Evasion Tactics Crackdown on Tax Dodgers Bites

Global efforts to crack down on corporate tax avoiders have been successful in recent years, but business groups are criticizing a new solo effort in Germany that it says hampers competition.
Germany's finance minister is at the forefront of a global crackdown on corporate tax avoiders, drawing the ire of business groups.

New legislation seeks to close a loophole companies exploit for tax benefits. A survey shows firms have become more cautious in their tax tricks, but industry groups warn the move will undermine Germany’s competitiveness.

Shortly before the end of the current coalition’s term in office, the German government agreed to patch up a tax loophole as part of its bigger crackdown on corporate tax evasion. But business advocacy groups decry the move and its timing, saying the decision hampered Germany’s competitiveness at a time of global uncertainty.

Germany’s cabinet on Wednesday approved a proposal by Finance Minister Wolfgang Schäuble that prevents international corporations from writing off intracompany expenditures on patents and licenses abroad for the sole sake of reducing their taxable profit in Germany.

Today, countries such as the Netherlands, Belgium and Malta offer companies so-called license or patent boxes that allow them to tax their income from these fees at very low rates or even not at all. Global heavyweights such as McDonald’s, Starbucks, IKEA, Apple and Microsoft employ the tactic to shift profits from high-taxation countries to subsidiaries in low-taxation countries.

The decision is a counterproductive signal for Germany as a research and development site. Markus Kerber, Head of the Federation of German Industries

But German industry groups warn that the government will bite its own tail with the measure. “The decision is a counterproductive signal for Germany as a research and development site,” Markus Kerber, the head of the Federation of German Industries, or BDI, was quoted by Dow Jones on Tuesday. He said the move was hampering Germany’s competitive advantage in the battle for attracting innovative firms. Mr. Schäuble said the law would not apply to expenses towards actual research that resulted in patent fees.

“We are very surprised about this push by the finance ministry at this current point in time,” Martin Wansleben, the head of the Association of German Chambers of Commerce and Industry (DIHK) told Dow Jones, adding that such decisions should be taken jointly in times of insecure global economic relations. “German solo efforts are only unsettling domestic business further.”

The offshoring of intellectual property through outsourcing is widely discussed on the European stage. In February last year, the European Parliament’s Green Party commissioned a report that found that furniture group IKEA dodged up to €1 billion ($1.1 billion) in taxes between 2009 and 2014 employing the patent box trick.

Germany’s finance ministry in the meantime expects the new law to flush government coffers with €30 million in annual taxes. According to calculations by business weekly Wirtschafts Woche, a Handelsblatt sister publication, the change could even spell as much as an extra €1 billion in annual corporate tax revenue.

Today companies prefer to reduce tax risks than simply minimize tax burdens. Gottfried Breuninger, expert on global tax law, Allen & Overy

A survey of 350 company experts in Europe, the U.S. and Australia, half of them chief executives and the other half tax-department directors, shows that increasingly tough measures adopted by tax authorities are already having an impact. Companies are less eager to avoid taxes.

“Today companies prefer to reduce tax risks than simply minimize tax burdens,” says Gottfried Breuninger, an expert on global tax law at the Allen & Overy law firm, who commissioned opinion-research institute Yougov for the survey.

At 40 percent of large companies, tax issues are discussed at least once a month at the executive level, compared to only 5 percent five years earlier, the survey showed. Companies increasingly prefer to scale down tax dodging tactics to avoid trouble with the authorities.

Stricter tax investigators have also had an impact. 31 percent of surveyed companies have recently experienced tax investigation raids. These have risen particularly in Germany and Italy. “Financial authorities are increasingly inclined to criminalize entirely normal tax cases; searches are carried out more and more frequently,” says Mr. Breuninger.

On an international level, agreements to combat tax evasion through patent boxes have been agreed upon by the OECD and the G20 nations. Under new rules called Base Erosion and Profit Shifting (BEPS), intellectual property boxes that solely seek to avoid taxes and are not aimed at promoting research will be outlawed in 2021. Preliminary steps will already be introduced in 2017 and 2018, leaving Mr. Schäuble to justify his proposed law as a move in anticipation of international changes.

Experts in the survey said the top priority today was to make tax planning BEPS-compatible. Five years earlier, minimizing tax burdens was the primary focus. Tax crackdowns by the European Commission in cases such as Apple or Fiat meant that there is overall much less appetite for tax planning, Mr. Breuninger said.

 

Donata Riedel has worked for Handelsblatt for 20 years and writes about economic policy. Tina Bellon, an editor with Handelsblatt Global, contributed to this article. To contact the author: [email protected]