Philippe Braillard, University of Geneva , Emeritus Professor, 4 March 2016

A senior academic figure in Switzerland says the Alpine state needs to be more assertive in protecting its banking sector and condemns what he sees as the double standards of countries such as the US.

https://www.wealthbriefing.com/html/article.php?id=167751#.VtmVh-bFkVt

The following opinion item, written by Philippe Braillard, emeritus professor at the University of Geneva, argues that Switzerland must be assertive in protecting the interests of its financial industry. He writes as a recent US/Switzerland programme comes to an end; that programme required Swiss banks and other financial institutions to state if they were at risk of, or had, sheltered US persons against tax. The programme has seen banks sign non-prosecution agreements and pay fines. Professor Braillard’s views are a most welcome addition to debate and the editors here invite readers to respond. (An earlier version of this article appeared in Le Temps, and in Finanz und Wirtschaft.)

In early 2016, the programme to settle the tax dispute between Swiss banks and the US authorities reached an important milestone when the “category two” banks – of which there are around 80 – formed an agreement with the US Department of Justice under which they will face no criminal prosecution in return for paying fines in excess of $1.3 billion. The total bill, including banks in all categories and sums already paid by UBS and Credit Suisse in 2009 and 2014, will probably exceed $6 billion, a figure that excludes the huge legal and audit fees incurred by banks as a result of the US authorities’ actions, which in some cases equal the size of the fine. This is an opportune moment to take a step back and take a critical look at the programme, which has damaged the Swiss financial market because of a lack of clear-sightedness among the Swiss political authorities.

Firstly, we must not forget that the programme has not yet been completed. Swiss banks will be required to work closely with the US authorities for four years, and in particular will have to send them various kinds of data. The US will be able to use the information thus obtained to make mutual assistance requests to Switzerland, enabling the US to identify taxpayers guilty of tax fraud. Another threat remains: the US authorities are reserving the right to prosecute certain Swiss bank employees and third parties such as external advisors and asset managers.

How did we get to this position? The US government’s desire to make its taxpayers comply with their tax obligations is perfectly legitimate. However, it does not justify the unilateralism and imperialist behaviour adopted by the US: using its decisive power over the operation of financial, economic and technological networks in our globalised world, the US is seeking to force the extraterritorial application of its laws.

Moreover, although it claims to be acting in the name of virtue and universal moral values, the main aim of the US’s strategy is the pursuit of economic and political interests. It is clearly in the US’s interests to weaken the Swiss financial market, which is a formidable rival to its own. The US’s stance is therefore hugely hypocritical: there is a glaring contradiction between what it is saying and what it is doing. The US has zero credibility when it criticises tax havens and Swiss banking secrecy, since the US itself is one of the world’s largest centres of tax evasion. One just has to think of the entirely opaque legal vehicles offered by several US states (Delaware, Nevada, Wyoming, South Dakota). This was confirmed recently by a Bloomberg analysis, which said that large amounts of untaxed assets are being transferred from Switzerland and exotic tax havens to the US, which is sheltering those assets from the eyes of foreign tax authorities. In addition, the US does not want any genuinely reciprocal arrangement with other states, despite imposing full tax transparency on them via FATCA. This is why the US will not genuinely implement the OECD’s new global standard on the automatic exchange of information, for fear that it will damage the US financial market, which is sheltering large amounts of untaxed assets owned by foreign taxpayers.

A critical examination of the US Tax Program also clearly highlights the weakness and lack of lucidity shown by the Swiss authorities when it engaged with the programme in order to seek a global political agreement.

The Swiss authorities agreed to and even encouraged the delivery of information to the US concerning several thousand bank employees who had done no wrong under Swiss law. The Swiss Federal Council negotiated badly, putting itself in a position of weakness and failing to anticipate correctly the effects of the programme that the US wanted to impose on it. It was unable to denounce the hypocrisy and cynicism of its partner and to frame the argument in terms of interests and competitiveness. That resulted in Switzerland ending up as the only country to be targeted so comprehensively by the US and to have a programme of this kind imposed on it. Many of the problems currently facing Swiss banks could have been avoided if FINMA had given clear directives after the UBS affair in 2008.

In addition, after almost forcing the Swiss banking sector to take part in the programme while refusing to get involved in its execution, the Swiss authorities now want to change the law to prevent Swiss financial intermediaries from deducting their US fines against tax, even though they have already been taxed on the revenue from the activities on which they are being fined. This change of policy will only increase the damage done by the programme to the Swiss financial market.

