Header graphic for print

Global Policy Watch

Key Public Policy Developments Around the World From Covington & Burling LLP

Congressional Investigations in the New Congress

Posted in Congressional Action

Covington yesterday issued a client advisory providing an overview of expected congressional investigation activity in the new Congress.  The advisory describes the new leadership and priorities for the major congressional oversight and investigation committees. While Republicans, who now control both houses, are expected to focus their investigations on the Obama Administration, those investigations inevitably draw in corporations and individuals who are caught in the cross-fire. For most corporations, congressional investigations are a rare event. But when they do happen, they threaten to trigger major legal, public relations, and business consequences. Congressional investigations are part litigation, part political theater. There are very few rules that govern them, and much of the due process present in courtroom litigation is absent in a congressional investigation.  Today’s advisory offers a glimpse of what the congressional investigation committees may have in store for 2015.

U.S. Commerce Department Prioritizes Mozambique in 2015

Posted in Africa, Trade Agreements

One of the most important opportunities to emerge from the U.S.-Africa Leaders Summit was the Obama Administration’s commitment to increasing the counseling and technical assistance provided to U.S. private sector companies who are looking to do business in Africa.  Several recent Commerce Department announcements related to Mozambique indicate that that country is a priority market for the Administration.

Starting in January 2015, newly appointed Senior Commercial Officer for Mozambique Jane Kitson will take up her post in Maputo.  A veteran of the U.S. Commercial Service and former Senior Commercial Officer for Morocco, Algeria and Tunisia, Ms. Kitson will be “responsible for opening the U.S. Commercial Service office in Maputo and for promoting U.S. exports to this new emerging market.”  This development is welcome progress on the Commerce Department’s announcement earlier this year that its International Trade Administration “will more than double its presence in Africa, opening their first-ever offices in Angola, Tanzania, Ethiopia, and Mozambique.” 

Mozambique also features in two of the Trade Missions that the Commerce Department is organizing for 2015.  In the first half of 2015, there will be a Trade Mission to Mozambique, Kenya, and South Africa.  Focusing on the energy equipment and services, transportation infrastructure and equipment, agricultural equipment, and medical technologies sectors, the Mission “will include one-on-one business appointments with pre-screened potential buyers, agents, distributors and joint venture partners; meetings with national and regional government officials, chambers of commerce, and business groups; and networking receptions.”  In the second half of 2015, the Trade Winds-Africa Business Development Conference and Trade Mission will include a stop in Mozambique as well as Angola, Ethiopia, Ghana, Kenya, Nigeria, and South Africa.  In addition to the Trade Missions to Mozambique and these other countries, 2015 Trade Winds-Africa “will feature an Africa focused business forum, consisting of regional and industry specific conference sessions as well as pre-arranged consultations with U.S. Senior Government Diplomats representing commercial markets from 19 different countries throughout the region.”

A country whose transition from conflict to frontier economy has been described by the World Bank as “nothing short of impressive,” Mozambique holds considerable promise for investors from a variety of industries.  U.S. companies interested in this market would do well to avail themselves of the assistance being provided by the Commerce Department and other agencies.

Are Chinese Companies Retooling in Africa?

Posted in Africa, China

Chinese companies are adopting new approaches to investing in Africa. These changes, if they become widespread, will boost the positive impact of China on Africa’s development agenda and improve how Chinese companies are perceived on the continent.

Conversations in China last month suggest a growing perception that the country’s model of extending low-interest commercial loans to African governments for large infrastructure projects—loans that are used to finance the purchase of Chinese labor, goods and services and are in turn repaid through the transfer of oil, minerals or other natural resources—is not sustainable.

China Identifies New Opportunities and Approaches in Africa

With government support, state-owned enterprises (SOEs) have begun to look at alternative, market-based financing solutions for their projects, possibly including Western private equity and other sources of funding. An example of Beijing’s new thinking was the announcement earlier this year by the People’s Bank of China and the African Development Bank (AfDB) of the establishment of a $2 billion co-financing fund. The partnership with the African Development Bank has been described, accurately, “as an attempt to rebrand Chinese economic activities in Africa and improve their effectiveness.”

