The Tax Dialogue, Copenhagen, 2 September 2016
"Check against delivery"
Ladies and gentlemen
Thank you for inviting me to be with you today.
I agree with you wholeheartedly. We need a dialogue on fair taxation.
Because all of us benefit when businesses pay their fair share of tax.
It’s not in the interest of business if the countries where they operate can't afford to invest in infrastructure.
It's not in the interest of rich countries if poor ones can't afford healthcare or education for their people.
And it's not in the interest of the individuals and businesses who do pay tax, if others aren't paying their share.
Tax avoidance, in the form of base erosion and profit shifting, costs up to 10% of the world’s corporate income tax revenues. That's up to 240 billion US dollar a year that governments need to find from other taxpayers, or by cutting public services.
In the first place, it's the job of the public authorities to put a stop to that, with better tax laws.
We’ve seen a lot of positive signs in that area in the last few years. The OECD's project on base erosion and profit shifting - the so-called BEPS project - is a powerful signal of an international determination to deal with tax avoidance.
And here in the EU, making sure companies pay tax where they make profits is a priority for the Commission as well.
In January, we proposed our Anti-Tax Avoidance Directive. That Directive has already been approved by the EU's member countries. Now implementation is key. So once fully implemented, we will make a big step forward in closing the loopholes which companies use to avoid tax.
That includes issues that were identified through the BEPS project, such as the way that multinationals can shift their profits to low-tax countries by making huge interest payments to other companies in the same group.
But the new Directive also goes further. For example, it will stop companies moving their assets to low-tax countries without first paying tax on capital gains.
However, agreeing good tax laws at EU level is not enough if Member States do not implement them properly. State aid rules do not question any tax systems that have a low corporate tax rate applied to all companies. It is however illegal under EU State aid rules, if Member States reduce the tax base only in the case of a selected number of companies or any selected sectors.
The fact is that the primary responsibility for ensuring that all tax arrangements comply with EU State aid rules rests fairly and squarely with Member States themselves. It is neither for the Commission, nor for companies, but for Member States to make sure that their authorities apply tax rules equally to all companies and that no company is granted special tax treatment not available to other companies in a similar situation.
That said, this does not absolve companies from themselves double-checking any special tax treatment. If the actual amount of tax paid looks too good to be true, then it may well be problematic under State aid rules.
Closing loopholes is not enough, unless you also make sure tax authorities have the information they need to do their job,
Those authorities usually don't know what tax a multinational company has paid in other countries. So when that company claims that its profits are already taxed elsewhere, it's hard for the authorities to check.
That's why we proposed that tax authorities in the EU should automatically exchange information on the tax rulings they give.
It's also why we proposed to put the BEPS action points into effect by introducing an automatic exchange between tax administration of country by country reports of multinational companies as of 2017. That will give the relevant tax authorities the full picture of the profits that each multinational makes, and the tax it pays, in every country where it's liable for tax.
It’s good news that those proposals have been agreed by the EU’s member countries. But transparency shouldn’t only extend to tax authorities. The public also has a right to know what's going on. This is also why the Commission came forward last April with a proposal making the country by country reports public.
The facts that have come to light about how companies avoid tax have shaken people's trust. To many people, they seem to show a double standard at work. The same governments that tax a hard line against individuals who don't pay their taxes seem to be much less concerned about making sure big companies pay their share.
So companies need to show the public that they're paying the tax that they should. And I think that makes our proposal on public country by country reporting especially important.
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 why that is.
In fact, I am often asked why it took so long for us to start investigating tax rulings that go back to the 90s. The answer is that, for a very long time, fiscal secrecy prevailed over transparency. In fact, it was the United States' transparency legislation that disclosed valuable information on tax treatment of companies also operating in Europe. This is this public information that prompted our initial investigations on tax rulings granted by EU tax authorities to companies operating in their territory.
State aid and taxation
If a selected few companies can avoid tax, it makes it hard for companies that do pay their share of taxes to compete on equal terms.
