Friday, June 7, 2013

There’s tax fraud and then there’s just not trying very hard

So apparently the VAT tax from last year increase has been completely counteracted by an increase in “fraud”. Well, it turns out that most of this supposed fraud is happening at big companies that do aggressive tax planning.

Which is really a way so say that the government can’t be bother to actually close the loopholes that allow these companies to get away with paying so little tax. In the case of most multinationals, it’s mostly done by “transfer pricing”, where the Spanish subsidiary buys its products from another subsidiary in a low-tax country at an inflated price. The subsidiary then sells the product at zero profit in Spain, thus paying very little in taxes in Spain.

Spain has anti-transfer pricing rules since 2008, which might work if it weren’t for the fact that many multinationals use Irish subsidiaries to house their intellectual property, taking advantage of generous Irish tax rules (which don’t have transfer pricing rules). The “double Irish” arrangement is widely used by Apple, Facebook, Starbucks, etc.

What could Spain do? Well, one way to start would be to threaten to cancel the double-taxation treaty with Ireland. Ireland has much more to gain the Spain from the current arrangement. Hell, the EU could probably even just bribe Ireland into removing the rules for a small fraction of current cost of Irish tax avoidance.

It’s strange that the EU hasn’t made more efforts in this regard, since the worst abusers are by far US-based companies, and the increase in taxation would have significantly positive impact on EU deficits, without negatively impacting European companies.




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