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The Tax Attraction Between Starbucks and the Netherlands The Tax Attraction Between Starbucks and the Netherlands
(about 9 hours later)
LONDON — American companies have plowed more money into the Netherlands than any other country in the world — for five years running. LONDON — American companies have plowed more money into the Netherlands than any other country in the world — for five years running.
This does not reflect a new fascination with pot or pancakes. It is about the taxes, or lack of them.This does not reflect a new fascination with pot or pancakes. It is about the taxes, or lack of them.
The Netherlands’ laws shield a variety of profits from taxation, making it attractive for big multinational companies like Starbucks, Google and IBM to set up offices. Even rock stars like the Rolling Stones and U2 have taken advantage of Dutch tax shelters. The laws in Netherlands shield a variety of profits from taxation, making it attractive for big multinational companies like Starbucks, Google and IBM to set up offices. Even rock stars like the Rolling Stones and U2 have taken advantage of Dutch tax shelters.
The same goes for Luxembourg, Bermuda, Ireland and the Caymans. Along with the Netherlands, those countries rank among the top destinations for foreign direct investment from the United States, according to a review of data collected by the Bureau of Economic Analysis that shows how entrenched tax avoidance strategies have become. The same goes for Luxembourg, Bermuda, Ireland and the British Caribbean countries like the Cayman Islands. Along with the Netherlands, those places rank among the top destinations for foreign direct investment from the United States, according to a review of data collected by the Bureau of Economic Analysis that shows how entrenched tax avoidance strategies have become.
Global authorities are now aiming to close the loopholes that have let such havens flourish and have allowed multinational corporations to legally avoid paying billions of dollars in taxes. On Friday, European Union authorities accused the Netherlands of making a special deal with Starbucks that helped the coffee company lower its taxes, seeing it as potentially illegal state aid. Global authorities are now aiming to close the loopholes that have let such locales flourish and have allowed multinational corporations to legally avoid paying billions of dollars in taxes. On Friday, European Union authorities publicly accused the Netherlands of making a special deal with Starbucks that helped the coffee company lower its taxes, seeing it as potentially illegal state aid.
It is the latest case to focus on favorable and often secretive tax arrangements between big multinationals and tax authorities — deals struck between Apple and Ireland, and Amazon and Fiat with Luxembourg. European authorities have also asked countries about arrangements made with a number of other companies, including Microsoft.It is the latest case to focus on favorable and often secretive tax arrangements between big multinationals and tax authorities — deals struck between Apple and Ireland, and Amazon and Fiat with Luxembourg. European authorities have also asked countries about arrangements made with a number of other companies, including Microsoft.
But regulators, if they even make a truly determined effort, face an uphill battle in changing the system.But regulators, if they even make a truly determined effort, face an uphill battle in changing the system.
Companies, for one, are doing their best to minimize the fallout.Companies, for one, are doing their best to minimize the fallout.
Starbucks hired RLM Finsbury, a crisis communications firm, as opposition to the company’s tax practices began building in Britain, its largest European market. This year, Starbucks decided to move its regional headquarters from Amsterdam to London as protests grew. Starbucks hired RLM Finsbury, a crisis communications firm, as opposition to the company’s tax practices began building in Britain, its largest European market. This year, Starbucks decided to move its regional headquarters to London from Amsterdam as protests grew.
Apple recently tapped Fipra, a prominent lobbying firm with expertise in competition policy and an offshoot of RLM Finsbury, to bolster its defenses in Europe. The firm helped A.M.D. win its European antitrust complaint against its rival Intel, and also counts Uber, eBay and Samsung among its clients, according to regulatory filings. Apple also hired a top lawyer from the branch of the European Commission investigating it in the tax case. Apple recently tapped Fipra, a prominent lobbying firm with expertise in competition policy and an affiliate of RLM Finsbury, to bolster its defenses in Europe. Apple also hired a top lawyer from the branch of the European Commission investigating it in the tax case.
Other American giants, like Microsoft, are already spending more on lobbying in the European Union than any European company does, though not all companies report those activities. And the American tech industry is also working with trade associations like the Digital Economy Group to lobby against proposed reforms. The financial bite from the European investigations may be limited. American corporations could potentially get credit on their tax bills back home even if they lose their cases, experts said, because the companies are likely to pay back taxes rather than face a fine.
