Since the financial crisis left a massive dent in the budget of many states, the press on both sides of the Atlantic has been crammed with stories of prominent multinational enterprises paying only a minuscule amount of corporate income tax. The public was shocked to learn of the elaborate – and more often than not legal – tax avoidance schemes employed by seemingly every major corporation. Some structures, such as the notorious stateless income-producing “Double Irish with a Dutch Sandwich”, even became household names. In 2014, the Luxembourg Leaks exposed how the multinationals’ tax minimization strategies were actively aided by overly “cooperative” tax rulings, while the 2016 Panama Papers allowed a glimpse into the even deeper shadows of offshore finance. In short, it was made abundantly clear that the current international tax system is unfit for the global business of the 21st century. And on their own national tax authorities are unable to do much about it.
The EU’s controversial state aid investigations
However, when the European Commission launched its state aid investigations of the tax rulings attained by some multinationals, it was met by fierce opposition from the U.S. Government. The recent decision ordering Ireland to collect €13 billion of “unpaid taxes” from Apple Inc.’s Irish subsidiaries drew particular criticism. Following a two-year long investigation, the European Commission concluded that two tax rulings issued by Ireland had enabled Apple to pay substantially less tax than other companies, which is illegal under EU state aid rules. Despite a statutory tax rate of 12.5 per cent, Apple’s Irish subsidiaries were said to have paid a mere 0.005 per cent in tax in 2014. Tim Cook, Apple’s CEO, disputed the figure dismissing the decision as “total political crap”, while U.S. officials alleged that the investigations appear to be discriminately targeting U.S. companies.
From a technical perspective, one may indeed question whether the EU state aid rules are the right tool to fight multinational tax avoidance. But as of now, it seems to be the only one available to effectively address at least the EU Member States’ incentives to engage in harmful tax competition. And even though they feature prominently in the press, U.S. groups are far from the only, or indeed the main, targets of the Commission’s new approach. So why, rather than welcoming the European efforts to curb the tax dumping by some of the smaller EU Member States, is the U.S. Government’s reaction so hostile?
One concern, as articulated by the U.S. Senate Committee on Finance, is “the prospect of U.S. taxpayers footing the bill for state aid recoveries”, since any back taxes collected in the EU may be eligible for foreign tax credits in the U.S. Yet this reasoning is most likely merely a cop-out intended both to cause a stir and increase the political stakes. If the EU claims turn out to be legitimate, the corresponding foreign tax credits for the Irish investments would of course have been far too low in the past. More importantly, foreign tax credits become relevant only where and when the foreign profits are actually taxed in the U.S. Yet due to the stalemate on U.S. corporate tax reform Apple currently avoids U.S. taxation by parking more than $200 billion in cash overseas. It is hence no surprise that shortly after the Commission decision Tim Cook announced to repatriate at least some of Apple’s offshore cash.
The U.S. Government’s legal argument is that the Commission decision reallocates taxes to the EU that according to well-established international tax standards should be paid in the U.S. However, this is exactly what was under investigation during the Commission proceedings. It also brings us back to square one as the outdated “international tax standards” have been found to be vastly inadequate for the 21st century, a sentiment that in principle is shared by the U.S. Government. In addition, the U.S. reference to the OECD/G20 base erosion and profit shifting (BEPS) project, the major effort to reform the international tax system and tackle tax avoidance, would be far more credible if the U.S. had not chosen to stay out of the most innovative and ambitious BEPS action, the so-called multilateral instrument. With the potential to change the more than 3.500 bilateral double taxation treaties in existence in one fell swoop, a broad-based adoption of the multilateral instrument could usher in a new era for international taxation and, at the same time, serve as a bold political statement against multinational tax avoidance.
Symptom of a wider disconnect?
The rebuff of the multilateral instrument is but the latest example of the U.S. reluctance for bold multilateral action. It is true that in the past U.S. Governments have also often taken a realist approach to international law. However, in the last two decades the U.S. has visibly shied away from many of the most ambitious proposals to establish global rules and institutions, whether in the area of climate change, international criminal law, accounting, financial regulation or tax. Instead, where thought necessary, the U.S. opted for an extraterritorial application of its own unilateral rules, such as the 2010 Foreign Account Tax Compliance Act (FATCA), while rebuking those who chose to do the same, like the European Commission’s application of EU state aid rules to U.S. groups. This approach is evidently inconsistent. Further, it is at odds with the global dimension of many of today’s policy challenges. An increasingly globalized world and economy can only be governed with the help of strong multilateral institutions and a common set of rules. And the transatlantic partners should (again) strive to take a leading role in shaping those rules. The adoption of the Paris Agreement on climate change gave hope, but what role, if any, multilateralism will come to play during the presidency of Donald J. Trump – or following a similar populist turn in the EU – remains to be seen.