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Tuesday
Dec182012

A Revolt Against Corporate Welfare Programs For Multinationals In France

“Paradox” is what the New York Times called France’s ability to attract €42.5 billion in foreign investment through October this year. Only China and the US were ahead for the first two quarters. A paradox because it shouldn’t happen. Investors should be scared off by restrictive labor laws, high income-tax rates, high cost of labor, and now the mud-wrestling bouts over nationalizing some industrial plants [Nationalizations Take Off In France]. But turns out, astute multinational corporations pay practically no income tax.

As if to underline the harsh reality in France, the article ran the same day that Texas Instruments announced its intention to shutter a research and development plant at Villeneuve-Loubet, near Nice, in southern France, as part of its corporate weight-loss program. Of the 541 employees, 517 would be axed. The remainder would be transferred. It would leave TI with fewer than 100 employees in France. But companies, like TI, that are packing up their marbles are not subtracted from the foreign investment total.

Yet France can be a veritable gold mine: it offers tax credits of 30% of R&D expenditures of up to €100 million. For the first two years, these credits are even higher. A huge benefit for small companies. “You can recoup a lot of your R&D expenses,” said Gene Bajorinas, Vice President of Novian Health, a biotech outfit from Chicago. “It’s an ideal scenario.”

As for large companies, the article cites other benefits—an educated workforce, infrastructure, and so on—to explain why Google located its headquarters for southern Europe in Paris, why Amazon is building a second distribution center, and why 171 foreign companies set up manufacturing plants in 2011, way ahead of Germany and the UK. A phenomenon Ernst and Young partner Marc Lhermitte called “paradoxical.”

It’s not a paradox. Last year, when French authorities raided Groupe Partouche, which owns hotels, casinos, restaurants, hot springs, and online gambling operations, they stumbled upon invoices from Microsoft and Google for ads and promotions. The invoices hadn’t been issued by the subsidiaries in France that had done the work, but by subsidiaries in Ireland. This led police and tax authorities to raid local Google offices in June 2011 and Microsoft offices in June 2012. Facebook offices were raided during the peak of summer.

Then, November 1, tax authorities raided Google offices at four locations in Paris and seized files. They apparently suspected Google of selling online ads to French companies without declaring revenues from those transactions in France—but in Ireland, where it declares its European profits. Google claims that its work in France is nothing but low-level “marketing assistance and service support.” While generating over €1.25 billion in revenues in France in 2011, it paid only about €5 million in corporate taxes there.

“I am very proud of the structure that we set up,” explained Google Chairman Eric Schmidt last week as it became known that Google might be liable for €1.7 billion in back taxes and penalties in France. “We did it based on the incentives that the governments offered us to operate,” he added. “It’s called capitalism. We are proudly capitalistic. I’m not confused about this.”

They hadn’t been the first ones. Yahoo and Amazon had already been hit, as had eBay. But on December 7, eBay’s office in Paris was raided with a very public display of force. Police cars pulled up, officers rushed inside, others blocked the entrances. The problem: in 2011, eBay and its subsidiary PayPal had declared only about €22 million in revenues and paid €1.35 million in corporate income taxes to the French government, compared to €1.18 billion in revenues that they declared in Germany.

Multinationals have always been able to slither through tax codes around the world—the ability of GE and Boeing, for example, to not pay income taxes in the US despite their immense profits has become legendary (CTJ report). So corporate giants, such as Google and eBay, have perfected their methods for France. Among other strategies, they rely on subsidiaries in Ireland, the Netherlands, and then offshore tax havens to shift revenues and income away from France.

Amazon’s subsidiary in France, for example, receives only a small commission off each sale. The rest of the revenue is routed overseas. Not illegal, per se. And proving that French law has been violated appears to be tricky. Companies are not expected to roll over. The fight in the French judicial system might be long and ineffectual. Meanwhile, France remains, contradictory as this may seem, a low-tax jurisdiction for foreign multinationals.

The crackdown has taken on hues of a populist and administrative revolt against these corporate welfare programs that multinational companies—but not local ones—have access to. Tempers are flaring as belts are being tightened around retirees, workers, and the unemployed until they’re gasping for air. Flamboyant threats of nationalizations and demands for protectionism were seen as a cure. But suddenly, they have run into a buzz saw. Read.... The Socialist Heart Of France Leaves Its First Victim.

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Reader Comments (1)

Completely counterproductive effort in most cases.
Nearly all MNCs have tax optimalisationstructures in place since a few decades. It started rather unsophisticated basically with mispricing. It went to capital and IPR allocation in low tax jurisdictions later on.
With the present technology it is so easy to go one step further especially when forced by nasty tax officials.

Take Amazon in France:
They need basically 3 things. A shop (internetplatform); distributionnetwork; complaints handling when things go wrong (callcentre mainly).
The first in basically a website, the second can easily by outsourced (no more people on nice MNC labour conditions), the third for France you could do in Vietnam or Africa.
Sales for Google could be done via an agentstructure.
Most things will be wise anyway only from a businessperspective. You basically get rid of high paid against MNCs labourconditions workforce and hire 3rd world ones or indirectly outsourced ones. Add tax advanbtages and you are on.

Rest of the functions can be done easily at another place. Or are of minor importance. Marketingwork can be outsourced as well and the startegic choices can basically be made by one man who could sit on a mountain in Bhutan if he wished.

They will get some companies. The ones that can difficult move activities. However with likely reaction no more new investments. Does anybody think that Mittal in say 5 or 10 year will start new things up in France for Europe?
A lot will be moving to places like Ireland (they speak a normal language as well and not only European Hottentot).
For companies that have the opportunity reorganising the corporate structure to make it match the tax structure would become a top priority.

We will see it most likley however. But that is mainly caused by stupidity or wanting to please the homecrowd (that suffers all sorts of cuts) or a combination.
Same btw imho if the US would start massively taxing HQs (which with Obama and his spendinghabits is a real possibility). Companies will relocate either themselves directly or indirectly via takeovers (leaving in the US a skeleton of the original ones in a couple of years).

For Europe we will likely see imho a split. Countries with a French model (high tax) and companies basically permanently outsourcing and moving to other places. And an Irish model who will benefit from that.
UK, France are extremely easy because the language is spoken in a lot of low tax places so is Spain. Germany is more difficult although a lot of former East block will likley give possibilities. Dutch, Skandinavians are now more or less used to order stuff in English (only need something for complaints, very difficult to do in another language).
December 18, 2012 | Unregistered CommenterRik

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