The financial bite from the European investigations may be limited. American corporations could potentially get credit on their tax bills back home even if they lost their cases, experts said, because the companies are likely to pay back taxes rather than face a fine. Peter Cussons, a partner at PricewaterhouseCoopers in London, said any funds “in principle should be eligible for U.S. foreign tax credit relief, subject to the usual rules.” Peter Cussons, a partner at PricewaterhouseCoopers in London, said any funds “in principle should be eligible for U.S. foreign tax credit relief, subject to the usual rules.”
In some ways, authorities are performing a futile task: As officials move to shut down certain loopholes, others are likely to pop up in their place. In some ways, authorities are performing a futile task: As officials move to close certain loopholes, others are likely to pop up in their place.
Last month, Ireland said it would phase out a loophole pioneered by Apple and used by many other companies, known as the Double Irish. The maneuver allows companies to pay royalties from one Irish subsidiary to a second incorporated in Ireland and domiciled in another country with low or no corporate tax. The strategy is often paired with a Netherlands subsidiary and known as Double Irish with a Dutch Sandwich. Last month, Ireland said it would phase out a loophole that Apple helped pioneer and is currently used by many other companies, known as the Double Irish. The maneuver allows companies to pay royalties from one Irish subsidiary to a second subsidiary incorporated in Ireland and domiciled in another country with low or no corporate tax. The strategy is often paired with a Netherlands subsidiary and known as Double Irish with a Dutch Sandwich.
But Ireland’s new strategy seems intented to cushion the blow for multinationals. Not only will there be a long phaseout period, but the country is setting up a so-called patent box. But Ireland’s move seems intended to cushion the blow for multinationals. Not only will there be a long phase-out period, but the country is setting up a so-called patent box.
A similar mechanism in Britain allows a company to pay lower taxes for “its patented inventions and certain other innovations.” Here too, European regulators are taking a closer look, viewing it as a potentially unfair trade practice.A similar mechanism in Britain allows a company to pay lower taxes for “its patented inventions and certain other innovations.” Here too, European regulators are taking a closer look, viewing it as a potentially unfair trade practice.
“It’s kind of a dance that’s going on,” said Sol Picciotto, a professor at Lancaster University Law School and a founder of the Tax Justice Network, which opposes tax havens. “It’s kind of a dance that’s going on,” said Sol Picciotto, a professor at Lancaster University Law School and a founder of the Tax Justice Network, which opposes tax avoidance strategies.
“The Irish are under pressure, not only from this legal action and bad publicity,” he said. “And it’s the same in other countries." “The Irish are under pressure, not only from this legal action and bad publicity,” he said. “And it’s the same in other countries.”
Foreign investment figures offer something of a road map to tax sheltering.Foreign investment figures offer something of a road map to tax sheltering.
Consider that 15.5 percent of American foreign direct investment goes to the Netherlands, and four-fifths of that goes into Dutch holding companies. Companies like Starbucks often have a number of subsidiaries with varying structures in the Netherlands, in Starbucks’ case with names like Rain City and Emerald City. Consider that 15.5 percent of American foreign direct investment goes to the Netherlands, and four-fifths of that goes into Dutch holding companies. Companies like Starbucks often have a number of subsidiaries with varying structures in the Netherlands, in Starbucks’s case with names like Rain City and Emerald City.
Luxembourg’s practices have drawn sharp scrutiny, putting its former prime minister, Jean-Claude Juncker, the new head of the European Commission, on the defensive. The country had inward foreign direct investment of $2.4 trillion in 2012, exceeding the combined intake of Germany and France, the eurozone’s two largest economies, according to International Monetary Fund data. Luxembourg’s practices have drawn particular scrutiny, putting its former prime minister, Jean-Claude Juncker, the new head of the European Commission, on the defensive. The country had inward foreign direct investment of $2.4 trillion in 2012, exceeding the combined intake of Germany and France, the eurozone’s two largest economies, according to International Monetary Fund data.
To put that in perspective, Luxembourg has a population of just over 500,000 people, less than half the population of Dallas. Germany and France have a combined population of 146 million people, nearly half the population of the United States. To put that in perspective, Luxembourg has a population of just over 500,000 people. Germany and France have a combined population of 146 million people.
About 91 percent of the foreign direct investment coming into Luxembourg is through special purpose entities. Such vehicles are often set up by multinational corporations for accounting purposes, according to the Organization for Economic Cooperation and Development, a club of developed countries. About 91 percent of the foreign direct investment coming into Luxembourg is through special-purpose entities. Such vehicles are often set up by multinational corporations for accounting purposes, according to the Organization for Economic Cooperation and Development, a club of developed countries.
