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Analysis: No quick fix for corporate tax take as pressure to act builds

A masked demonstrator leaves a Starbucks coffee shop in central London December 8, 2012. REUTERS/Luke MacGregor
A masked demonstrator leaves a Starbucks coffee shop in central London December 8, 2012. REUTERS/Luke MacGregor

By John O'Donnell and Huw Jones

BRUSSELS/LONDON (Reuters) - Europe's leaders are talking tough about making companies pay more tax but they are expected to take only baby steps for fear of alienating big business during an economic slump.

Schemes used by Starbucks , Apple , Amazon and others, operating within existing law to minimize taxes, have prompted British Prime Minister David Cameron to put the matter on the agenda when he hosts a meeting of leaders from the Group of Eight leading industrialized nations on June 17/18.

The issue of aggressive tax 'planning' will then go to the Group of 20 global powers, including China, when a leading think tank, the Organisation for Economic Cooperation and Development(OECD), outlines steps next month to tackle it.

Lawmakers and officials predict progress will be slow. Europe is torn between the demands of small countries such as Luxembourg and Ireland, fiercely resisting change to their low-tax regimes which attract foreign investment, and states such as Britain and Germany, wary of driving away big employers.

Taken at face value, the global political direction is clear. "When you don't like some behavior but they are legal, you need to change the law," Pascal Saint-Amans, the OECD's head of tax, told Britain's House of Lords this week.

Recent political pledges to act have come as a welcome surprise to the European Commission's top tax official, Algirdas Semeta, who has struggled for years to get noticed.

"I have laid out a comprehensive approach to attack corporate tax avoidance from all angles," said Semeta. "Member states now need to follow through on this - to prove that they are as determined to stop tax avoidance as they say they are.

"It's about closing loopholes between national tax laws, tightening anti-abuse provisions, strengthening transparency ... and cracking down on tax havens," he said.

Semeta's limited success so far points to a difficult path ahead. His suggestion for a 'Common Consolidated Corporate Tax Base' - including a standard way to calculate tax breaks - made scant progress, with countries such as Ireland worried it would lead to a single EU tax rate.

One official compared its chances of success with mounting a "manned mission to Mars".

Vieri Ceriani, head of fiscal affairs at the Bank of Italy, was a little more optimistic.

He likened tackling tax avoidance by multinationals to "the 30 years war, with battles won and battles lost", but said conditions were more favorable now, particularly due to positive noises from the United States.

'HUGE RESISTANCE'

EU lawmakers are skeptical about the public pledges and question whether Germany and Britain are serious about tax reform.

"This high-level talk doesn't seem to stack up with what's going on," said Sharon Bowles, an influential member of the European Parliament from Britain's junior coalition Liberal Democrat party.

Bowles, who like other lawmakers has the power to sharpen new EU rules, wants companies to publish details of activities on a country-by-country basis as banks must do.

The reform is supported by the EU's commissioner in charge of regulation, Michel Barnier, and Britain's opposition Labour party. By forcing large companies to disclose how much tax they pay to which country, Barnier hopes they will be shamed into paying more.

"All big companies, including the ones in the news recently such as Apple, Google and Amazon, should be required to say how much they pay in taxes and to whom," he said. "This will be an important step in the fight against corporate tax evasion."

But Bowles said she has faced opposition in Berlin and London. "We've encountered huge resistance every step of the way on country-by-country reporting," the British lawmaker told Reuters, singling out Germany, Luxembourg and Britain as opponents.

Without international agreement, companies will be able to arbitrage between different tax regimes.

"It's important to get agreement internationally otherwise there will be pressure on individual countries to act alone, which would not be a good result," said Mary Monfries, head of tax policy at PwC.

"What could happen, with so much public expectation building up around the G8, the OECD and the G20, is some disappointment around what can be achieved and how quickly. An expectation gap could be very damaging."

A question mark over London's commitment was raised in Dublin in April, when Britain's finance minister joined his German and French peers to announce a push for greater bank transparency.

When deeper discussion among a wider group of EU ministers began the following morning, a Saturday, Osborne had already left, replaced by a junior minister.

Tax campaigners are critical of Britain. London will cut corporate tax, allowing for effective rates as low as 6 percent and offer exemptions for overseas subsidiaries.

"There are a lot of delaying tactics and wriggling out," said Arlene McCarthy, a British member of the European Parliament who has also pushed for more transparent company accounting. "Countries need to have the backbone to do it."

IRELAND AND LUXEMBOURG

The developments are being closely watched in Luxembourg, where the government fears such interference.

"Every country has to develop a business model that generates growth," said one official familiar with its thinking. "Ireland and Luxembourg will never have the economic sectors of a country like Germany. There has to be some space to breathe."

There is little hint of compromise from the tiny European state, whose citizens are Europe's richest.

Finance Minister Luc Frieden said Luxembourg would support "redefining tax planning in the spirit of fairness".

"We must ensure that the global economy continues to work and allow companies to choose in which jurisdiction they locate certain activities and we must have tax competition in order to encourage growth," he said.

For now, Frieden has little reason to be concerned.

"What we will get is incremental change, probably tightening and applying the existing rules, but I don't think there will be wholesale change," said Christopher Morgan, head of tax policy at accountants KPMG.

EU finance ministers will meet in Luxembourg next week, a few days after the G8 summit, but officials predict the focus will be elsewhere.

"The mega billions from multinationals going away at the expense of the poor taxpayer won't be a subject for discussion this time," said one official. "Ministers want to focus on areas where they can get results and that's not one."

That view is echoed by Russia's deputy finance minister Sergei Storchak, after peers from the G20 countries discussed profit shifting by multinationals earlier this month. "There are many pitfalls," he said.

"We may undermine competitiveness of national jurisdictions and national corporations. In the sphere of taxation and cooperation, the process will be very slow and I don't think we need to force it".

(Additional reporting by Tom Bergin in London, Gavin Jones in Rome and Maya Nikolaeva in Moscow. Editing by Mike Peacock)

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