The Swiss Federal Council must quickly learn from the mistakes it has made and remember that Switzerland is a financial centre that strictly applies international standards on transparency, and that requires its rivals to do the same, starting with those who claim to set an example. It must be resolute with its resistance in the event that this programme, which is proving so lucrative for the US tax authorities, inspires other countries attracted by the fines that they could seek to impose on Swiss banks.

It is high time for Switzerland to stop the self-flagellation and show that it is a strong financial centre, determined to defend its interests and stay competitive without apology.

The European Commission has concluded that selective tax advantages granted by Belgium under its ‘excess profit’ tax scheme are illegal under EU state aid rules.

George M. Mangion

Published on Malta Today

3 March 2016, 8:03am

The European Commission is looking at Member States to assess compliance with EU state aid rules in the context of aggressive tax planning by  multinationals, with a view to ensure a level playing field. A number of Member States seem to allow multinational companies to take advantage of their tax loopholes and thereby reduce their tax burden.

Only two months ago came the revelation that the EU is investigating Belgium for the cozy tax deals it signed with dozens of multinationals. A recent EU ruling forces Belgium to reclaim millions of undercover deals on tax avoidance signed with mega business in many other countries.

The European Commission has concluded that selective tax advantages granted by Belgium under its “excess profit” tax scheme are illegal under EU state aid rules. The scheme has benefitted at least 35 multinationals mainly from the EU, who must now return €700 million in unpaid taxes to Belgium. The hybrid scheme made use of a twisted logic to assume that a taxpayer being a multinational generates an “excess profit” so it redeems this factor by slashing its tax charge.

Critics of the scheme argue that even if in fact a multinational does have a Midas touch, then the benefits should be shared between its group companies in a way that reflects economic reality. But nothing of the sort happens in this Belgian tax fable. Contrary to what Belgium claims, the scheme cannot be justified by the need to prevent double taxation.

The discounted profits are not taxed elsewhere and the scheme does not even require companies to demonstrate any evidence or even risk of double taxation. Instead of preventing double taxation, in reality the scheme gives a ‘carte blanche’ to double non-taxation.

According to the information assessed at this investigation at least 35 multinationals benefitted from the scheme yet it cannot name the companies at this stage because the Commission assessed and found the scheme itself illegal. Ironically Brussels, being the cradle of a monolithic EU administration adorned with its lofty palaces housing thousands of bureaucrats, has been on attack after it was disclosed that it gave shelter to multinational companies to avoid taxes at the expense of others.

It makes use of tax havens by taxpayers such as Panama an expensive and far away destination – when Belgium is so central and convenient. But the game is up as tax commissioner Pierre Moscovici has promised a more comprehensive approach to reform.

Some may ask how did such a drain of such mega proportion ever go undetected when it was administered under the noses of Brussels “long in tooth” technocrats? The so-called excess profit scheme, (or simply double-non taxation) has been in place for over 15 years and financial tax advisers were not too shy to recommend it to fee paying patrons.

Unashamedly it was branded as exclusive to the “French fries and Moules” community and marketed by the tax authority under the logo “Only in Belgium”, as it gallantly allowed mega corporations to reduce their tax base by half or even pay as low as ten percent.

But it failed the Robin Hood test since tax rulings by the Belgian authorities favoured exclusively the rich and powerful corporations that obtained a ruling on profit recorded in Belgium, skillfully adjusted downward by excluding from the tax base “excess profits” arising from the company’s membership of a multinational group. It discriminated against companies not forming part of groups as these could not claim similar benefits.

The famous “excess profits” scheme which has been operating on the quiet for more than a decade is a classic case of distortion of competition within the EU’s Single Market. In a most uncanny way the scheme found a foolproof method of how to exempt legitimate profits from mainstream tax. It did this simply by issuing one-to-one tax rulings.

A devious logic was behind the Belgian fudge. This just compared the actual profit of a multinational with the hypothetical average profit of a stand-alone company and the difference in earning capacity was siphoning off as “excess returns” – hitherto untaxed or taxed at a ridiculous low rate.

This is based on a convoluted premise that multinational companies make “excess profit” as a result of being part of a multinational group, e.g. due to synergies, economies of scale, a Midas reputation, client and supplier networks, access to new markets. Imagine if tax havens copy this technique by pretending that they are a high tax jurisdiction and prima facie levy a 30 % tax on profits but secretly concede that the mega companies deserve a hefty deduction to cream off excess profits allegedly generated due to their size and dominance in the market.

Certainly incentive legislation to attract FDI needs to be ingenious and each country tries its utmost to invent schemes to lure business to their fold. However, to ensure a level playing field and eliminate unwarranted state aid the schemes have to be fair. Certainly with unemployment within the EU still high at 17 million there is nothing wrong for governments to try to create jobs and boost economic growth.