Large companies typically manage their taxes by using a number of countries as way stations. One reason that Ireland, the Netherlands and Caribbean islands are popular destinations for American foreign investment is that all three are often used together. Such strategies can reap huge savings. Ireland has become particularly popular as a way station for managing taxes. A United States Senate report last year found that from 2009 to 2012, Apple transferred “$74 billion in worldwide sales income away from the United States to Ireland where Apple has negotiated a tax rate of less than 2 percent.” Another Senate report found that Microsoft transferred “rights to the intellectual property developed by American engineers” to a small Dublin office with less than 400 employees, then reported an annual profit of $4.3 billion, which was taxed at 7.2 percent.
Ireland has become particularly popular. A United States Senate report last year found that from 2009 to 2012, Apple transferred “$74 billion in worldwide sales income away from the United States to Ireland where Apple has negotiated a tax rate of less than 2 percent.” Another Senate report found that Microsoft transferred “rights to the intellectual property developed by American engineers” to a small Dublin office with less than 400 employees, then reported an annual profit of $4.3 billion, which was taxed at 7.2 percent. “This income equates to about $11 million of profit per employee,” the report found. Companies defend their tax practices.
Corporations warn they could leave without such inducements. In a filing earlier this year, the American Chamber of Commerce wrote that “any attempt to reduce Ireland’s attractiveness as an investment location” will “divert investment from both Ireland and the E.U. itself to other competing jurisdictions.” Apple has said, “Our success in Europe and around the world is the result of hard work and innovation by our employees, not any special arrangements with the government.”
Companies also defend their tax practices. Apple has said, “Our success in Europe and around the world is the result of hard work and innovation by our employees, not any special arrangements with the government.” Starbucks has said that it complies with all relevant tax rules and laws. Amazon has said that it received no special treatment. And Fiat said it stands by the “legitimacy” of its tax practices. Amazon has said that it received no special treatment. Fiat said it stood by the “legitimacy” of its tax practices. Starbucks said that it had never “sought unfair tax incentives” and complied with all relevant rules.
The most ambitious effort to close loopholes and overhaul the tax system globally is a project being undertaken by the Organization for Economic Cooperation and Development. The project, which began at the request of the Group of 20 countries, aims to rein in a variety of tax-avoidance practices like transfer pricing. With that maneuver, companies like Facebook, AstraZeneca and Google have been able to lower their taxes by manipulating the prices one subsidiary charges another for a good or service. The final proposals for the effort are due next year.The most ambitious effort to close loopholes and overhaul the tax system globally is a project being undertaken by the Organization for Economic Cooperation and Development. The project, which began at the request of the Group of 20 countries, aims to rein in a variety of tax-avoidance practices like transfer pricing. With that maneuver, companies like Facebook, AstraZeneca and Google have been able to lower their taxes by manipulating the prices one subsidiary charges another for a good or service. The final proposals for the effort are due next year.
“You will always have the game of cat and mouse, but indeed this will be marginal in the future,” said Pascal Saint-Amans, the director of the Center for Tax Policy and Administration at the economic development organization. “Today you have avenues not to pay your taxes. It’s not even a game or sophisticated. The international tax system is outdated, and we’re just bringing it up to date.” “Today you have avenues not to pay your taxes. It’s not even a game or sophisticated,” said Pascal Saint-Amans, the director of the Center for Tax Policy and Administration at the economic development organization. “The international tax system is outdated, and we’re just bringing it up to date.”
Many experts are skeptical about how much this can achieve. The economic development organization’s recommendations would need the approval of national governments, all with their own interests and goals.Many experts are skeptical about how much this can achieve. The economic development organization’s recommendations would need the approval of national governments, all with their own interests and goals.
Will other tax havens, like Ireland, take any steps on their own? Will other countries take any steps on their own?
Not the Netherlands. “Unilateral measures may actually increase mismatches and other differences between systems, instead of removing them,” the finance ministry said in a statement. The finance ministry of Luxembourg, which has made its name as a tax haven, said the government recently submitted legislation to make its tax rulings more transparent. Mr. Juncker said last week that addressing corporate tax avoidance “can’t be a Luxembourgish answer — it has to be a European answer.” Not the Netherlands. “Unilateral measures may actually increase mismatches and other differences between systems, instead of removing them,” the finance ministry said in a statement. The Luxembourg government recently submitted legislation to make its tax rulings more transparent. Mr. Juncker said last week that addressing corporate tax avoidance “can’t be a Luxembourgish answer — it has to be a European answer.”