In times of austerity, every dollar counts—and so do uncollected dollars. As belts have tightened across Europe, legislators have begun to consider boosting taxes, asFrancehas already done on its large corporations and high earners and asBritainlooks likely to do on the homes and capital gains of the wealthy.
But, despite the stir caused in September by the French CEO of LVMH seeking to become a Belgian citizen—though he denied acting to avoid French taxation and said he would remain a "fiscal citizen" of France—the trend in many countries is toward higher taxes, and not solely or primarily on wealthy individuals. Corporations, particularly multinationals seeking domiciles with low tax rates, are now in the crosshairs of both regulators and lawmakers for tax-cutting or avoidance strategies in nations where they do business.
Simply avoiding foreign investments won't safeguard clients' portfolios from foreign consequences. In fact, U.S. multinational corporations making healthy profits but paying small—or no—tax bills abroad have found their tax strategies currently under scrutiny in the countries where they do business. That's a trend that looks to continue. While manyU.S.multinationals have been quite efficient at cutting their tax bills, European regulators are not favorably impressed. Regulatory action, whether here or abroad, could have a sizeable effect on client investments. Advisors had best stay alert.
In October, Starbucks made headlines when it was revealed that for years it has been saying one thing to shareholders and analysts, and something entirely different to the tax man inBritain. For the past three years Starbucks has claimed operations in its 735 British outlets to be unprofitable in itsU.K.filings, paying no taxes on proceeds of 1.2 billion pounds ($1.924 billion) raked in by its British stores.
Analysts and investors, however, were told not only that theU.K.outlets were profitable but their operations were models forU.S.outlets to follow. The company has said that its actions regarding taxes were completely legal.
However, the news did not sit well with British authorities, who questioned Starbucks—and Amazon, and Google, which also actively seek to lower their foreign tax bills—about their tax practices, and then issued a report on Dec. 3 that accused companies of "immorally" avoiding taxes and declared their intention to pursue the issue.
France's fiscal authorities have already billed Amazon for $252 million in back taxes, although the online retail giant has said it will fight.
Not just income taxes are at issue; so are the value added taxes (VAT) a company pays, which are easier to challenge. For example,Luxembourg's rate is only 15%, compared with theU.K.'s 20% and most other European Union (EU) countries' rates that range from 19-25%. While it is legal for multinational companies to establish headquarters inLuxembourgto take advantage of the country's lower VAT rate (non-EU countries must pay VAT to the governments of their customers, and at those governments' rates), such offices' validity can be challenged by individual EU countries' tax authorities in their own domestic courts. Challenged companies must prove that the Luxembourg-based entity is actually the true supplier of goods and services.
BritainandGermanyare currently pursuing eBay for more VAT, after the online auction company chose to locate its European operations headquarters inLuxembourg, thus lowering the VAT it must pay to governments on European customers' purchases. According to authorities, the total at issue forBritainandGermanyamounts to some $1 billion—hardly small change.