But it will be abuse of competition rules for national tax authorities to grant favours to foreign business, however large or powerful they are, as this constitutes an unfair competitive advantage when compared to others. Undoubtedly, such schemes put SMEs at an unfair disadvantage since they too are competing in the same markets and have to pay the full brunt of national taxes.

Readers may recall the Luxleaks that was discovered two years ago and wonder whether the Belgium scheme pales by comparison. Of a higher magnitude was illegal state aid afforded to Fiat in Luxembourg and Starbucks in the Netherlands. Naturally the investigative arm at EU level is over-stretched to secure sufficient resources to weed out unfair tax competition as this calls for an effective combination of both legislative action and enforcement of state aid rules.

It comes as no surprise that as an interim measure it announced last month its four legged Action Plan for fair, transparent and efficient corporate taxation. Later this year, the Commission will present a package of proposals which aims for a coordinated and efficient implementation of international tax good governance standards: that companies should pay taxes where they make profits.

This avoids the situation where multinational companies earn their profits in a number of high tax jurisdictions but the holding company is located in a country which permits them secret tax rulings to lower their liabilities. It also calls for a comprehensive country by country report where taxes are paid.

In conclusion, the Commission established that Belgium must cease applying the excess profit ruling system and recover the full, unpaid tax from the companies involved. Belgium has announced it will likely appeal the decision. Several companies are considering to appeal as well or to intervene in the Belgian procedure. With Belgium setting the standards for lower tax there is little appetite left for tax consultants to travel to South American tax havens such as Panama.

https://sites.morimor.com/wp-content/uploads/sites/20/2015/12/Letter-A.-Gurria-from-J.-Bacchus.pdf

By MICHAEL J. de la MERCED, DAVID GELLES and LESLIE PICKER

Published November 23,2015

The New York Times

In phone calls to Washington lawmakers and Obama administration officials, the chief executive of the largest drug maker in the nation had a surprising message: A deal that would allow the company to move its headquarters to Ireland was actually good for the United States.

The Scottish-born chief executive of Pfizer, Ian C. Read, told them that a merger with Allergan, the maker of Botox that is based in Dublin, would significantly cut Pfizer’s tax bill and give it more cash that it could invest in the United States and ultimately add jobs, according to people briefed on the calls. He made the calls in recent days as the two companies were hammering out a $152 billion deal.

Monday’s announcement of the deal — the biggest merger in 15 years — has revived a fierce public debate over whether mergers that allow a company in the United States to relocate to a lower-tax country are, in fact, good for America.

Pfizer, founded by German immigrants in Brooklyn in 1849, is becoming the biggest company yet to shed its American citizenship to lower its taxes. While not structured as what is known as an inversion, it achieves the same goal of a lower tax rate abroad.

An aborted bid by Pfizer to acquire AstraZeneca of Britain in an inversion last year set off a public uproar — leading President Obama to call such deals “unpatriotic” — and prompted moves by the Treasury to curb them.

The latest merger announcement has stirred a similar outcry across the political spectrum.

Hillary Rodham Clinton, a Democratic candidate for president, said, “We cannot delay in cracking down on inversions that erode our tax base.”

Donald J. Trump, a Republican candidate for president, said in a statement: “The fact that Pfizer is leaving our country with a tremendous loss of jobs is disgusting. Our politicians should be ashamed.”

Yet the two companies and their advisers are betting that the Treasury Department will not be able to come up with new rules to block the union, and that Congress will fail to revamp the tax code before the merger’s expected close late next year.

And as Mr. Read has made clear publicly and privately, his main priority is doing well by his shareholders — and that means finding a way to compete with huge foreign rivals that enjoy much lower tax rates.

“We’ve assessed the legal, regulatory and political landscape and are moving forward with our strategy to combine these two great companies for the benefit of the patients and to bring value to shareholders,” Mr. Read said on Monday on a call with analysts. “That is our obligation.”

Mr. Read and those close to him have noted that Pfizer, based in New York, has been upfront about its intentions. Even after its takeover campaign for AstraZeneca collapsed, the Pfizer chief made no secret of his desire to try again, while criticizing a tax code that he said leaves his company fighting with one hand tied behind its back.

The drug maker, which manufactured penicillin during World War II, has complained that its tax rate last year was 26 percent, compared with the approximately 5 percent that Allergan’s predecessor company paid during that same time.

Bigger international rivals, from GlaxoSmithKline and AstraZeneca of Britain to Novartis of Switzerland, also pay substantially less in taxes, potentially letting them win takeover contests with higher bids.

Perhaps more important, Pfizer kept overseas $74 billion in profits that were earned abroad last year, because bringing them home would have racked up billions of dollars in taxes.

