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The EU estimates that it’s 28 member countries are collectively losing some £1 billion through corporate tax evasion. On the basis that there are far more companies operating in the larger, developed member states, the amount lost by the UK is likely to be considerably higher than the average of £35 billion. However, even if we use this figure, that is enough on its own to cover the country’s entire defence budget or, alternatively, finance massive Income Tax cuts for hard pressed individuals.

Eu calling time on corporate tax abuse by multinationals
Eu calling time on corporate tax abuse by multinationals

Of course, to call this tax evasion in the first place is something of a misnomer because what the best known tax “evaders” like Amazon, Google and Starbucks are actually doing is engaging in tax avoidance which is, of course, perfectly legal. In fact, these companies go to great pains to insist that they and their corporate tax advisers are merely operating within the law and that, if governments think they aren’t paying enough, then it is up to them to change it.

The problem for larger corporations is that “Fairness” has become the big political mantra of the day and the Coalition, like their counterparts overseas, is struggling to dispel the impression amongst the electorate that individuals continue to bear the brunt of austerity while bankers, energy companies and global giants appear to do what they like and get away with blue murder.

It is largely as the result of political pressure both in the UK and on the Continent that the EU’s executive arm, the European Commission, is moving to stop multinationals from flouting existing tax laws by setting up “letterbox subsidiaries” in countries with the lowest corporate tax rates such as Luxembourg and Cyprus. They are called letterbox subsidiaries because they are little more than accommodation addresses through which paperwork is channelled to ensure that the parent companies’ profits are nil to negligible in the larger, higher tax markets in which they operate.

This initiative follows the EU leaders’ summit meeting in May which pledged to crack down hard on abuse of existing tax arrangements by high profile multinationals. The aim is to ensure that these companies henceforth abide by both the spirit as well as the letter of the law.

To this end the EU intends to make member countries adopt an anti-abuse rule which would allow tax authorities to target those companies that persist in using letterbox subsidiaries. Needless to say, some of the smaller countries with low corporate tax rates who stand to lose out from this directive are none too happy about complying. Two of them, Austria and Luxembourg, have already signalled that they would block new rules on banking secrecy unless five other tax havens such as Switzerland and Monaco agree to adopt similar measures.

For more information on Corporate Tax Services, visit http://www.bakertilly.co.uk/services/tax/corporate-tax.aspx