As sure as night turns to day, politicians love a bandwagon. Stewart Hosie is the latest to take a ride on the Google tax bandwagon, writing to European Commissioner Margrethe Vestager, asking that she conduct inquiries as to the propriety of the Corporation Tax settlement between HMRC and Google. To complain to the EU’s Competition Commissioner about companies shopping around for favourable tax treatment is quite incredible, given that it’s the EU treaties that makes Google’s alleged “tax dodging” possible in the first place! Not only that, the European Court of Justice (ECJ) has a long history of striking down national laws designed to combat tax avoidance.
Article 49 of the Treaty on the Functioning of the European Union (TFEU) prohibits restrictions upon freedom of establishment of nationals of Member States in the territory of another Member State including establishment of companies. Article 58 TFEU further prohibits any restrictions on the free movement of capital. National laws, including tax laws, which infringe upon those rights are, in almost all circumstances, not permitted. This has resulted in a number of laws designed to clampdown on tax avoidance being struck down by the ECJ.
The case of Sandoz concerned a requirement to pay Austrian stamp duty on loans. Austrian law contained a provision designed to prevent the arrangement of loans outside of Austria to avoid paying the tax. In his opinion on the case, Advocate General Leger took the view that
[t]he principle of the free movement of capital was introduced inter alia in order to enable Community nationals to enjoy the most favourable conditions for investing their capital available to them in any of the States which make up the Community.
The Court agreed with the Advocate General’s position, holding that the measure
deprives residents of a Member State of the possibility of benefiting from the absence of taxation which may be associated with loans obtained outside the national territory. Accordingly, such a measure is likely to deter such residents from obtaining loans from persons established in other Member States.
It follows that such legislation constitutes an obstacle to the movement of capital within the meaning of Article [63 TFEU].
If the very purpose of free movement is to ensure the allocation of resources to their most efficient location, it logically follows that measures which inhibit “shopping around” for the most favourable environment for those resources must surely be unlawful.
Of even greater relevance is the decision of the ECJ in Cadbury Schweppes. At issue in the case was the UK’s controlled foreign corporation (CFC) rules, designed to prevent companies from shifting profits outside of the UK to avoid tax, were compatible with the treaties. The Court in Cadbury Schweppes reiterated its earlier pronouncement in Barbier that
a Community national cannot be deprived of the right to rely on the provisions of the Treaty on the ground that he is profiting from tax advantages which are legally provided by the rules in force in a Member State other than his State of residence.
the mere fact that a resident company establishes a secondary establishment, such as a subsidiary, in another Member State cannot set up a general presumption of tax evasion and justify a measure which compromises the exercise of a fundamental freedom guaranteed by the Treaty.
In other words, under EU Law the fact that a company shifts its operations to another EU state (such as Ireland or the Netherlands) to take advantage of more favourable tax treatment cannot be prohibited. Anti-avoidance rules may not be applied, even where there is an explicit intention to avoid tax, where the taxpayer nonetheless carries on genuine economic activities.
And herein lies the problem. For all we complain about “opacity” and “lack of transparency”, the reality is that the arrangements of Google, like so many other enterprises who have been the subject of much public and political ire, are not, in fact, artificial at all. At of end 2014 Apple and Google had 4,000 employees a piece in Ireland, and Facebook approximately 500.
The EU Treaties allow companies to locate anywhere in any Member State in order to take advantage of more favourable treatment. If you want to complain about laws that facilitate tax dodging, start with the EU Treaties.