Since the AstraZeneca bid, the Obama administration has introduced new rules that have made it harder for companies to do inversion deals, scuttling efforts by companies like AbbVie, a large drug maker based in Illinois, to relocate abroad.

From the beginning of their deal discussions nearly three months ago, Pfizer and Allergan agreed that the best way forward was to forgo an inversion altogether, according to people with direct knowledge of the matter. Instead, Allergan would serve as the buyer despite being substantially smaller.

Mindful of the sensitivity in Washington, Pfizer included in its advisory team the boutique investment bank Moelis & Company, whose vice chairman is Eric Cantor, the former House majority leader.

While Mr. Cantor will not lobby lawmakers, people with direct knowledge of the matter said, he has advised the company on political aspects of the deal and maintains friendly contact with his former colleagues.

Despite the political uproar, the merger is not expected to encounter significant resistance from the American regulator that will review the transaction, the Federal Trade Commission, according to the people with direct knowledge of the deal.

A spokesman for the Treasury Department said on Monday that it did not comment on specific transactions. Still, the department has clearly signaled its distaste for deals that move a company’s tax home.

The particular design of Monday’s transaction, however, effectively shields Pfizer and Allergan from the administration’s efforts to curb such deals.

When the Treasury Department announced its latest rule changes on Thursday, advisers to both companies sat down to review the changes — and quickly went back to work on their negotiations, the people with direct knowledge of the matter said.

“Treasury’s proposals don’t touch them,” said Robert Willens, an independent tax consultant who examined the deal.

Presidential candidates offered swift condemnation of the transaction all the same.

Such transactions, Mrs. Clinton said, “take advantage of loopholes that litter our tax code, distort incentives for investment and disadvantage small businesses and domestic firms that cannot game the international tax system.”

Senator Bernie Sanders of Vermont, a Democratic candidate for president, said, “The Obama administration has the authority to stop this merger, and it should exercise that authority.”

Yet others said a broader tax overhaul was needed.

Senator Orrin G. Hatch of Utah, the Republican chairman of the Senate Finance Committee, said the news of the merger “only further underscores the arcane, anticompetitive nature of the U.S. tax code.”

Executives at both Pfizer and Allergan are betting that Congress will continue to be conflicted about how to deal with inversions. Republicans, who control the House and the Senate, have called for a comprehensive regulatory overhaul and have shown reluctance to focus on particular companies.

“It’s not clear what Washington’s wishes are,” said one person close to the transaction. “We tried to tell them to fix our tax system. It’s not like this is a surprise.”

At the same time, both Mr. Read and his counterpart at Allergan, Brenton L. Saunders, have emphasized that the deal isn’t being done just to cut taxes.

Both executives contend the deal gives Pfizer access to fast-growing treatments in the eye care and dermatology space, as well as brands like Botox and the cosmetic treatment Juvéderm.

Moreover, it will give Pfizer enough size and product diversity to break itself up in three years’ time, dividing itself into a company focused on faster-growing innovative drugs and another built on more mature treatments that face competition from generic competitors. The company said on Monday that it would decide in late 2018 whether to proceed with a split.

Buying Allergan will bring more fast-growing treatments to Pfizer’s portfolio. That would complement Pfizer’s $17 billion acquisition of the generic drug maker Hospira earlier this year, meant to bulk up its so-called established treatments division.

Under the terms of the deal, Pfizer would essentially pay $363.63 for each Allergan share, representing a nearly 30 percent premium to Allergan’s share price in late October before news emerged that they were in talks. That values the acquisition at $152 billion. Including debt and subtracting cash, the deal is worth $160 billion.

After the transaction, Pfizer shareholders are expected to own about 56 percent of the combined company, with the remaining 44 percent owned by Allergan shareholders. Mr. Read will be chief executive of the new Pfizer P.L.C., to be based in Dublin, while Mr. Saunders will become president, and will be in line to take over one of the company’s businesses if and when it decides to break itself up.

Investors appeared unimpressed. Shares of Allergan fell 3.4 percent, while Pfizer’s ended down 2.6 percent.

The expected cost savings of about $2 billion over the first three years announced after the deal was made were well below most analysts’ projections. And the $5 billion in planned stock buybacks that also were announced on Monday were in line with Pfizer’s previous efforts.

Some analysts still regarded the deal positively, so far as it ties into Pfizer’s goals.

“Allergan was easier to get done as a friendly deal in terms of getting a structure done and management roles done,” said Jeffrey Holford, an analyst with Jefferies.

To some involved in the deal, the tax savings are all that matters. “If the tax stuff went away entirely, the deal would be off,” a person briefed on Mr. Read’s thinking said.