Panel probes taxes on multinationals

Date: 06/05/1999

By Tim Jones

EU FISCAL experts have opened an inquiry into the advantageous tax treatment of holding companies amid growing evidence that governments are using sweetheart schemes to poach multinational investment.

A panel of national officials chaired by UK Treasury Minister Dawn Primarolo is investigating all the regimes in force in the EU, but attention has already focused on a long-standing scheme in the Netherlands and a four-month-old Danish system.

The European Commission submitted a detailed study of all national regimes to a meeting of Primarolo's 'code of conduct group' today (6 May) which examines the various systems of tax credits and exemptions aimed at avoiding the double taxation of multinational firms' profits.

Under credit systems such as that operating in the UK, internal revenue authorities tax dividends paid to parent holding companies by their overseas subsidiaries but allow headquarters to offset the corporate tax paid by the subsidiary.

The Commission says that if the corporate tax rate in the country where the firm has its headquarters is lower than that in the subsidiary's fiscal home, this can work out favourably for the holding company.

A more controversial system is the 'participation exemption' operated most successfully by the Dutch authorities. This exempts dividend income and capital gains on the sale of shares in subsidiaries from corporate tax - a regime guided by the principle that firms should only be taxed once on their profits.

The Commission notes that this system, combined with a huge number of long-established tax treaties with other EU countries and the Dutch revenue service's experience of dealing with multinationals, has made the Netherlands Europe's top destination for holding companies.

Only last month, Swedish-Swiss engineering giant Asea Brown Boveri and France's Alsthom registered in Amsterdam as a Naamloze Vennootschap (NV), following hard on the heels of Indian steelmaker Ispat International, Greek telecoms firm Stet Hellas and Italian fashion house Gucci.

Officials say this Dutch system and the ability of foreign companies to pre-negotiate how much corporate tax they will pay under so-called 'ruling practices' has attracted considerable attention on the code of conduct group.

” The Dutch feel under threat by the code of conduct,” said a tax expert. “Their authorities have broad discretionary powers, which are difficult to examine by the group.”

The German and French governments, in particular, are concerned that Dutch success will trigger a wave of imitation by other countries. In December, the Danish parliament passed a law abolishing withholding taxes on company dividends transferred in and out of Denmark to parent holding companies in an explicit bid to mimic the Dutch.

The Primarolo group, which must complete a report on 'harmful tax competition' in time for the EU's Helsinki summit in December, is examining whether the various holding company regimes discriminate in favour of foreign firms.

Theoretically, under the code of conduct, laws allowing foreign holding companies exemptions from corporate tax on overseas subsidiaries' dividends or capital gains tax should be banned if these do not also apply to domestic firms.