This shift in approach creates new opportunities for trilateral cooperation with other AfDB donors, including the United States. China can also leverage its new participation in the international development institution to resolve commercial disputes.

Chinese officials are also recognizing the need to participate more actively in the communities where they invest in Africa. In fact, while corporate social responsibility is still a new concept for many Chinese companies, it received attention in the 2013 report on China-Africa trade published by the Chinese Academy of International Trade and Economic Cooperation (CAITEC), a think tank of the Ministry of Commerce.[1] 

In addition, the CAITEC report states that 82 percent, or 17,600 employees, of the Chinese National Petroleum Corporation staff in Africa are local hires. The Chinese National Minerals Corporation has hired 12,500 workers in Zambia. Despite these positive developments, it seems that company investments in local training, health and education programs, local sourcing initiatives and compliance with international environmental, transparency or labor standards might still be missing, as they are not mentioned in the report.

The decision by the Huajian shoe company to establish a production facility in Ethiopia is also a reflection of China’s new thinking about Africa, and using certain markets as manufacturing platforms to export to global markets. It is projected that rising labor costs could cause China to export 80 million manufacturing jobs, and both Chinese manufacturers and African governments understand the opportunity that exists to relocate many of those jobs to the African continent.[2] The Huajian factory already employs 3,500 Ethiopian workers and last year produced 2 million pairs of shoes, which are eligible for export to the U.S. under the African Growth and Opportunity Act.

China Still Faces Criticism on the Continent

Chinese companies have gained a greater appreciation for the risks and complexities of investing in the African market. Several mega-deals gone wrong has generated an awareness that a singular reliance on government-to-government relations is not sufficient for commercial success in Africa. The recent decision by the China Machine Engineering Corporation to pull out of the Belinga iron ore mine in Gabon, valued at $3.5 billion, is a case in point.

Indeed, the kidnapping of Chinese workers in northern Nigeria, Sudan, Ethiopia and Somalia reflect the reality that Chinese nationals run risks similar to other expatriate employees. The experience of China in Libya in the aftermath of the uprising against Moammar Gadhafi was especially sobering as more than 35,000 Chinese workers from 75 companies had to be evacuated, and Chinese companies lost nearly $20 billion in investments.

Despite the awareness in some quarters of the need for a new business model, problems still persist for Chinese companies in Africa. In May, Chinese Premier Li Keqiang signed a multibillion dollar deal in Nairobi with the leaders of Kenya, Uganda, South Sudan and Rwanda to build a standard gauge railway that is projected to cut freight costs by more than 60 percent and boost regional trade.

Almost immediately however, local communities in Kenya protested reports that China would import 5,000 laborers to work on the project. The Kenya portion of the rail was awarded to the China Road and Bridge Corporation (CRBC) without a competitive bidding process, reportedly a condition of the financing. The CRBC is a subsidiary of the China Communications Construction Company, which has been debarred by the World Bank from bidding on any tenders from 2009 until 2017 due to allegations of fraud and corruption. In Uganda, its parliament has initiated a probe into the procurement process of its portion of the railroad after the government overturned a construction award to the China Civil Engineering Construction Company in favor of China Harbour Engineering Company.  

To achieve long-term commercial success in Africa, Chinese companies need to invest in Africans in a more substantial way (while investing on the continent), comply with rule of law and maintain transparent business procedures. These realities have been recognized by some in Beijing and, as a result, have the potential for enhancing the positive impact of China’s engagement in Africa.


[1] “China-Africa Trade and Economic Relationship, Annual Report, 2013, Chinese Academy of International Trade and Economic Cooperation, p. 7.

[2] Turning Ethiopia Into China’s China By Kevin Hamlin, Ilya Gridneff, and William Davison July 24, 2014; http://www.businessweek.com/articles/2014-07-24/ethiopia-vies-for-chinas-vanishing-factory-jobs  

Indonesia — Can it Unleash Needed Investment?

