Europe Points Finger at Ireland Over Tax Avoidance

Multinational companies have made such extensive use of Ireland to funnel royalties–a common way to shift profits and avoid tax–that these payments averaged 23% of the country’s annual gross domestic product between 2010 and 2015, according to a European Commission report.

The scale of the net royalty payments channeled through Ireland contrasts sharply with the average in the EU as a whole, where such payments are a fraction of 1% of the bloc’s annual GDP, RTE reported.

Brussels has highlighted Ireland’s role in channeling royalties as part of evidence it will present on Wednesday that tax rules in seven member states–Belgium, Cyprus, Hungary, Ireland, Luxembourg, Malta and the Netherlands–could have enabled multinational companies to cut their tax bills aggressively.

The tax planning practices “undermine fairness and the level playing field in our internal market, and they increase the burden on EU taxpayers”, said Pierre Moscovici, EU tax commissioner. “While we recognize the steps some of these member states have taken to adapt their tax model recently, clearly more needs to be done.”

The commission report analyses economic data from EU member states to identify rules that could enable aggressive tax avoidance by companies. But it stops short of accusing member states of enabling tax avoidance. Instead, it aims to kick-start national and bloc-level tax reform.

Royalty payments made by one subsidiary of a company to another–typically in return for use of patents or other intellectual property–are a common way to shift profits from high tax to low-tax jurisdictions. Paying interest on intercompany loans and sending dividends to group companies are two other methods used.

Companies say that they comply with all laws and pay the taxes legally required and that their company structures fulfill their obligation to maximize shareholder value by minimizing tax costs.

Margrethe Vestager, the EU competition commissioner, has also ordered payment of back taxes from individual companies–including Apple, Amazon, Fiat and Starbucks–whose tax deals were so favorable that they constituted illegal state aid.