Taking a Holiday in a Tropical Tax Haven
Tax havens have been a hot topic over the last couple of weeks, especially with the Federal Opposition attempting a good old-fashioned character attack upon Prime Minister Malcolm Turnbull.
The PM has not walked away from the fact he has investment funds that make use of The Cayman Islands to minimise tax obligations, however in recent times there has been some interesting investigation and analysis of large companies in Europe and the way they use completely legal means of minimising tax.
Bill Sample (Microsoft), Maile Carnegie (Google) and Tony King (Apple) face the senators (Image: msn.com)
This is along similar lines to the Senate Economics References Committee Inquiry into Corporate Tax Avoidance. While in Australia the focus was very much on big players in IT – Apple, Microsoft and Google – in Europe the blowtorch is being applied to the humble cup of coffee.
Starbucks is under fire for its tax minimisation practices. Clearly, governments across the EU are not happy with the fact that whole the absolutely vast majority of revenue is derived in countries with less than favourable tax conditions, the monies are funneled through small subsidiaries in The Netherlands that are, in a structural sense, the roasters of the coffee beans.
The Dutch subsidiary of coffee multinational then charges an exorbitant fee for this service. The EU hates this because it distorts the market and limits competition within individual countries.
So, how do they mitigate this issue when the practice is technically legal? Okay, stick with us here…
The Dutch Government has reviewed Starbucks pricing structure for supply of beans and given it a green light – and they have a fair amount of national interest to take this course. Subsequently, the EU Competition Commission has come over the top and declared their dissatisfaction with the practice given its broader effect on the the European Union.
The method of reclaiming the lost income appears to be through claims that it breaches the State Aid guidelines. That is, the practice of given favours to large companies must not be anti-competitive across the EU.
This sounds great on the surface, however it creates an extreme sovereign risk issue for the European Union which only adds to the region’s reputation for red tape and extreme bureaucracy.
This is a big step in trying to remove tax avoidance practices, and you can bet the big players are lining up the lawyers as we speak. We might get to see how this plays out for many, many years.