Posted in Asia, International Strategy

Indonesia’s new President Joko Widodo (“Jokowi”) is sending strong signals about how he wants to position the country as a self-sufficient, regional power.  He laid out reform priorities in November to CEOs from APEC countries: 1) simpler, faster investment licensing; 2) higher but cleaner and more efficient tax collection; 3) cuts in the country’s massive fuel subsidies with savings invested in physical and social infrastructure to spur growth; and, 4) public investment in human resources — health, education, poverty reduction.  The President did indeed cut fuel subsidies, which unleashed temporary inflation and protests, but he has responded with promises of new infrastructure and social investments to fight poverty and improve competitiveness.  

If Indonesia’s new government overcomes deeply entrenched interests and forges new economic policies to unlock investment in innovation, human capital and natural resources, it can reach the 7 percent annual growth needed to cut poverty and build support for reform.  Global headwinds pose serious near-term challenges, which President Jokowi seems determined to meet by strengthening Indonesia’s economic and regional strength and self-sufficiency.  In the short-run, however, Indonesia must weather the current worrisome emerging market currency crisis.                 

President Jokowi has already taken some bold action: to stop an estimated $20 billion per year in illegal fishing losses by seizing foreign boats, to warn China away from Indonesian waters and resources, and to commit to spending billions of dollars to expand military and maritime capacity and to ramp up security cooperation with the U.S.  At the same time, Indonesia has committed to join the Beijing-sponsored Asian Infrastructure Investment Bank.  The President has repeatedly promised to streamline investment procedures and business requirements and to provide tax and other incentives, and infrastructure, to be competitive for much-needed foreign investment. 

This week, however, Indonesia’s courts upheld the government’s ban on exports of unprocessed ore despite foreign investors’ dismay at being forced to investment in Indonesian processing.  Producers elsewhere are ramping up, so Indonesia must forge productive partnerships with foreign investors to develop its substantial mineral resources.  Indonesia’s Minister in charge of State-firms this week also announced that notoriously-corrupt State-owned oil company Pertamina would have funds and new leadership to enable major reform and investment.  Pertamina is key to public revenues, subsidies and domestic energy supplies; it will be a bellweather for reform.  The state-owned electricity monopoly is also slated for deep reform.

Meanwhile, local unions have called for cuts in coal production (Indonesia is the world’s largest coal exporter) to boost world prices, as the government tendered for 25 new geothermal plants to boost energy self-sufficiency.  Indonesia also just announced a $95 million government initiative to dramatically improve outmoded cocoa production practices and to rationalize cocoa processing.  Indonesia is the world’s third largest cocoa producer, but uses less than half its cocoa processing capacity; it hopes to become more productive with the involvement of major new players like Cargill and Barry Callebaut. Productivity must be a priority economy-wide.   

Spluttering Chinese and global growth have sent prices for oil, coal, copper, nickel and other Indonesian exports down, but also cut its energy import and subsidy costs.  Moody’s and JP Morgan estimate that Indonesia’s current account deficit (a worry to investors) could shrink by as much as 40 % from 3 percent of GDP next year if oil averages $60 per barrel globally.  Yet, with US growth and higher interest rates also expected, foreign bondholders are abandoning the Russian ruble and emerging market currencies generally.  Indonesia’s central bank intervened repeatedly after the rupiah fell to a 16-year low against the dollar this week. 

Indonesian growth, while dampened, is projected at a still-strong 5.2 percent for 2015.  This appears to be the best opportunity in many years for the world’s fourth most populous country to take concrete steps to bolster investment in housing and construction, health and education, railways and roads, agribusiness and industry, security, and energy and power as well as to enable the “start-up” aspirations of its optimistic youth.  Indonesia’s quest for self-sufficiency and poverty reduction will require U.S. and other foreign investment, and competition and innovation, not protection, finally to reach economic reach lift-off. 

