The European Union, which is mired in tax disputes with large multinational companies like Apple Inc. and McDonald’s Corp., has announced his intention to restrain the government, who are trying to win over multinational companies by means of favorable tax benefits, enabling the latter reduce their tax liability by placing profits abroad.
The European Commission, which has the right to prohibit unfair tax breaks provided by multinational companies, has announced his intention to limit the ability of EU Member States to adopt provisions that allow reducing tax burden for foreign companies.
A document published by the European Commission determines how the regulator will provide support to Member States, and is a warning shot in the direction of the companies that are engaged in deducing profits, insisting that the transactions between related parties should be carried out at market prices.
The document specifies that any intentions to deviate from the certain market prices should be limited and proportional. This applies to situations where it is impossible to determine a comparable transactions, for example, in matters of profits produced using sophisticated payment schemes for intellectual property rights with the participation of companies registered in jurisdictions with low taxation.
The European Union has already shown its determination on this issue in 2015, obliging the Starbucks Corp. company pay taxes in the amount of 30 million euros. The Commission concluded that the Dutch division of the company has paid millions of euros related to the company – a resident of the UK, the latter is not taxed in the United Kingdom (in exchange for information about the technique of roasting coffee). Enlarged and tax-free royalty for the provision of this technique allowed registered in Seattle the Starbucks Corp. company unfair reduce taxation of their Dutch “daughter”.
In January 2016 Commission obliged Belgium to reclaim approximately 700 million euros of taxes that have been unfairly attributed to tax relief of 35 companies, including Anheuser-Busch InBev NV and BP Plc.
Based on these decisions, the regulator has determined its new powers to limit the number of transactions that have been permitted particularly in Ireland in relation to Apple’s, and Luxembourg – against Amazon.com Inc. and McDonald’s.
Agreement on the tax concessions between Apple and Ireland have been criticized by the European Union, according to which such agreements are unfair in terms of company tax benefits in exchange for jobs in the country. EU’s conclusion was that the methods used for the distribution of profit based on the results of the negotiations more than on the use of pricing methods.
Naturally, all countries and companies, which the EU accused, deny that from their side there were any violations.
Multinational companies are required to adhere to the requirements adopted by the Organization for Economic Cooperation and Development regarding the use the principle of «arm’s length» in order to determine how to distribute the profits.
OECD requirements is an “international consensus” by a principle, which is intended to ensure the application of market prices for transactions between related entities for tax purposes.
According to the OECD representations elimination profits by international companies brings losses to States in the amount of about 240 billion dollars per year.
In conclusion, we note that the preparation of the European Union of this legislative act is the logical continuation and supplement of the action plan for combating tax minimization and elimination of profits (BEPS) approved by the Organisation for Economic Cooperation and Development. Of course, the provisions of these documents greatly hinder multinational companies to structure their activities rationally. At the same time, we are already working on the development of new and effective tax optimization schemes and closely follow for changes in tax legislation of Ukraine and other countries.
If you want to keep abreast of the latest trends in taxation in Ukraine and abroad, do not hesitate to contact us. Our lawyers will provide you with qualified consultation.