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24 • Fifty Shades of Tax Dodging 3.6 Tax rulings The international rules for taxation of multinational corporations remain uncertain and complex, and concerns have been raised that the outcome of the OECD’s BEPS process (see section 1.3) will only increase this problem. 156 In order to have legal clarity, tax administrations can offer companies or individuals tax rulings, including advance pricing agreements (APAs), that make their tax position clear and assures that the tax administration will not challenge the tax practices agreed on. These types of agreements can be effective ways to make the tax system more efficient by bringing certainty to corporations. However, they can also be misused to legitimise significant tax avoidance, and so their use needs to be transparent and accountable. Currently, these agreements are often negotiated bilaterally between the multinational corporation and the national tax administration, and are kept in secrecy. The secret world of tax rulings for multinational corporations became better known after the LuxLeaks revelations in November 2014. 157 A law professor has described these tax rulings in the following way: “It’s like taking your tax plan to the government and getting it blessed ahead of time.” 158 Such tax rulings have now become a key tool in corporate tax avoidance. With provision for tax rates lower than 1 per cent in some cases, 159 multinational companies flocked to Luxembourg’s tax department to get a ruling. The audit company PwC that brokered the tax rulings has since been accused in the UK’s Public Accounts Committee of promoting tax avoidance on an industrial scale. 160 Along with other EU Member States, Luxembourg is currently under investigation by the European Commission for using tax rulings as a form of illegal state aid. The Commission’s investigation was expanded in March 2015 to include tax deals with McDonald’s. 161 Shocking as the revelations from Luxembourg were, the really disturbing thing about these leaks was that they only involved one country and the tax rulings brokered by one audit company. It is safe to say that LuxLeaks revealed only the tip of the iceberg: underneath is a much wider and deeper problem, since 22 of Europe’s Member States make use of tax rulings and we can only guess at the provision for lower corporate taxes that they involve. While Luxembourg is one of the most active Member States in issuing tax rulings, it is certainly not the only one. Figure 5 illustrates this, showing only one type of tax ruling – the so-called Advance Pricing Agreements (APAs). Important as this step may be, it does nothing to assist developing countries or the citizens of Europe in accessing the tax rulings, and doesn’t address the underlying problem of a complex, uncertain and very opaque tax system, where governments often engage in ‘tax competition’ to attract multinational corporations with opportunities to lower their taxes, rather than work together to ensure a solid and coherent tax system. 163 Data from the Commission shows that, out of the 547 APAs in force in EU Member States by the end of 2013, 178 were with non-EU countries. 164 The Commission is conducting an impact assessment to look into the pros and cons of making parts of the tax rulings public. This is expected to be ready by the beginning of 2016. However, as is the usual case with the Commission’s impact assessments, it will most likely not consider the interests of developing countries when weighing up the pros and cons. 3.7 Excluding developing countries from decision making As has been highlighted above, the OECD BEPS reforms have systematically been biased against the interests of developing countries. Europe plays a key role in upholding the current system, which dictates that international taxation reform is discussed and progressed through OECD and G20 forums, where more than 100 developing countries are not represented. For years, developing countries have been calling for the UN to take over the international taxation reform process, as this would allow all countries in the world to have a seat at the table when decisions are to be taken. The EU played an active role in blocking this proposal in the July Financing for Development conference in Addis Ababa, where the question of the global tax body was a key sticking point between developed and developing countries. In the early stages of the negotiations, the EU seemed to indicate some openness to discussing the proposal, calling for a cost-benefit analysis, more clarity of what the mandate would be and reflections on the potential interlinkages with between different bodies to avoid ‘wasteful duplication’. 165 However, the EU’s line then changed to opposing the intergovernmental tax body with a reference to the problem of ‘institutional proliferation’ and their preference for keeping the decision making at the OECD. 166 The proposal was also opposed by other developed countries, including the United States 167 and in the end it was not adopted. The European Commission announced in March 2015 that the details of tax rulings would be automatically exchanged between Member States within the EU in an attempt to discourage excessive rulings. 162
Fifty Shades of Tax Dodging • 25 Figure 5: Total number of Advance Pricing Agreements (APAs) in force by the end of 2013 in selected EU Member States Luxembourg United Kingdom Hungary Spain Italy France Czech Republic Germany Finland EU Average Poland Slovakia Denmark Source: European Commission 2014. 168 The data on APAs in force at the end of 2013 Ireland Belgium Romania Austria Portugal is incomplete for Austria and missing for the Netherlands (although data shows that the Netherlands granted 228 APAs in 2013 alone). The EU countries that do not currently have APA programmes are: Bulgaria, Estonia, Croatia, Cyprus, Malta and Slovenia. Greece has an APA programme, but did not have any APAs in force by the end of 2013. As there is no EU-wide definition of APAs or when an APA is entered into force there may be discrepancies in how the figures Sweden were arrived at for each country. 0 20 40 60 80 100 120 3.8 Building capacity or consensus? Despite this contradiction, the need for capacity building on taxation is undeniable in most developing countries: it Amid the accusations that the OECD is an unrepresentative is estimated that African countries would have to hire an body for discussing international tax reform, and that is additional 650,000 tax officials to have the same ratio of tax not a disinterested ‘honest broker’ as it is sometimes officials to population as in OECD countries. 171 represented, 169 the OECD has stressed the need to build the capacities of developing countries’ tax administrations in order for them to be able to implement global tax standards. However, capacity building can also be used to promote the OECD’s policies in developing countries, and to increase the pressure on developing countries to implement these, However, reducing the question of how developing countries regardless of whether they serve developing country interests can raise more tax revenues to one of capacity misses the or not. This includes policies that have proven to be difficult to inherently political nature of the problem and shifts the operationalise in developing countries – such as the OECD’s onus onto developing countries and away from developed arm’s length principle to address transfer mispricing. 172 countries. This was captured in a report adopted by the 54 African Union heads of state, which states: “it is somewhat contradictory for developed countries to continue to provide technical assistance and development aid (though at lower levels) to Africa while at the same time maintaining tax rules that enable the bleeding of the continent’s resources through
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