In addition to global challenges, President Widodo faces domestic opposition, including from the Subianto and Bakrie-led Golkar party camps.  If he can make progress, and lift Indonesia from its place as 114th out of 189 places among the World Bank’s Doing Business Indicators, Indonesia will be one of the best emerging market opportunities for investors.

Analysis of the European Commission’s 2015 Work Programme

Posted in EU Law and Regulatory, Uncategorized

The European Commission’s Work Programme for 2015 falls in line with Juncker’s political guidelines for his Presidency. The overall focus lies on the creation of jobs and economic growth, and the vision is to achieve this through a greener, more digital and more unified European economy. At the same time the Commission has restated its ambition to make regulation leaner and relieve markets from unnecessary administrative burden without compromising the high standards in social, environmental and consumer protection.

The Work Programme stands out from prior ones by its emphasis on discarding a total of 80 proposals that have either not progressed or that are not aligned with the objectives of the new Commission. Amongst the most prominent proposals to be withdrawn are the directive for the taxation of energy products and electricity, and the directive on the reduction of national emissions of certain atmospheric pollutants.

Combined with Juncker’s €315 billion investment plan, however, the Commission’s Work Programme is potentially very good news for companies seeking to invest in cutting-edge infrastructure and technologies, but also for those that simply seek to benefit from the single market. There is a renewed focus on a strong European industrial base and the Commission’s introductory note promises measures to improve its competitiveness.

The Commission also intends to work on further pooling sovereignty in economic governance, for example through a Common Consolidated Corporate Tax Base and a Financial Transaction Tax. The focus here is on providing more transparency and a level playing field, mainly in response to the Luxleaks affair. This might imply a revision of state aid rules as well as of the implementation of Juncker’s investment program.

From a broader perspective, the Commission’s Work Programme emphasizes the importance of trade, with the Transatlantic Trade and Investment Partnership Agreement (TTIP) at the very top of the priority list of bilateral agreements. The Work Programme also mentions the intention to promote stability at Europe’s borders, although it is likely that internal security matters, e.g. on cross-border crime, cybercrime, terrorism and radicalization, will trump any focus on external policies.

The links below open analysis pieces on topics and initiatives linked to particular sectors, focused on by the Commission:

  • Energy and transport, read the overview here
  • Life sciences, read the overview here
  • ICT and telecoms, read the overview here

The European Commission’s full Work Programme for 2015 can be found here.

 

Colombia: Much Needed Tax Reform

Posted in South and Central America

The next few years will be difficult for Latin American countries.  Low petroleum and commodity prices are adversely affecting the economies of the region.  At the same time, there is increased pressure on the governments for economic and social reforms.

Colombia, which has had a strong economy, recently passing Argentina as the third largest in Latin America, is being buffeted by these cross winds.  Colombia already has a budget deficit of COL$12.5 billion for next year.  The situation is likely to get worse because governmental expenses will increase sharply in the next five years.

The existing tax structure in Colombia makes it impossible for the government to deal with these realities.  Tax revenue is approximately $14.3 % of GDP.  The low percentage is due in part to corruption and tax evasion.  On the other hand, the state income taxes are high particularly for foreign companies doing business in Colombia.

At this point it is critical for Colombia to implement a structural tax reform that will be effective in raising revenue to cover obligations, including the agricultural sector, pension funds, education improvements, attention to early childhood, infrastructure, justice, public safety, and other commitments that will likely be part of a potential peace accord. 

To address the budget deficit, the government proposed tax reform, which generated lots of vocal opposition.  The private sector expressed serious concerns with the reform package.  Particularly upsetting are the proposed increased property taxes.  The private sector argues that taxation in Colombia is very high (between 52 and 71%) and, according to Fedesarrollo, with the proposed reform rates would increase by an average of three points. 

