How to get through the fiscal Middle Ages in Europe ?

For a millennium, Europe experienced a chaotic transition from the Roman Empire order to the one of nation states that emerged during the Renaissance. During this period of time, the persistence of social structures in applying obsolete rules led to a durable disorder. It is clear that the latest tax-related events gives the impression of going through a similar period, especially for corporate, as illustrated by the Apple case.

Our current international tax system frame was built on national sovereignty when the rule of law was guaranteed by borders. In the meantime, the economy became globalized and borders disappeared. National sovereignties came into conflict, challenging the principles of legal security and multiplying double taxation. International trade then stopped growing and the rate of employment in mature economies has remained low without anyone seeming to acknowledge a link between the two things. Europe, true to its history, is particularly affected by this chaotic mutation.

The example of Apple is very instructive. This American company set up its European headquarters in Ireland and benefits from an attractive level of taxation. This arrangement is based on the country’s law. Ireland’s neighbors and the European Commission have known about its tax regime for years and it was once widely accepted. Other countries even tried to imitate Ireland with varying degrees of success. France is one of them because it developed a HQ system for foreign corporate which was supposed to be as competitive as the Irish one but was less successful because of its extreme complexity.

This American company is now summoned to reimburse the gains obtained from the application of the Irish law. An entity without any tax sovereignty – the European Commission – is condemning a State because it used its sovereignty which is guaranteed by the European treaties and is thus presenting the bill to a company that neither the Commission nor the Irish State have anything to reproach. Ireland refuses to benefit from this reimbursement and has appealed the Commission’s decision. Also, it is not excluded that Ireland might have to transfer the amount received to the United States. Somehow, the European Commission will have helped the US Government to reduce its deficit. In comparison, the medieval methods appear to be less tortuous.

This story could be funny if it didn’t represent a huge step backwards towards protectionism and economic rivalry. Indeed, the United Stated now considers that the Commission is trying to harm American interests and is threatening Europe with economic reprisals. And, potential American reprisals may affect all European companies, from all sectors of activity, as the Deutsche Bank a few days ago.

However, the already famous Apple case illustrates the chaos of the European tax system. A single market, a single currency, 25 different competing fiscal tax systems and a European Commission that has suddenly decided to incorporate tax systems into competition law, the boldest and most contestable legal innovation of this new century. Taxation has left the field of legal security and has entered the world of political conflicts.

The OECD has tried to tidy up this mess, by trying to use soft law, which means using recommendations without legal enforcement. But, the soft law’s weakness is its incapacity to enforce the Tax system security that companies need so badly. That’s why, despite the quality the OECD’s work, they could not prevent the growth of double taxation, which affects 94 % of European companies, nor its harmful consequences on economic growth. The solutions are well known : a unique fiscal tax system in Europe, and a global organization of fiscal tax systems or at least an efficient international arbitration system like the one that exists for trade. The legislators keep on deferring the implementation of these measures as they prefer the race to protectionism in spite of its negative effects which are well known.

Companies therefore have to face a chaotic tax system that represents their first non-operational risk. Indeed, not only is there a major financial risk but also one of reputation. Before being right in the eyes of the law, they need to convince the public opinion, their employees and their clients of the benefits of their tax system, because the judge’s decision comes after the involvement of the media and politicians.

Confronted with a mess that seems to be lasting, conceiving and applying a full fiscal governance is the best answer for a company. Each governance is specific but all rely on three principles:

  1. A management of the risks based on a global cartography that is prospective and comparative
  2. A financial strategy that incorporates fiscal modelling
  3. Clear and pedagogical internal and external communication

Such a governance will allow us to invest efficiently, despite the current disorder that hopefully won’t last for a thousand years.