Juncker turns tax debate away from Luxembourg and on to entire EU

The surprise announcement by the European Commission that it is to extend its request for information on tax rulings to all European Union member states has the potential to significantly shift the terms of the debate on multinational tax avoidance.

The timing of the announcement – a day before the first European Council since the Luxembourg Leaks scandal – prompted some to observe privately that Mr Juncker's commission has very effectively turned the focus of the debate away from Luxembourg and on to the entire EU.

Taoiseach Enda Kenny was unequivocal yesterday in his support for the move. Speaking on his way into yesterday’s European Council, he said: “What has been put in place by one will now apply to all.”

Luxembourg's prime minister, Xavier Bettel, was even more direct. Mr Juncker's successor at the duchy briefed journalists yesterday evening, outlining Luxembourg's strong support for the commission's decision to broaden the inquiry. Mr Bettel also confirmed Luxembourg had withdrawn two challenges to the commission's investigation into its tax rulings.

Noting that “everybody is now in the same boat”, he said: “We insisted that it should be a global level field and we are now very happy that now this level field has been reached . . . the rules are the same for everyone. That is the reason why we decided to withdraw the two trials.”

Enormous workload The decision to widen the i

nquiry, and demand a list of all companies who received tax rulings from the years 2010 to 2013 in all member states, leaves the commission’s competition division with an enormous workload. It also forced the commission to defend the right of its competition arm to demand such information from each member state. The length of time the mammoth information- gathering exercise will take will be key to its credibility.

The prospect of a blanket investigation into tax rulings has sparked interesting reactions in some unlikely quarters, such as Germany, one of the three countries that wrote to EU economics commissioner Pierre Moscovici earlier this month demanding a stronger response from the EU on tax avoidance.

Consistently one of the most strident critics of governments who work with corporations to “optimise” their tax bills, the federal finance ministry in Berlin welcomed the commission’s broad investigation into the ways corporations “optimise” their tax bills.

“It’s only right that the commission concerns itself with damaging tax competition,” said a spokesman. “Germany supports the work of the commission in this area.”

And well it might: even at this early stage it is unlikely Berlin has much to fear from such an investigation.

Germany’s federal structure means Berlin has competence over setting tax legislation, but the implementation and collection of taxes is a matter for the 16 federal states. And in the case of business-related taxes, such as corporate tax, this competence – and income – is shared between state capitals and municipalities.

These tiers of German administration were caught off guard by the commission’s announcement and declined several requests for comment.

“We cannot judge yet how we federal states will address this initiative,” said a senior official at one state finance ministry.

Any response from Germany's federal states on what tax rulings they have provided to companies is likely to be co-ordinated by North Rhine- Westphalia, which currently holds the chair in the upper house of parliament, the Bundesrat. A spokeswoman yesterday declined to say if, or when, the ministry would respond to the commission.

Tax harmonisation Despite the strong push by larger member states including Germany, France, Italy and Spain

to clamp down on tax avoidance at EU level, Ireland has some supporters in terms of its position on corporate tax planning. Countries such as Britain and the Netherlands are also opposed to any move towards tax harmonisation.

However, the public mood across Europe cannot be underestimated. The possibility that thousands of companies are exploiting loopholes and differences in tax regimes to slash tax bills when citizens are experiencing the effects of austerity measures is a significant political issue in many member states. Some politicians are acutely aware the EU will need to be seen to be taking action to address an issue that is of significant public concern to many across Europe.