There was a great deal of creative thinking about ways that the government could obtain the revenue it needs without hurting the private sector.  In an attempt to reach a resolution, the government and private sector held several meetings, according to Colombian publication Portafolio.  Two of the main issues discussed during these meetings had to do with a reduction in wealth taxes and the commitment to structural tax reform for next year.  Also being discussed is a sharp increase in the CREE tax, called the income tax for equity.  Consideration is being given to raising the VAT (currently 16%) by 2 points. 

Last week, the Senate approved the reform package that began with 23 articles and ended up with 72. The Senate will also create a committee that will draft a comprehensive reform to last for the next 20 years.  

In the final debate, the essence of the tax reform package was preserved.  For example, the tax on financial transactions will be in place for the next four years, after which it will be gradually eliminated.  Measures to control tax evasion remained in the bill.  Also, the CREE tax and the wealth tax will remain in place with the latter gradually decreasing until it finally disappears in 2018.

It is important to highlight one of the adopted measures that promotes investment in infrastructure through Public Private Partnerships.  There will be a rate of tax withholding at source of 5 percent instead of 14 percent, “for payments or deposits of accounts related to revenues or interest payments made to non-residents or persons not domiciled in the country, such payments or deposits should originate from loans or credit securities, for a term not equal or greater than eight (8) years, destined to funding projects of infrastructure.”  The reform package was to be voted by the lower chamber of congress on Friday, December 12.  However, due to time constraints it will only be debated today.

How does this affect foreign companies in Colombia?

A company will have to pay income tax if it is headquartered or has an effective administrative base in Colombia, where key and necessary commercial decisions are made to carry out the activities of the company as a whole.  This is the location where senior executives and managers exercise the bulk of their responsibility and work.  Under these circumstances, income generated in Colombia or abroad will be considered taxable income.  Income tax for those companies established permanently in Colombia will be paid at the rate of 25 % from income and capital gains generated from that permanent establishment.  It is important for companies to keep a detailed accounting system to explain clearly whether operations generating revenue are from the establishment in Colombia.  Additionally, permanent establishments of foreign companies are to pay CREE tax. 

For those companies doing business in Colombia, it is not enough to follow what is happening on tax reform.  It is important for them to participate in the ongoing discussions. 

Tax Reform Is Already on the Table

Posted in Congressional Action, Tax Reform

The battle for future tax reform ignited even before the close of the 113th Congress.

In the waning hours of the congressional session on December 11, outgoing House Ways & Means Committee Chairman Dave Camp (R-Mich.) unveiled H.R. 1, the sweeping corporate tax reform legislation that he and his staff had spent several years laboring over. The retiring Camp knew there was no prospect that his bill would be considered but he did not want to leave the nation’s capital without a bill that would spur further action on this critical issue in the 114th Congress. The role of leading the Ways & Means Committee, which has legislative jurisdiction over all tax issues, will fall to Rep. Paul Ryan (R-Wis.) when the House reconvenes. Ryan, who was Gov. Mitt Romney’s running mate during the 2012 presidential campaign, has made no secret of the fact that he supports tax reform, but he has yet to lay out a vision for how to make it happen.

That same day in the Senate, two key tax-related events occurred: Sen. Orrin Hatch (R-Utah), the incoming chairman of the Finance Committee, released a report prepared by the panel’s Republican staff entitled “Comprehensive Tax Reform for 2015 and Beyond.” The report provides an historical background to the development of the modern U.S. federal tax system and examines various options for reform. Unlike the House bill, which was directed at corporate tax reform, the Hatch report focuses on both individual and corporate tax systems. The report does not recommend particular reforms, except for a few, such as replacing the current worldwide corporate tax system with a territorial system. Instead of proposing reforms, the report is clearly designed to lay out options. Following the introduction of the bills by Camp and outgoing Senate Finance Committee Chairman Ron Wyden (D-Ore.) and the tax reform principles outlined by former Senate Finance Committee Chairman Max Baucus (D-Mont.), the Hatch report is fast becoming an important touchstone for the possible future course of reform.

