Two weeks ago, the EU revealed that they were set to launch an investigation into a British government scheme that could help multinational firms pay less tax. The EU believes that the special exemption for multinationals in Britain do not comply with EU competition rules as they allow them to pay less tax than their domestic-only competitors. So with the release of the Paradise Papers this week, it is useful to examine the relationship that Britain has with tax avoiders and evaders and the UK stance on the EU clamp-down on tax dodging tactics.

The crux of the investigation centres around the UK’s ‘controlled foreign company’ (CFC) rules that George Osborne implemented in 2013. It allows a multinational company that resides in the UK to reduce its tax bill by moving some taxable income to an offshore subsidiary (or CFC). The Financial Times reported that,

“European officials will examine the group financing exemption, a rule which allows UK parent companies to avoid paying tax on interest paid on loans to their subsidiaries when that interest is paid into offshore jurisdictions.”

Without these measures, the interest income would be taxed in the UK because the CFC rules would disregard the offshore shell and allocate the interest income to the UK parent company. These set-ups aren’t illegal, but can be challenged by HMRC. For example, Ithaca Energy, an oil firm with headquarters in Aberdeen, was revealed in the Paradise Papers to have set up a shell company in Burmuda to reduce their tax bill. According to BBC reporting on the topic,

“Ithaca Energy set up a “shell” company in the tax haven of Bermuda in 2012 to purchase its share in a $50m (£38m) North Sea oil production platform. In the leaked papers, Ithaca stated it was “important” to its tax position the company was controlled from Bermuda.”

Burmuda is popular as a home for offshore subsidiaries as they do not tax income or capital gains. The set up is technically legal under UK law, however, if it is ruled that the company is being run from the UK, not Bermuda, it would nullify any Bermuda tax benefits and potentially lead to a challenge from HMRC. Professor Prof Avi-Yonah told the BBC that,

“I think the point is to take the profits that are derived from operations in the North Sea and to funnel them through the Jersey company to Bermuda and then have them sit there as long as you want until the Canadian company wants to have them, and at that point you send them out to Canada and they’re tax exempt in Canada as well because they’re treated as dividends… It’s perfectly clear. The only reason to have a Bermuda company in there is because Bermuda is a tax haven. I can’t see any other reason to have this extra holding company in this structure.”

Just how much money there is being lost through these CFCs is unknown, but when the measures were brought in, HMRC calculated that the CFC rule changes would reduce the tax take by £805m a year by 2016. HMRC released documentation that estimated that multinationals avoided paying £5.8bn in taxes in 2016, 50% more than government forecasts, and three times higher than the entire government estimates of the benefit fraud bill (£2 billion) – though that figure does not include losses from the CFC rules under investigation.

Was EU Tax Evasion Regulation The Reason For The Brexit Referendum?

Brexit will not exempt the UK from these investigations, as the EC is keen to ensure that any outstanding investigations be completed under EU law (even if the UK has already left). If the UK remains in the EU for a transitional period, as Theresa May has stated she would like, it would have to sign up to all EU rules on including state aid policy and anti-tax avoidance rules, including the law set to come into place in January 2019 requiring all member states to have anti-tax avoidance rules governing CFCs on the statute book.

This is far from the first battle that the EU have had with Britain over tax evasion. Back in 2015, Britain rejected plans announced by Brussels to combat “industrial-scale tax avoidance by the world’s biggest multinationals”. Britain had built a corporate tax haven for multinationals that included slashing corporation tax from 28% to 20%, new favourable tax regimes for multinationals with offshore financing subsidiaries, and tax breaks for patent-owning companies. As a result, Britain saw a number of large corporations like Aon, Fiat Industrial, and Starbucks’s European operations, set up headquarters in the UK with a small number of staff in order to take advantage of these tax laws. The common tax regulations would have clamped down on offshoring and removed many of these elements of Britain’s competitive tax advantages over other EU Member States.

Earlier in 2015, Conservative, UKIP and DUP MEPs also voted against EU plans to crack down on corporate tax dodging, by making companies report where they make their profits and pay taxes. The plan included a requirement for all Member States to agree on a common EU position for the definition of tax havens and for co-ordinated penalties to be imposed upon countries or territories across the world that are uncooperative in tackling tax evasion.

These measures and crack-downs are part of a lengthy EU campaign to fight corporate and multinational tax evasion and Britain is not the only company facing challenges to their tax structures. The European Commission (EC) has already declared that Ireland failed to collect up to €13 billion in taxes from Apple, in a case set to be heard in the European Court of Justice (ECJ). This is not an isolated case either, Luxembourg has also been accused of granting Amazon illegal tax benefits worth €250 million, the European Union has ordered Amazon to pay back the taxes as it amounts to illegal state aid under EU law. European Competition Commissioner Margrethe Vestager said in a statement,

“Luxembourg gave illegal tax benefits to Amazon. As a result, almost three-quarters of Amazon’s profits were not taxed… In other words, Amazon was allowed to pay four times less tax than other local companies subject to the same national tax rules. This is illegal under EU state aid rules. Member states cannot give selective tax benefits to multinational groups that are not available to others,”

Britain and Europe have a fractious relationship when it comes to tax evasion and avoidance regulation, many British MPs MEPs have frequently been at odds with the majority of European states when it comes to cracking down on tax dodging multinationals.

Perhaps, and understandably so, the EU fear Britain becoming another offshore tax haven for European multinationals, but that doesn’t seem to provide a justification for the serial evasion and avoidance that has been uncovered by the Panama and Paradise Papers. If we seek a society where everyone pays their fair share, it seems paradoxical to willfully ignore (and arguably encourage) multinationals to funnel money offshore. Large corporations and companies will always find ways to reduce their tax burden, but perhaps we shouldn’t make it quite so easy.

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