After Blow to Europe Tax Havens, Some Promise More Staying Power

Luxembourg and the Netherlands lost a bit of luster as tax havens for some of the world’s biggest companies this week, as the European Union fired its latest salvo aimed at multinational tax dodging.

Yet the Netherlands is on pace to maintain its attractiveness as a tax-friendly address for multinationals, said several tax advisers to big companies. That’s less likely for Luxembourg, they said.

On Wednesday, the EU announced that a tax deal between the Netherlands and Starbucks Corp., and another between Luxembourg and Fiat Chrysler Automobiles NV, constituted illegal state aid. It said each company owed as much as 30 million euros ($34 million) in back taxes.

The move is the latest in a multi-continent crackdown on how companies use addresses across the globe to minimize their tax bills, costing countries as much as $240 billion annually, the Organization for Economic Cooperation and Development estimates. Several tax advisers say they don’t expect the latest rulings to stop the flow of the profits into European tax havens. However, they do say they expect the mix of those havens to gradually change.

Enormous Profits

Some countries, such as Ireland and the U.K., may retain their appeal. Others, like Luxembourg, could eventually lose their abilities to attract revenues from companies that have addresses there but not much more.

For years, Ireland and the Netherlands have enabled companies to shift enormous profits to island havens like the Cayman Islands, where they located subsidiaries holding valuable intellectual property. Bowing to international pressure, Ireland has announced plans to discontinue some benefits.

“The days of having all your intellectual property in offshore tax havens and charging huge royalties, those days are running out,” said Conor Hurley, a tax lawyer for Arthur Cox, a large Irish law firm that advises U.S. multinationals. “They may not be quite over, but running out.”

Ireland is simultaneously creating new shelters. Last year, the country said it would eventually end something called the “Double Irish,” which enabled companies like Google Inc. and LinkedIn Corp. to move billions of profits into offshore mailbox subsidiaries. At the same time, Ireland is pursuing plans to tax companies at a rate of just 6.25 percent on profits generated as a result of patent innovations. That is similar to a new incentive offered by the U.K., which is also offering a slew of new corporate tax breaks.

More Palatable

Because Ireland is home to actual offices and factories for numerous technology and pharmaceutical firms, the country could endure as a tax haven for multinationals, albeit a more palatable one in the eyes of global regulators, the advisers said.

The Netherlands has historically also been used as a way-station to move profits into island havens. But like Ireland, the Netherlands also offers a so-called patent box benefit for profits related to innovation. The country’s significant calling cards in the non-tax realm -– its large port, airport and financial sector – could permit companies to move a modicum of substantive operations there and continue to get outsized tax benefits.

Luxembourg, on the other hand, could find it harder to continue enabling large-scale tax avoidance, because it can’t easily accommodate the inflow of offices, workers and other signs of real economic substance that international reforms may eventually require, said Marc Sanders, a partner at Taxand Netherlands, an organization of multinational tax advisers.

“There is no reason to be in Luxembourg from a business perspective, really,” said Sanders. “If you want to put substance somewhere, you are going to look at the Netherlands.” From a company perspective, he added, “you can at least substantiate you are doing business here.”

‘Plan B’

Luxembourg’s finance ministry points to the nation’s efforts to embrace global standards, including its participation in the OECD’s so-called BEPS project, which stands for base erosion and profit shifting.

“It’s wrong to assume that companies are only in Luxembourg for tax reasons,” the ministry said in an e-mailed response to questions. The tiny country has “many assets,” including economic and political stability, a central location, infrastructure, a multilingual highly skilled workforce and knowhow in transnational finance.

To be sure, while big companies are “looking at Plan B right now,” said Hurley, they are not yet dismantling their existing tax structures.

Indeed, it is far from certain that any alternate plans will be necessary: The EU’s decision will likely end up being fought in court for years, with an unknown outcome. Starbucks said it planned to appeal the EU’s decision. Fiat declined to comment on the matter. The Netherlands and Luxembourg disputed the finding, but didn’t say whether they would bring the matter to the courts.

Small Bills

For now, the EU is seeking relatively small bills from Fiat and Starbucks – tens of millions of dollars from companies reporting hundreds of millions, and sometimes billions of dollars, in annual profits. (Bigger bills are expected soon in EU disputes over tax deals between Ireland and Luxembourg with Apple Inc. and Amazon.com Inc., say observers.) The small bills underscore how much profit companies are permitted to shift by using “transfer pricing” deals between their own subsidiaries, even when they are called out by the EU.

The OECD earlier this month released its long-awaited plan to curb corporate tax dodging, targeting some of the worst abuses, but leaving the transfer pricing system fundamentally intact.

“The most important question is whether countries like the U.K. and U.S. will change their transfer-pricing rules to make the income shifting transactions no longer feasible,” said Michael C. Durst, a veteran international tax attorney in Washington, D.C. “Only that will stamp out these kinds of ‘nowhere income’ structures.”