While Sen. Hatch was releasing his report, Sen. Ben Cardin (D-Md.), a member of the Finance Committee, introduced the Progressive Consumption Tax Act. His bill would establish a value-added tax and use the revenue to offset federal income tax liabilities in a progressive manner. Sen. Cardin pointed out that every other country in the OECD Organization for Economic Co-operation and Development relies in part on a value-added tax. Under his legislation, the United States would be brought in line with other advanced economies. But there is already certain opposition to Cardin’s bill. The Camp bill does not include a value-added tax and the Hatch report actively attacks the concept of a value-added tax, labeling it difficult, cumbersome, and regressive. However, Hatch acknowledged it would be part of the debate.

This spate of activity in the closing days of Congress, as the Republicans prepare to take over the Senate, shows that tax reform remains a very active part of the debate in Washington. Given the politics at play with a Republican controlled Congress and a Democratic administration, it is easy to expect that tax reform will go nowhere.

But the flurry of bills indicates that there will be a strong push by both parties to overhaul the nation’s antiquated tax structure. Even if no law ultimately passes, companies and individuals with a stake in the debate will need to engage throughout the process. Decisions must get made and an eventual bill will take shape. Once certain decisions are made, getting them changed is a challenge because you need offsetting revenue. As they say, he who snoozes loses. Nowhere is that truism more accurate than during the development of tax legislation.

House Committee Turns Up Heat on FAA in UAS Hearing

Posted in Congressional Action, Drones

Members of the House Committee on Transportation and Infrastructure pushed the FAA on Wednesday, December 10, to accelerate integration of unmanned aircraft systems (UAS) into U.S. airspace, expressing concern that regulators in other countries are ahead of the FAA in permitting safe UAS use, setting back economic development in the United States.

But these same members also made it clear that safety is critical.  As the Chairman of the Full Transportation and Infrastructure Committee Bill Shuster (R-PA) said, “Safety is paramount.  It must be first and foremost.”  These views were echoed by the Ranking Member of the Aviation Subcommittee Rick Larsen (D-WA), who urged FAA to “move forward to ensure progress and competitiveness” but not “at the expense of safety.”

This tension—between accelerating the development of an exciting new technology while at the same time ensuring its safe operation—was a common theme throughout the hearing.  And with the FAA reauthorization bill looming on the horizon, members were clearly interested on what action they could take legislatively to move the ball forward.

Meanwhile, even as House members questioned the FAA on its progress in UAS integration, the FAA announced Wednesday that it had granted a second round of exemptions to allow four companies to use UAS commercially for aerial surveying, monitoring construction sites, and inspecting oil rigs.  Earlier this year, the agency granted exemptions to seven film and production companies.  But the FAA still has not acted on at least 150 other requests for drone exemptions from commercial operators.

Rep. Frank LoBiondo, chairman of the House Subcommittee on Aviation, said at Wednesday’s hearing that major U.S. companies were taking their UAS research activities to foreign countries such as Canada and Australia “because FAA regulations are too burdensome.”  He also noted that road builders in Germany and farmers in France are using UAS now and reaping economic benefits from it.  “I can’t help but wonder that if German, French, and Canadians can do some of these things today, then why can’t we also we doing them,” said Rep. LoBiondo (R-N.J.).

He said that UAS represent “a tremendous economic opportunity,” with potential applications in real estate, agriculture, medical transport, and infrastructure maintenance, among other possible uses.  The Association of Unmanned Vehicle Systems International estimates that UAS will create more than 70,000 jobs in the United States and generate an economic impact of more than $13.6 billion in the first three years of integration.  The FAA estimates that $89 billion will be invested in UAS worldwide over the next decade.

But the FAA has been slow to integrate UAS into the U.S. airspace.  The FAA Modernization and Reform Act of 2012 directed the FAA to facilitate safe integration of UAS into the national airspace by September 2015.  That goal will not be met, according to Matthew E. Hampton, Assistant Inspector General for Aviation at the U.S. Department of Transportation, who testified at Wednesday’s hearing.  Hampton testified that “considerable challenges remain” before UAS can be safely integrated into U.S. airspace, including reaching consensus on UAS regulatory standards.

