into practice. And EU countries have already agreed to a proposal - which the Commission put forward in January - for an Anti Tax Avoidance Directive that will implement many of the BEPS recommendations throughout the EU.
It makes sense for us to work together, because fair taxation depends on international cooperation. That's the only way we can avoid mismatches between our national tax laws, which multinationals can exploit to avoid tax.
And it also makes sense because our aims are very similar, even if our laws are not. The story of the Apple investigation began in the United States. Because the US Senate cares as much as we do about making sure companies pay their fair share of tax. And it was their investigation into Apple - and US transparency rules - that tipped us off that the company might have received State aid.
State aid and taxation
Of course, the State aid rules are unique to the EU. And I realise that it can sometimes be difficult for people in other countries to understand our rules. I think people sometimes look at these rules which they’ve never heard of before, and assume we must have come up with a new piece of law just to make life difficult for certain companies.
But nothing could be further from the truth.
The European Commission has been enforcing the State aid rules for nearly sixty years. And it's been clear since the start that State aid can take many different forms.
A government might just hand over cash, of course. But the effect is just the same if it gives a company some land at a knock-down price; or makes a loan with a favourable interest rate; or, for that matter, if it provides a tax benefit that others in the same situation don't get.
There has never been any secret about that. The Commission gave guidance in 1998 on when corporate tax rules can lead to State aid. And the European courts confirmed in 2006 that dealings between group companies had to be on market terms to avoid State aid.
This isn't about interfering with national tax laws. There's nothing to stop EU governments from deciding to apply a low tax rate to everyone. They just have to make sure that when they apply their tax laws, they don't give certain companies special treatment.
So if you're a company that has been offered an arrangement that seems too good to be true, it would be a good idea to check that it doesn't break the State aid rules. But in the end, it's up to the national authorities to make sure they comply with those rules.
Complying with State aid rules
If we find that the State aid rules have been broken, then of course we have to take action.
But that doesn't mean we’re trying to turn the Commission into a tax authority. We know it's not easy to work out how a company should be taxed. And we’re not trying to second-guess the decisions that national authorities make. We just want to be sure that the tax treatment that a company gets isn't totally out of line with economic reality.
Take our decision about the tax ruling granted by the Netherlands to Starbucks.
That case was about Starbucks Manufacturing, which roasts Starbucks coffee. Like any roasting company, it has to buy green coffee beans. It also had to pay a royalty for a formula which it needed to roast those beans.
An independent coffee-roasting company would have no choice but to pay the market price for those things. But Starbucks Manufacturing got both the beans and the formula from other companies in its group. And the amounts that it paid for them were out of line with market prices. So much so, in fact, that the taxes it paid since 2007 were 20 to 30 million euros below what they should have been.
The same goes for the tax ruling that Ireland gave Apple.
The Irish authorities allowed two of Apple’s subsidiaries in Ireland to allocate most of their profits to a so-called head office, which wasn't liable for tax anywhere in the world. And those so-called head offices had no employees, no premises and no real activities. So the idea that they generated most of the companies’ profits was clearly out of line with economic reality.
Of course, tax rulings as such are perfectly legal and not all tax rulings are like this.
We've looked at more than a thousand different rulings from all Member States in the last three years. And most of them are designed to give companies clarity about what the tax laws mean, not to help them avoid tax.
Looking ahead, the ultimate goal should of course be that all companies, big or small, pay tax where they generate their profits. Enforcement of EU state aid rules alone cannot achieve this – that's why we need a change in corporate philosophies and the right legislation to address loopholes and ensure transparency.
I believe that public transparency is key to ensure good corporate responsibility in this domain. In many of the cases we have investigated, there are very little - if any - figures in the public domain. That's why it's vital that EU countries agree as soon as possible on our proposal on public country by country reporting.
That proposal would allow everyone to see if companies are paying tax where they make their profits. Large multinationals that operate in the EU would have to publish information on where they made their profits, and where they paid tax. And if the two don't match, companies would have to explain to the public the reasons why.
Because fair taxation affects us all, and we have the right to know whether big companies are paying their share.
I know it's been said that without these tax breaks, companies wouldn't be willing to invest in the EU. But I doubt that’s true.
Because the EU has a huge amount to offer to every company that does business here, from the largest to the very smallest. We have modern infrastructure, skilled people and an absolute commitment to the rule of law, within a market of more than 500 million consumers.
So if we want to make Europe an even better place to invest, we should be coming up with plans that benefit everyone. Plans like the European Fund for Strategic Investments, which aims to mobilise more than 300 billion euros in new investment in things like infrastructure, research and education. We shouldn't be putting our money into tax breaks that only benefit a few companies.
Because when everyone pays their share, our societies, work better. Governments have the money they need to invest in infrastructure. Responsible taxpayers don't have to pick up the bill left by companies that avoid tax. And the public gains confidence that there's a fair chance for everyone, not just for a few well-connected companies.
I think that's why we now have a firm consensus, in the European Union and all around the world, that we need to act to ensure fair taxation. And that’s an opportunity that we have to seize. Because fair taxation is the way forward to a fair and decent society.