Corporations can escape death for as long as they make a profit -- but they still have to pay their taxes, the European Commission has ruled in two cases involving Apple and Amazon.com. At the same time, the Commission has unveiled reforms to the way value-added tax (VAT) is collected that will affect businesses selling online across the EU.
Two decisions published Wednesday could have consequences for multinationals operating in Europe and seeking to optimize the rates of corporation tax they pay by allocating profits to entities not directly involved in the provision of the goods or services to which the profits relate.
Last year, the Commission, the European Union's antitrust and competition watchdog, ordered the Irish government to recover a staggering €13 billion in back taxes that it said Apple should have paid. On Wednesday it took the country to court for failing to make Apple pay.
The Commission has also wrapped up another tax investigation, this time into Amazon.com's relations with the government of Luxembourg. It ordered the government there to recover what it called illegal state aid (in the form of a reduced tax bill) estimated to be worth around $250 million.
Both governments were accused of having allowed the companies to channel their profits through companies that existed primarily for tax arrangements from which they benefitted.
Apple's back tax bill represents about 5 percent of its cash reserve or one quarter's global profit, enough that it might be forced to rethink its European pricing in order to retain its margin.
For Amazon, the tax bill will be smaller -- but still more than the global profit it reported for its most recent fiscal quarter
With these orders the European Commission is making clear that it expects companies to pay taxes in the EU for their sales in the EU -- even when their use of the internet to deliver goods or services makes it unclear in which country the tax liability lies.
To help close one loophole that has allowed businesses to go jurisdiction shopping, paying taxes where the rates are lowest or even avoiding them altogether, on Wednesday the Commission proposed a unified system of value-added tax (VAT) collection across the EU. It estimates that this could help governments recover up to €150 billion a year in VAT, €50 billion of which is lost to fraud.
"This anachronistic system based on national borders must end. Member States should consider cross-border VAT transactions as domestic operations in our internal market by 2022," said Pierre Moscovici, European Commissioner for Economic and Financial Affairs, Taxation and Customs. The change will make life easier for EU companies trading across borders, simplifying VAT-related administrative procedures, he said.
Value-added tax rates and rules vary among EU member states, and sellers are required to declare sales and tax due to authorities in each country where sales of goods to consumers exceeded a certain threshold, typically between €35,000 and €100,000.
If the VAT reform goes ahead, then it could make it simpler for businesses operating across borders to collect and pay the correct tax in their own country and language, while still ensuring that the government of the country in which the purchase is made receives the revenue. The Commission estimates the changes could reduce compliance costs for businesses collecting cross-border VAT by around 10 percent. It will make a more detailed proposal next year, with goal of introducing the changes in 2022.
The Commission's last attempt to simplify VAT collection did little to please small businesses. The introduction in 2014 of the "mini one-stop shop" for collection of cross-border VAT was accompanied by a lowering of the thresholds under which businesses were exempted from VAT collection altogether. For businesses that found themselves obliged to collect cross-border VAT for the first time, even the simplified system introduced major complications and costs.
The challenge for the Commission will be to ensure that its proposed changes help online businesses across the board, and not just multinationals like Apple and Amazon that can afford expensive tax advice.