State aid or not – what about ‘reputational tax risks’

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Reputational risk is a key element in tax risk management as it is it not only considers individual tax risk but also sees how tax risk may influence the positions in other areas, negatively or positively

On June 2014, the European Commission said it had opened three in-depth investigations into tax decisions affecting Apple, Starbucks and Fiat Finance and Trade in Ireland, the Netherlands and Luxembourg respectively.

An U.S. Senate investigation has revealed that Apple, that, “under the agreement Apple has with Ireland”, Apple paid a maximum tax rate of 2 percent or less. Apple’s annual reports show that over the past three years, Apple paid taxes worth 2 percent of its $74 billion in overseas income.

On his 2008 Presidential campaign trail, Barack Obama made his hostility toward “offshore” jurisdictions very clear:

There’s a building in the Cayman Islands that houses supposedly 12,000 U.S.-based corporations. That’s either the biggest building in the world or the biggest tax scam in the world, and we know which one it is.

European Commission’s decision

In the light of the foregoing considerations, the Commission’s preliminary view is that the tax ruling of 1990 (effectively agreed in 1991) and of 2007 in favour of the Apple group constitute State aid according to Article 107(1) TFEU [Treaty on the Functioning of the European Union]. The Commission has doubts about the compatibility of such State aid with the internal market. The Commission has therefore decided to initiate the procedure laid down in Article 108(2) TFEU with respect to the measures in question.

According to Article 107(1) of the Treaty on the Functioning of the European Union (TFEU), state aid which affects trade between Member States and distorts, or threatens to distort, competition by favoring certain undertakings, is incompatible with the EU Single Market.

The European Commission considers that advance pricing agreements (APAs) should not have the effect of granting taxpayers lower taxation than other taxpayers in a similar legal and factual situation.

Apple says EU probe of Irish tax policy could be ‘material’ on April 29, 2015 – Apple Inc (AAPL.O) said the European Commission’s investigation into Ireland’s tax treatment of multinationals could have a “material” impact if it was determined that Dublin’s tax policies represented unfair state aid.

Apple has warned investors that it could face “material” financial penalties from the European Commission’s investigation into its tax deals with Ireland — the first time it has disclosed the potential consequences of the probe. Under US securities rules, a material event is usually defined as 5 per cent of a company’s average pre-tax earnings for the past three years. For Apple, which reported the highest quarterly profit ever for a US company in January, that could exceed $2.5bn, according to FT calculations. [Source: ft.com]

The above, raises the question whether besides evaluating tax risks (level of tolerance) also reputational risks of the company – as part of proper tax risk management – should have been considered when such schemes were setup.

In Apple’s defense lots of multinationals have been doing the same and I believed myself that change of the tax system – as those structures are often legally allowed – was the only way to close such gaps. That changed a bit with the European Commission decision that Luxembourg and the Netherlands have granted selective tax advantages to Fiat Finance and Trade and Starbucks, respectively. These are illegal under EU state aid rules: Fiat and Starbucks ruling.

About change and competencies

Effective tax advice by a tax professional should nowadays not only address the ways of how not paying more tax than necessary and evaluate associated tax risks of implementing such tax planning schemes (rate level of tolerance on a risk scale), but should also take in consideration the impact of such planning on the reputation of the company if it becomes public knowledge.

  • What is the impact if the tax planning at hand becomes public knowledge?
  • What are the consequences if a newspaper or politician picks it up to make statements about lack of ‘tax morale’ and the company is used as case study?

VAT reputational risks

VAT exposures associated with the wider impact on the company’s that arises from a company’s actions or errors and have become public knowledge, examples:

  • Aggressive VAT planning / VAT non compliance becomes public knowledge
  • Due to company’s VAT failures vendors are not paid in time that might disrupt the business
  • Due to company’s VAT failures VAT deduction of clients are disputed and assessed by tax authorities
  • Failure to drive the optimum relationship with the (indirect) Tax Authorities

A tax professional should contribute and give guidance to achieve that taxpayers do not pay more tax than necessary. Every opportunity had to be considered. At least that was the job description and actually how you could differentiate yourself among competition to make that happen for example via realizing beneficial tax rulings.

Has that – due to the Starbucks and Fiat ruling – now changed and to what extent?

In the indirect tax field, especially value added tax, similar aggressive tax structures were for a long time often approved by (national) case law. That has changed when the European Court of Justice ruled a couple of years ago (ECJ Halifax: February 21, 2006) that the tax advantage had to be revoked or denied.

The indirect tax profession had to change as well and reposition itself to ‘manage the numbers of indirect tax’ – focus more on risk management – and because of new trends relationships with tax authorities became more important to realize the taxpayer’s tax objectives.

Will tax planning become more about ‘being in compliance’ planning?

The new trend is to have an open dialogue between revenue bodies, taxpayers and tax intermediaries. OECD promotes ‘enhanced relationship’ (OECD report: Study into the Role of Tax Intermediaries). Even if the authorities have not embraced such an approach (yet), a proactive mode and using elements of this way of working might not only safe time and money, result in a good relationship but as well mitigate reputational VAT risks.

Richard H. Cornelisse

Further (new) information

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