The FAA is expected to release as soon as this week its much-delayed notice of proposed rulemaking on small UAS (those less than 55 pounds).  That is just the first step in reaching a set of final regulations.  At the current pace, a final rule on small commercial UAS use may not come until late 2016 or early 2017, according to testimony Wednesday from Gerald Dillingham of the GAO.

FAA Associate Administrator for Aviation Safety Peggy Gilligan told House members that the FAA has made “steady progress” toward UAS integration. The FAA is committed to safely integrating UAS into the NAS.  She emphasized that the United States has the safest aviation system in the world, and the FAA’s goal is to integrate this new and important technology while still maintaining safety as its highest priority.  “We are committed to ensuring that America continues to lead the world in the development and implementation of aviation technology,” she said.

But FAA’s “steady progress” may not be fast enough for some lawmakers.  Rep. LoBiondo told Politico that the next FAA authorization bill would look for “specific advances and improvements” in UAS integration.

The Root of Middle East Turmoil

Posted in Asia, International Strategy

Iranian jets struck ISIL targets in Iraq, according to a senior U.S. defense official.  What makes this report so bizarre is that it means the Iranians are working toward the same objective, destruction of ISIL, as their avowed enemy, the Great Satan, according to Iran’s Supreme Leader.  Here is one more indication that companies doing business in the Middle East must be mindful that events and political alignments are shifting as quickly as the sand in a windstorm.

The Iranian move comes at the same time that Saudi Arabia led an OPEC decision not to cut oil production.  It is impossible to know precisely what drove this Saudi decision.  However, undeniably one consequence of this action by the Sunni Saudi government is to inflict economic pain on Shiite Iran.  And it comes at a time that the Iranian economy is reeling from international sanctions imposed in connection with that nation’s nuclear program.

These two events have a common cause:  The intense animosity between Sunnis and Shiites.  Their battle began in the seventh century in a dispute over Mohamad’s successor.  The issue of whether he should be selected by a committee of wise men or be determined by Mohammed’s bloodline evoked a fierce battle.  Peace was never made between the warring groups.  Their dispute has flared over the centuries.  Now it threatens to engulf the entire region in warfare.

One current battle line is in Iraq where Iran is seeking to bolster the Shiite dominated government in Baghdad.  Others have been drawn in Syria and Lebanon.  In both of these states, the Shiite Sunni conflict is the driver of events.  Doing business in the Middle East has always been a complex matter.  Now, trying to discern how the Sunni Shiite conflict will affect host countries is critical. 

Jean Claude Juncker and the “Luxleaks”

Posted in EU Law and Regulatory

Jean Claude Juncker, the new President of the European Commission whose term started on 1 November, wanted his institution to become more “political”. This wish was fulfilled earlier than he expected.  The same week, the world press published a detailed inquiry by the International Consortium of Investigative Journalists, on extraordinary tax breaks offered by the Finance Ministry of his country, Luxembourg, to multinational companies with headquarters there.

The scandal was called “Luxleaks” because the information came from files “leaked” from a Luxembourg office of PricewaterhouseCoopers (PWC); they related to ‘rulings’ negotiated between these companies and the Luxembourg tax authorities between 2002 and 2010. The way they were presented to the general public generated an immediate uproar: reckless multinationals manage to avoid paying taxes at the time when the ordinary citizen is the victim of austerity policies “imposed” by the European Commission – whose new President was the initiator of these tax breaks in his country of origin!

Luxembourg is indeed a well-known fiscal paradise and by far the richest country in the European Union. Jean Claude Juncker, who was Prime Minister for 18 years, is credited for this success. His zeal in defending his country’s tax regime was well known by his colleagues in the European Council. When the G 20 advocated for tax transparency during the financial crisis, with support from Austria, he stubbornly resisted for years the application at the EU level of the principle of automatic exchange of information between tax authorities.

