Friday

23rd Feb 2018

Tax breaks for the big hit the smallest

  • EU competition commissioner Margrethe Vestager concluded that some tax deals for multinational companies amounted to illegal state aid. (Photo: European Commission)

Oliver Grun's Germany-based software company employs around 100 people and pays 30 percent tax on profits. Microsoft, his biggest competitor, pays 3 percent.

"We are paying 10 times more taxes on profits than them, that's crazy, that's absolutely intolerable," said Grun, who is also the president of the Brussels-based European Digital SME Alliance.

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  • Secret deals cut in Luxembourg, revealed in 2014 by the International Consortium of Investigative Journalist, showed that some companies managed to get away with less than 1 percent. (Photo: Chris Tolworthy)

The EU has around 23 million small and medium-sized companies. They represent around 99 % of all enterprises in the EU.

Of those, around 26,000 are in the digital sector. And they employ millions.

They also compete against multinational corporations. But Apple, Starbucks and many others benefit from huge tax breaks.

Knock-on effect on European business

Secret deals cut in Luxembourg, revealed in 2014 by the International Consortium of Investigative Journalists, showed that some big firms managed to get away with paying less than 1 percent.

Some of those deals were made under the stewardship of EU commission president Jean-Claude Juncker when he was the prime minister and finance minister of Luxembourg.

The knock-on effect for businesses in Europe is widespread.

Fabio De Masi, a German MEP from the United Left who is spearheading parliament efforts to weed out big tax-avoidance schemes, said it was unfair to honest taxpayers and also bad economics.

"All those profits siphoned off are not reinvested into the local economy. Besides the disastrous effects of half a decade of austerity, this is a serious drain on growth and employment," he said.

His statement is backed with numbers.

Up to €70 billion lost yearly

An EU parliament study last September estimated up to €70 billion is lost each year or the equivalent of 23 percent of corporate tax revenue in 2013.

The real figure is likely to be much higher because the study looked only at profit shifting within the EU, and not from and to other countries.

Another study from 2010, recently cited by the EU commission, says foreign-owned affiliates in high-tax European countries pay 32 percent less tax than domestically owned companies.

It means multinationals like Apple and Microsoft can use the extra cash to aggressively market their products and buy out smaller firms that may pose a threat.

Exploiting different tax rules

As a result, smaller companies are finding it difficult to get recognition.

The EU is a market leader in things like Enterprise Resource Planning (ERP) software because of smaller firms. But few realise it, and clients still tend to go to their much bigger rivals.

"They have a market share of 51 percent but everybody thinks they have to buy Microsoft or Oracle," said Grun.

Multinationals are also able to exploit 28 different tax regimes, setting up shop in the states that allow them to squeeze the public coffers elsewhere.

Gerhard Huemer of the European Craft and SME Employers' Organisation said having so many different tax regimes made cross-border business excessively difficult.

"While big business can profit from them for tax planning, we have a high price for this," he said.

Only Bulgaria, Greece, France, the Netherlands, and the UK give SMEs tax breaks because of their size.

Huemer says a fairer system is needed and backs EU Commission efforts of harmonising the tax base throughout the EU.

Stiff resistance from member states

But member states are jealous guardians of their tax systems. And reforms at the EU level are likely to be met with stiff resistance from national governments.

"The fact that Amazon doesn't pay tax makes it more difficult for the bookshops to sell their products. Same with the Starbucks and the coffee shop around the corner," Huemer said.

Amazon, which had a net revenue of €13.6 billion in 2013 - paid as little as €60 million in taxes per year. Last year, it stopped funneling most of its sales through Luxembourg.

The EU commission says it wants to harmonise the tax base with a re-launch of the Common Consolidated Corporate Tax Base, also known as the CCCTB.

Last October, it had also announced that selective tax advantages issued through tax rulings for Fiat in Luxembourg and Starbucks in the Netherlands were illegal under EU rules on state aid.

And in January, it proposed new measures to claw back money from those who had benefited from corporate tax avoidance.

Europe's hidden champions

Grun remains sceptical of the EU Commission's efforts to crack down on corporate tax given the scale of the problem.

"It's lip service. At the end of the day, they are talking to the multinationals," he said.

He said Europe had "hidden champions" but are unable to get the proper exposure.

"We have strong hidden champions in the digital SME area but no-one is able to see it," said Grun.

He said the EU had already lost out to the digital revolution to the US, where giants like Facebook and Google dominate.

He said the only chance the EU now has to become a global leader is to shore up on business-to-business software.

The problem, aside from big firms getting unfair tax breaks, is that there is no single European law on tax.

"We must solve this problem and I don't understand why it still hasn't been solved," he said.

This story was originally published in EUobserver's 2016 Business in Europe Magazine.

Click here to read previous editions of our Business in Europe magazine.

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