Giving a specific tax treatment to a particular company gives that company a benefit just as surely as if had been handed a bundle of cash. So the state aid rules apply to tax exemptions just as much as to any other type of aid.
This is not new. The State aid rules apply since 1958. They are laid down in the Treaty ratified by parliaments in each and every Member State. The Commission gave specific guidance on when a tax ruling could involve state aid in 1998. And the European Courts confirmed in 2006 that dealings between group companies had to be at market terms (or at arm's length terms) to avoid state aid.
So it's never been a secret that tax exemptions could be state aid, and that if so, they'd have to be paid back. The only secret was the tax rulings themselves.
Transfer pricing and profit allocation methods
A lot of our work so far has dealt with transfer pricing. Those arrangements are an essential part of doing business as a multinational, but they can also cause problems with competition.
After all, companies that are not part of a group - including SMEs - don't have the luxury of setting transfer prices. They just have to pay the market price for what they buy. So if multinationals use transfer prices that don't match the market price, that can give them an unfair benefit.
That's why, in 2006, the European courts decided that transfer prices had to comply with the arm's length principle to avoid state aid.
What that means in practice is that transfer prices should be a reasonable approximation of the market price.
The Commission is not a tax authority. And we’re not trying to be one. We know that working out the market price may not be simple. So we are not trying to second-guess the decisions that national tax authorities make. We just want to be sure that the transfer prices are not unreasonable.
Most recently we looked at this issue in the cases of Starbucks in the Netherlands and Fiat in Luxembourg. If you look at our decisions, you can see that the transfer prices endorsed by the tax rulings there were so far from the market price that they had no connection with economic reality.
The case of Apple did not concer transfer prices but a methodology to allocate profits within a company.
The tax treatment received by Apple in Ireland allowed two of its Irish subsidiaries to escape billions of euros in tax. Because they could allocate most of their profits – within the company – to a so-called "head office" that wasn't liable to pay tax anywhere in the world. As a result, for every million euros of profit that one of those companies made in 2011, it paid only five hundred euros in tax. In 2014, it was just fifty euros on every million profit.
But allocating those profits to the "head offices" made no sense. Those offices only existed on paper. They had no employees, no premises where anyone could work and no real activities. So the idea that they were mostly responsible for the profits those companies made was completely out of line with economic reality.
Of course, not all tax rulings that deal with transfer pricing or profit allocation are like this.
We've looked at more than a thousand different rulings in the last three years. And most of them give us no concern at all. Rather than allowing them to avoid tax, most rulings are just designed to give companies clarity about how the tax laws will be applied.
That's why I think that no one benefits more from our work than companies themselves. Because the large majority of businesses, which pay their fair share of tax, shouldn't have to compete with rivals that get special favours from government.
I realise that companies which do pay their fair share of tax want reassurance that they haven't accidentally broken the rules. That's why, in May this year, the Commission adopted a Notice on the Notion of State Aid, which explains when special tax treatment counts as state aid. And my staff followed that up with a Working Paper on State Aid and Tax Rulings, which gives more details on what we've learned from our work.
Because I don't want to make life difficult for responsible businesses, which pay their fair share of tax. On the contrary, I want to make sure everyone has a fair chance of success.
When everyone pays their share, our economies, and our societies, work better. Governments have the money they need to invest. Responsible taxpayers don't have to pick up the bill that's 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.
The public authorities can help, of course. We can close loopholes in the tax laws, and we can protect competition by enforcing the state aid rules,
But in the end, what we really need to do is to change attitudes. We’ll know we’ve succeeded when businesses stop trying to pay as little tax as possible, and focus on paying the right amount of tax.
I'm encouraged to see that companies like Maersk and DONG Energy are starting to treat tax as a question of corporate social responsibility. That's an important step in the right direction.
But to achieve the cultural change we need, we have to keep talking. And that's why I think this dialogue is so important.