Britain and Germany may have missed out on a combined $1 billion in sales tax since online marketplace eBay picked a tiny Luxembourg office as its base for EU sales, a shift that lawmakers say should now be investigated.
EBay’s nomination of Luxembourg unit eBay Europe Sarl – with a staff of nine – as its provider of services to EU clients allows it to charge customers in Europe a low rate of sales tax, often known as Value Added Tax, helping it to compete against rivals.
However, the unit doesn’t actually receive the money from sales. Instead, eBay said it continues to channel revenues through a Berne-based unit, allowing the company also to benefit from what Swiss tax lawyers say is the most competitive corporate income tax regime in Europe.
EU rules allow companies to establish subsidiaries in Luxembourg and levy VAT at Luxembourg’s low VAT rate on sales to customers across the bloc.
However, the rules also allow individual EU taxmen to challenge any claim to Luxembourg residence, and the right to charge Luxembourg VAT, in their domestic courts, if the taxman feels a Luxembourg-based subsidiary does not have sufficient staff or assets to support its claim to be the true supplier of goods or services.
Tax experts say eBay’s arrangement, which appears to give eBay the best of both income and sales tax worlds, could be open to challenge, and lawmakers in the UK and Germany want their taxmen to investigate.
“I hope that HMRC (UK tax authority Her Majesty’s Revenue and Customs) takes note … and takes prompt action,” said Margaret Hodge, member of parliament and chairman of the Public Accounts Committee (PAC), which monitors government finances.
“I will be seeking assurance that they are, next time we take evidence from HMRC,” she added. Officials from HMRC are due to testify to the PAC in early December as part of the committee’s investigation into tax matters.
Sven Giegold, member of the European Parliament for Germany’s Green Party, said he wanted the German tax authorities to “have a very critical look at this”.
It is common for companies to seek to reduce their tax bills, and a number of multinationals have established bases in Luxembourg so they can charge customers lower levels of VAT.
EBay said HMRC was aware of all its tax arrangements and that it was confident it met all its tax liabilities in the UK and elsewhere.