Commission tax plans could create added administration

The European Commission has published the first of two tax transparency packages to tackle corporation tax fraud and harmful tax competition in the EU.

It is recommending greater co-operation across EU member states and the automatic exchange of information on tax rulings across EU countries, which sounds good on paper but on closer inspection makes very little sense.

There are three elements to this issue: where profit is made; how the profit is calculated; and how and where that profit is taxed.

The EC proposal concerns itself with just one of the three elements, where profit is made, and it could end up just as a paper-pushing exercise to make it look like something is being done about companies evading or avoiding tax while actually doing very little.

For example: a Starbucks coffee shop in Belfast sells a cup of coffee – does that mean that all the profit was made in Northern Ireland?

Of course not.

Some of the profit was made where the coffee beans were grown and processed. More of the profit was made because some customers will pay a premium for a branded coffee; the Starbucks franchise owns that part of the profit.

Some of the profit was made because somebody designed a machine and a staff training programme to produce what is perceived to be a higher quality coffee.

Break down the profit on the sale of the cup of coffee and the UK state will get a modest share of corporation tax. It will, however, get a much larger amount of tax from the VAT on the sale of the cup of Starbucks coffee and from the tax on the barista’s wages. The EC has not given due regard as to how individual member states calculate how much profit was made.

Are they to use International Financial Reporting Standards, German accounting standards, French standards or perhaps US Generally Accepted Accounting Standards? (And yes, they all measure profits differently).

Then there are local tax rules which are myriad in their diversity – something that affords accountants a good living, helping firms navigate their way around. Under the EC’s proposed tax transparency package, it is only this last aspect that will be required to be disclosed.

There are other tools in the EC arsenal to fight corporate tax evasion and avoidance, which it outlined in its code of conduct on business taxation – however, they have become less effective in addressing harmful tax regimes, as its criteria do not take into account more sophisticated corporate tax avoidance schemes.

You would have to question whether it would be more effective to change the “criteria” rather than have every tax ruling in the EU preserved for posterity, accessible only by other member states in search of sensitive company information.

While it is broadly accepted that a company should pay tax in the country where it earns its profit, the reality is that no two countries measure taxable profit the same way – and equally, very few countries can agree on where the profit is made.

Until these issues are sorted out, it is difficult to see how mandatory filing of tax rulings will make any difference other than to serve to create lots of administrative jobs.