How Google’s Tax Deal With Britain Could Upend Tax Avoidance Strategies

new-google-logoThe backlash to the $185 million tax deal between Google and Great Britain, which critics say lets the company off too easy, has the European Union abuzz with the prospect of full-blown investigations into this deal and others.

The Guardian reports: “Although a decision from the European commission could be weeks away, pressure for a full-scale EU investigation is likely to grow. Catherine Bearder, a Liberal Democrat MEP, added her voice to calls for the EU executive to act. ‘More transparency is needed across Europe to end these cosy deals and ensure multinationals pay their fair share,’ she said. Alain Lamassoure, a French centre-right MEP, who chairs the European parliament’s special committee on tax, described Google’s tax treatment in the UK as ‘absurd.’”

Since the controversy broke, EU officials have introduced multiple proposals that could make popular tax avoidance strategies a thing of the past.

The Financial Times reports: “The commission said the plans were part of a sustained campaign to address tax avoidance that would also include pushing ahead with proposals for a harmonized European system for calculating taxable profits and possibly further requirements for companies to publicly disclose the taxes they paid to individual countries. The plans include an effort to limit the extent to which a multinational company could cut its tax bill by financing some parts of its business through debt owed to overseas subsidiaries. They would limit the amount of interest a company can claim as tax-deductible each year, setting an upper limit measured as a percentage of operating profits. The measures would also make it easier for countries to tax companies on profits parked in a subsidiary based elsewhere.”

One country in particular, Ireland – a popular destination for US companies looking to lower their tax bills – is under the microscope.

The Irish Times reports: “Ireland’s corporate tax system has come under renewed scrutiny this week after Google reached a £130 million tax settlement with the British tax authorities. The US tech giant has long been shifting the profits deriving from UK sales to Ireland for tax purposes. The issue has also featured in the US presidential campaign this week, with Democratic front-runner Hillary Clinton describing as ‘outrageous’ the ‘tax inversion’ arrangement whereby American companies buy Irish-based companies in order to benefit from Ireland’s low corporate tax regime. Speaking in Brussels this morning, EU economics commissioner Pierre Moscovici said that the current corporate tax practices were ‘unacceptable.’”

This all could spell trouble for the already flailing mergers marketplace since, as CNBC reported in November. While overall M&As were down, tax inversions were proving to be “a better deal for companies that already have substantial sales abroad, or (like pharmaceuticals) rely on high-margin businesses based on intellectual property.” Last year’s purchase of Dublin-based Allergan by Pfizer for $160 billion was not only be the biggest deal the healthcare industry has ever seen, it will also be one of the biggest tax inversions in recent history, CNBC reported.

But as The New York Times reports, Ireland isn’t alone in this fight. Other member states like the Netherlands and Luxembourg that utilize tax policies to lure multinationals, could team up to bring down any efforts to curb their activity.

Writes the NYT: “The European Union wants no member state to use tax policy to achieve an unfair business advantage over its neighbors. But the ability of European countries to tailor tax practices to their own purposes is a matter of national sovereignty that many leaders are unwilling to cede to Brussels. That is true for the countries that are trying to compete for jobs and foreign investment brought by multinational titans like Google, Apple or Facebook as well as for those trying to wring more tax revenue from rich companies to help support a struggling economy.”