European Leaders Will Debate Corporate Tax Avoidance Their Laws Facilitate

One day after a Senate hearing during which Apple executives explained how they avoid nearly all taxation on tens of billions in international sales, European leaders are reportedly reshuffling an agenda summit to zero in on corporate tax avoidance:

The four-hour summit was originally called to discuss energy policy, but investigations in Britain, France and the United States exposing how little tax major international companies have been paying by carefully structuring their European operations has forced the issue to the top of the agenda.

France and Britain in particular have grown concerned by the sheer scale of the legal tax schemes, with a U.S. investigation revealing on Monday that Apple Inc had paid just 2 percent tax on $74 billion in overseas income, largely by exploiting a loophole in Ireland’s tax code.

That followed reports that the British unit of Amazon paid just $3.7 million tax on 2012 sales of $6.5 billion, and similar revelations concerning the UK operations of Google and Starbucks.

The summit is unlikely to produce immediate action, but there are two opportunities on the horizon to refine an international consensus on corporate tax reform. The next G8 summit is in June, and takes place in Ireland, whose crucial role in tax evasion schemes by multinationals was central to the Apple hearings on Tuesday. And in July, the Organization for Economic Cooperation and Development will put out an “action plan” on tax avoidance.

International coordination in Europe is crucial if any curbs on corporate tax dodging are to be effective, as a pair of recent Bloomberg stories indicate. The continent is so central to the tax schemes employed by Apple, Google, and others that tax lawyers have coined nicknames like “the Double Irish” and “the Dutch Sandwich” for specific profit-shifting gambits.

And while Europe’s leaders publicly decry their neighbor states’ efforts to lure corporations through tax law, they also try to outdo their neighbors. Experts point to Ireland, the Netherlands, and Luxembourg as the worst actors on corporate tax avoidance, but larger European players including the U.K. have reduced various rates in ways that encourage tax avoidance. The result is a race to the bottom in taxing many of the world’s richest companies, chased by regressive sales tax hikes and public service cuts to maintain some fiscal balance. The result, Bloomberg’s Jesse Drucker writes, is that “individuals rather than businesses are often bearing the brunt of higher taxes.”

European powers are illustrating the inherent weaknesses of the territorial approach to reform which Apple’s CEO Tim Cook advocated in Tuesday’s Senate hearing. This summer’s G8 meeting and OECD release are opportunities for the sort of paradigm shift that was absent in Cook’s testimony, from failed territorial approaches to a destination-based system of corporate taxes that could both stem the tax avoidance tide and encourage companies to invest more heavily in creating jobs at home.