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European tax investigation gathers pace

It's a sad and recognised truth that no one really "loves" January. Overshadowed by its neighbours December and, to a far lesser extent, February, January has long been considered the worst month for a number of reasons. At some point someone will trot out that most tortured of headlines, that "Today is officially the most depressing day of the year".

Be assured, it could be worse, much worse. In comparison to those companies and European governments involved in sweetheart tax deals, this January might rank as the best on record. Buried in the pre-Christmas confusion came an ominous press release from the European Commission announcing a widening of its enquiry into corporate tax ruling practices. Member States are being ask to divulge whether they make tax rulings and, if so, a list of all of those companies who were subject to a tax ruling between 2010 and 2013.

In October, we reported on the European Commission's investigation into the tax arrangements entered into by Apple Inc. and the Republic of Ireland. Numerous other corporations, including Amazon and Starbucks, have come under scrutiny for their tax arrangements. The European Commission is now set to blow the issue wide open, against the wishes of many of Europe's member states and, according to the Financial Times, the newly elected President of the European Commission, Jean-Claude Juncker.

The European Commission's began its investigation into the tax arrangements of seven member states, (Belgium, Cyprus, Ireland, Luxembourg, Malta, the Netherlands and the United Kingdom) in June 2013. By widening the scope of its investigation, the European Commission is attempting to identify "if and where competition in the single market is being distorted". An investigation of this scale and with such a wide scope will inevitably be the cause of some red faces. The years between 2010 and 2013 were not times of economic plenty for Europeans, who are unlikely to look kindly upon corporations who play the tax market against a backdrop of cuts and austerity.

Tax rulings are of course synonymous with transfer pricing mechanisms. Transfer pricing mechanisms are employed by corporations with a multi-national presence, operating in a number of different jurisdictions. Corporate tax rates differ wildly from state to state; by manipulating the price at which intra-group purchases of inventory and supplies are made, companies can effectively generate profits in low tax jurisdictions and losses where the rates are not so favourable. The European Commission's suspicion is that member states have been, in effect, "signing off" on these arrangements, which is tantamount to State aid.

That multi-national corporations create and exploit complex tax avoidance schemes is no great revelation. The fact that governments of European states are complicit in these activities might raise some discussion. However, this very behaviour demonstrates the inherent tension between the measures designed to protect competition within the single market and the way in which Member States compete in the global market. As the World Economic Forum meets in Davos there is much discussion on the "Global Labour Market" and an acknowledgement that now, to a greater extent than ever experienced in human history, effective labour can be found and utilised almost anywhere. For developed service-based economies this is a frightening prospect; in this context it seems only natural (if not a political necessity) that Member States should want to employ every tool available to attract jobs and prosperity.

The debate could yet widen to the effect that State aid rules have on Member States; only time will tell.