Both historical and contemporary perceptions of tax have characterised it as a necessary extraction, a penalty. A likely fallout of this statutory burden is that there is an innate urge to either mitigate the liability or even eliminate it. Tax avoidance is when a lawful mitigation of tax burden takes place. Tax evasion is where a seepage in the boundaries set by fiscal laws is discovered, and which is then used to escape the tax net to a great extent or altogether. Here is the genesis of tax notoriety, the artistry, where prima facie the tax mitigation exercise appears legitimate, but in reality it maybe an abusive tax avoidance strategy which may lead to very low payment or no payment of taxes.
Era of double non-taxation Out of all the taxes, corporate taxes imposed on multinational corporations (MNCs) are major sources of revenue for most economies. But in the event of these corporate tax payers shifting their tax liabilities from a high tax jurisdiction to a low- or no-tax jurisdiction, massive revenue losses are imminent for the fiscal jurisdiction where the taxes should have been ideally paid. Once riddled with incidents of double taxation, the MNCs have now outsmarted the system and have moved into an era of double non-taxation. With a mélange of some creative accounting techniques and existing loopholes in different fiscal jurisdictions across the world, tax evasion has emerged as a global woe in the last few decades.
Various countermeasures have been deployed by states, either at an individual level or as members of different economic groups. Lately, the north and south have come together and there is a conscious attempt to tackle the reckless acts of base erosion and profit shifting (BEPS). The BEPS action plan is a step in that direction where the developing and the developed have jointly worked on strategies to curb the exploitation of gaps and mismatches in tax rules, which can be used to artificially shift profits to low- or no-tax locations. Since a majority of corporate entities in such jurisdictions have little or no economic activity and are mere subterfuges, it is all the more critical to identify and penalise such entities. Some jurisdictions have also taken the initiative of revising or updating their existing Double Taxation Avoidance Agreements (DTAAs) to plug the existing loopholes. Another important instrument of tackling tax notoriety are the Tax Information Exchange Agreements. These bilateral agreements act as information bridges between different fiscal jurisdictions and they aid in the establishment of tax transparency. Despite some major limitations, various fiscal jurisdictions have already gone ahead with signing such agreements. Further, novel techniques such as the Diverted Profits Tax, popularly known as the Google Tax, are providing more salvo to the tax administrators in tackling aggressive tax planning.
Apple tax ruling Now, a colossal decision by the European Commission on August 30 has taken the fight against “aggressive tax planning” by corporations to a new turf altogether. The European Commission has issued a ruling in relation to the tax arrangements of Apple in Ireland, where it has its European headquarters. A bulk of its global sales profits are directed there. In a nutshell, the subject matter of this dispute was the selective treatment, a sweet deal, granted by Ireland to Apple Ireland through two tax rulings in 1991 and 2007. The Commission relied on the financial information of Apple Ireland and found that though the corporation recorded a €16 billion profit in 2011, the effective tax rate on the same amount was just 0.05 per cent in the same period. It also found that the rate in effect declined to 0.005 per cent in 2014 even as profits grew. These corporate tax rates are significantly lower than the corporate tax rates applicable in any other EU member state. Therefore, the Commission has questioned this entire special tax arrangement extended by Ireland to Apple on grounds of illegal state aid and failure to reflect economic reality. The Commission has consequently ordered Ireland to recover up to €13 billion from Apple Ireland. On the one hand, this retrospective action against Apple focusses on compensating Ireland for a loss of revenue in at least the last decade. Then again, it is also a clear message to all EU member states not to slacken their taxes excessively and maintain diligence when entering into special arrangements with MNCs. The wrath of the Commission is not sudden, and its vigil stretches to hundreds of matters similar to Apple. One among several such investigations is the scrutiny of Luxembourg’s special tax arrangements for Amazon and McDonald’s.
Challenging the Commission Interestingly, though the Commission’s decisions would appear to undo the wrong done to the EU member states by the tax-avoiding MNCs, the decisions are not seeing a meek acceptance at the hands of the concerned states and the defaulting corporations. In fact, the Netherlands and Luxembourg are the first countries to challenge the Commission over its decisions last year that the tax arrangements they extended to Starbucks and Fiat Chrysler, respectively, were illegal. Even Apple and Ireland have decided to appeal against the Commission’s decision.
This is an alarming emergence where the concerned fiscal jurisdictions, despite being awarded judicious reliefs, are simply trying to justify the special arrangements which allowed such tax seepages in the first place. This trend also seems to add an entirely new chapter to tax notoriety, where the states are coming to the aid of the defaulting MNCs and both are in harmony against any possible regulatory measures by the concerned authorities.
Clearly, the tax defaulters and tax administrators are in no mood of granting respite to each other. The sensational duel between prolific tax notoriety and amplified tax vigilance continues.