Curiously, this weakness did not prevent the major political groups in the European Parliament from endorsing him as their candidate for President of the Commission. But ghosts of the past always come back to haunt politicians. Juncker, ‘poacher turned gamekeeper’, should have expected this. Instead, he apparently suffered so much emotionally from the attack that for a number of days he disappeared from the public eye. But when he came back, on 13 November, he managed to regain the initiative by making proposals to address the problem, which were immediately supported by the major political groups in the European Parliament, thus demonstrating that he is a good politician.

‘Rulings’ are a well-known and perfectly legal practice used by tax authorities in many countries to inform (wealthy) taxpayers of the amount of  taxes they will have to pay in order to help them anticipate it in their accounting. The problem is that they also have become a way for skilled intermediaries – like PWC – to negotiate the most attractive tax arrangements on behalf of their clients.

The information leaked from PWC exposes, among other evidence, how the ‘rulings’ were used to confirm transfer pricing arrangements between a firm and its subsidiaries, resulting in a very low rate of taxation for the Luxembourg subsidiary where the tax was levied.

But this was not really news. The EU Commission had already started to investigate some of these schemes in 2013, used to the benefit of four companies in three different Member States: Apple in Ireland, Fiat and Amazon in Luxembourg and Starbucks in the Netherlands. 

What will be the consequences of the “Luxleaks”?

From a political point of view, 76 MEP from the extreme right (including UKIP, Cinque Stelle and Marine Le Pen’s Front National) presented a ‘motion of censure’ in the European Parliament against the European Commission, which will be voted on Thursday 27 November. It stands no chance of reaching the two thirds majority required, but it will allow the populist Eurosceptics to mobilize attention, a day after Juncker will have presented his famous 300 billion euro investment plan aimed at reviving the EU economy. The extreme left did not want to join the motion presented by the extreme right, but will undoubtedly also make its voice heard.

Juncker himself announced, when he came back from his short ‘escape’, that the Commission will soon propose a directive on the automatic exchange of information regarding tax rulings negotiated between national administrations and multinationals. It will be presented in January by Commissioner Moscovici, in charge of tax issues.

Juncker also promised that the Commission would rework its proposal for a common consolidated corporate tax base (CCCTB). The proposal, presented in 2011, has since been  ‘bogged down’ in the Council (according to the Commission’s spokesman) but, even revised, has little chance of being approved due to the unanimity rule still applicable to tax matters in the EU.  

An effective way of dealing with the problem is to address it through the EU rules on state aid, as the Commission has already started to do.

Indeed, EU law provides that any selective advantage granted by an EU Member State to an individual company is prohibited – and needs to be reimbursed – if it distorts competition in the European internal market.

Two weeks before the leaks were published, Covington circulated an alert on this issue. 

The new Commissioner in charge of competition, Danish Margrethe Vestager, told the press on 20 November that she “admired the journalistic work” on this issue and that the Commission considered the Luxleaks as “market information” and would “evaluate whether or not it will lead us to opening new cases”.

As mentioned above, several cases – Apple in Ireland, Starbucks in the Netherlands, Fiat and Amazon in Luxembourg – are already under investigation by the European Commission. The four investigations relate to tax rulings validating transfer pricing agreements (‘advance pricing agreements’ or APAs). These are agreements on the prices charged for commercial transactions between parts of the same corporate group. The investigation centers on the calculation methods for these APAs and their compatibility with internationally agreed standards. The OECD Transfer Pricing Guidelines will be used as the reference point to assess potential state aid.

Vestager insisted that bringing these four cases to a conclusion will remain a priority and that the decision could come by spring of next year. But the Commission has also asked for detailed information on other cases from the authorities of several EU countries: “we don’t want every single tax ruling but we do want to look at a list if there are certain patterns in the use of tax rulings”, said Vestager.

This signals a quick start for Vestager, who was chosen for the competition post because of her record as Minister for the Economy in Denmark.