Forget Panama, try Belgium for a cozy tax deal

The European Commission has concluded that selective tax advantages granted by Belgium under its ‘excess profit’ tax scheme are illegal under EU state aid rules.
The European Commission is looking at Member States to assess compliance with EU state aid rules in the context of aggressive tax planning by multinationals, with a view to ensure a level playing field. A number of Member States seem to allow multinational companies to take advantage of their tax loopholes and thereby reduce their tax burden.

Only two months ago came the revelation that the EU is investigating Belgium for the cozy tax deals it signed with dozens of multinationals. A recent EU ruling forces Belgium to reclaim millions of undercover deals on tax avoidance signed with mega business in many other countries.

The European Commission has concluded that selective tax advantages granted by Belgium under its “excess profit” tax scheme are illegal under EU state aid rules. The scheme has benefitted at least 35 multinationals mainly from the EU, who must now return €700 million in unpaid taxes to Belgium. The hybrid scheme made use of a twisted logic to assume that a taxpayer being a multinational generates an “excess profit” so it redeems this factor by slashing its tax charge.

Critics of the scheme argue that even if in fact a multinational does have a Midas touch, then the benefits should be shared between its group companies in a way that reflects economic reality. But nothing of the sort happens in this Belgian tax fable. Contrary to what Belgium claims, the scheme cannot be justified by the need to prevent double taxation.

The discounted profits are not taxed elsewhere and the scheme does not even require companies to demonstrate any evidence or even risk of double taxation. Instead of preventing double taxation, in reality the scheme gives a ‘carte blanche’ to double non-taxation.

According to the information assessed at this investigation at least 35 multinationals benefitted from the scheme yet it cannot name the companies at this stage because the Commission assessed and found the scheme itself illegal. Ironically Brussels, being the cradle of a monolithic EU administration adorned with its lofty palaces housing thousands of bureaucrats, has been on attack after it was disclosed that it gave shelter to multinational companies to avoid taxes at the expense of others.

It makes use of tax havens by taxpayers such as Panama an expensive and far away destination – when Belgium is so central and convenient. But the game is up as tax commissioner Pierre Moscovici has promised a more comprehensive approach to reform.

Some may ask how did such a drain of such mega proportion ever go undetected when it was administered under the noses of Brussels “long in tooth” technocrats? The so-called excess profit scheme, (or simply double-non taxation) has been in place for over 15 years and financial tax advisers were not too shy to recommend it to fee paying patrons.

Unashamedly it was branded as exclusive to the “French fries and Moules” community and marketed by the tax authority under the logo “Only in Belgium”, as it gallantly allowed mega corporations to reduce their tax base by half or even pay as low as ten percent.

But it failed the Robin Hood test since tax rulings by the Belgian authorities favoured exclusively the rich and powerful corporations that obtained a ruling on profit recorded in Belgium, skillfully adjusted downward by excluding from the tax base “excess profits” arising from the company’s membership of a multinational group. It discriminated against companies not forming part of groups as these could not claim similar benefits.

The famous “excess profits” scheme which has been operating on the quiet for more than a decade is a classic case of distortion of competition within the EU’s Single Market. In a most uncanny way the scheme found a foolproof method of how to exempt legitimate profits from mainstream tax. It did this simply by issuing one-to-one tax rulings.

A devious logic was behind the Belgian fudge. This just compared the actual profit of a multinational with the hypothetical average profit of a stand-alone company and the difference in earning capacity was siphoning off as “excess returns” – hitherto untaxed or taxed at a ridiculous low rate.

This is based on a convoluted premise that multinational companies make “excess profit” as a result of being part of a multinational group, e.g. due to synergies, economies of scale, a Midas reputation, client and supplier networks, access to new markets. Imagine if tax havens copy this technique by pretending that they are a high tax jurisdiction and prima facie levy a 30 % tax on profits but secretly concede that the mega companies deserve a hefty deduction to cream off excess profits allegedly generated due to their size and dominance in the market.

Certainly incentive legislation to attract FDI needs to be ingenious and each country tries its utmost to invent schemes to lure business to their fold. However, to ensure a level playing field and eliminate unwarranted state aid the schemes have to be fair. Certainly with unemployment within the EU still high at 17 million there is nothing wrong for governments to try to create jobs and boost economic growth.

But it will be abuse of competition rules for national tax authorities to grant favours to foreign business, however large or powerful they are, as this constitutes an unfair competitive advantage when compared to others. Undoubtedly, such schemes put SMEs at an unfair disadvantage since they too are competing in the same markets and have to pay the full brunt of national taxes.

Readers may recall the Luxleaks that was discovered two years ago and wonder whether the Belgium scheme pales by comparison. Of a higher magnitude was illegal state aid afforded to Fiat in Luxembourg and Starbucks in the Netherlands. Naturally the investigative arm at EU level is over-stretched to secure sufficient resources to weed out unfair tax competition as this calls for an effective combination of both legislative action and enforcement of state aid rules.

It comes as no surprise that as an interim measure it announced last month its four legged Action Plan for fair, transparent and efficient corporate taxation. Later this year, the Commission will present a package of proposals which aims for a coordinated and efficient implementation of international tax good governance standards: that companies should pay taxes where they make profits.

This avoids the situation where multinational companies earn their profits in a number of high tax jurisdictions but the holding company is located in a country which permits them secret tax rulings to lower their liabilities. It also calls for a comprehensive country by country report where taxes are paid.

In conclusion, the Commission established that Belgium must cease applying the excess profit ruling system and recover the full, unpaid tax from the companies involved. Belgium has announced it will likely appeal the decision. Several companies are considering to appeal as well or to intervene in the Belgian procedure. With Belgium setting the standards for lower tax there is little appetite left for tax consultants to travel to South American tax havens such as Panama.