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It almost sounds like tit for tat: a European investigation into the propriety of tax avoidance schemes operated by Apple and Starbucks. With uproar continuing over threatened fines by U.S. regulators of up to $10-billion (U.S.) on BNP Paribas, the French bank, for sanctions-busting, it is tempting to see the European Commission's probe as another salvo in a regulatory cold war. It is, however, much more significant; it reflects the first judicial move in a concerted effort by governments on both sides of the Atlantic to shut down tax avoidance schemes in which hundreds of billion of dollars in corporate profits are parked offshore.

One distinction is very important: the EU's competition authority is not pursuing Apple or Starbucks. Instead, it is investigating the behaviour of the tax authorities in Ireland and the Netherlands, the two EU states which struck deals over how to treat the taxable profits of Apple and Starbucks, respectively, rulings which may have given those firms an unfair competitive advantage. A third probe is being launched in Luxembourg over rulings given by its tax authority over the affairs of a Fiat finance subsidiary.

Apple, Starbucks and Fiat are not off the hook; Joaquin Almunia, the European Commission vice-president, said today that the EU could seek recovery of funds from the three multinationals if it found a tax loophole that conferred on the companies an advantage amounting to "state aid," illegal under EU competition rules. Yet, the true loss for Apple, Starbucks and Fiat would not be an unexpected bill for back taxes; the bigger blow for these and other corporate giants would be a tightening of the corporate tax net worldwide and the closure of a host of elaborate schemes operated by big companies to shelter foreign-earned profits offshore.

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U.S. companies are sheltering $1.2-trillion in profits offshore, according to PIRG, a left-leaning U.S. think tank. The size of the pile has excited people in the Obama administration with the notion of how many government social programs could be saved from the axe if the IRS were able to capture even a small fraction of the money. Pfizer's recent and ill-fated tilt at U.K. rival Astra Zeneca came undone when it was made clear that a large part of the U.S. drug company's corporate agenda was to shift its tax base to the U.K., liberating some $49-billion in cash parked offshore. Pfizer was also fascinated by the U.K.'s "patent box," a new low-tax regime available for patent income. The cynical dismissal of Pfizer's unrequited love for AstraZeneca can be explained by the revelations in 2012 about Starbucks' extraordinary fiscal arrangements, which enabled the company to reduce its U.K. corporate tax liability to just £8.6-million ($15.7-million) in 14 years, despite boasting to its shareholders of the profitability of its U.K. operations.

This is too much, even to many conservative politicians, and it only heightens resentment when voters learn that these arrangements are always legal, albeit hugely complex. The effort to curb corporate tax avoidance must therefore straddle borders and the G20 has charged the OECD to plan the global campaign of attack. The organization has recently scored a big scalp in fighting personal tax evasion with Switzerland suddenly agreeing to automatic exchange of information with foreign tax authorities. With Switzerland's long career as Global No. 1 Tax Haven now over, the net will swiftly drop on other havens and the OECD will finally shift its attention to the elephant in the room, which OECD Secretary-General Angel Gurria dubbed: "double non-taxation."

Over many decades, the corporate tax departments of multinationals have worked the system of double taxation, finding loopholes in treaties that were originally devised to prevent taxpayers from being billed twice because a company has activities in two countries. In the case of Apple, Starbucks and Fiat, the EC is believed to be investigating transfer pricing rules.

Ireland, Luxembourg and the Netherlands all operate tax systems that allow foreign holding companies established in those countries to import income from foreign operating subsidiaries, such as dividends or interest, tax-free or at very low tax rates. If the overseas operating subsidiary is, for example, funded by high-interest loans from the holding company or pays exceptionally large management or royalty fees to the holding company, its profits will be correspondingly reduced or eliminated. Correspondingly, income is inflated at the low-tax holding company. It is such transfer-pricing arrangements made by Apple, Starbucks and Fiat that the EC is investigating.

It was the U.S. prosecutorial assault on the Swiss banks, most recently Credit Suisse, that forced Switzerland to give up its defence of bank secrecy. The legal mechanism that is tightening the noose is FATCA, the Foreign Account Tax Compliance Act, which drags individual Americans into a global IRS net. FATCA requires that banks voluntarily supply the U.S. tax authorities with details about any American citizen. Failure to do so exposes the bank to ruinous sanctions which no large financial institution could tolerate. While the U.S. is obsessed with cheating by its citizens, the EU not surprisingly is more concerned with the shady dealings between business and governments and it now seems to be taking the lead on corporate taxation. The outcome could be embarrassing for Ireland, Luxembourg and the Netherlands. But it will be worse news for Apple and its many imitators.

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About the Author

Carl Mortished is a Canadian financial journalist and freelance consultant based in the U.K. With a career spanning investment banking, journalism and consulting for global companies, he was for many years a financial writer and columnist for The Times of London. More

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