“There continues to be a debate about whether corporate income tax should be apportioned differently, including whether tax payments should shift from countries where value is created to those where goods and services are consumed,” Adam Cohen, head of economic policy for EMEA at Google, said during a public hearing held by the EU Parliament special committee on financial crimes, tax evasion and tax avoidance.

“This is a matter for governments to decide,” he continued. “Hopefully, any changes will be based on broad international consensus with clarity that ensures companies and citizens alike have confidence in the global tax system.”

Cohen was joined by Alan Lee, head of global tax policy at Facebook. The pair were  relatively untroubled during a largely toothless questioning session by members of the European Parliament (MEPs) on November 27, at which Sophie Maddaloni, tax director at Kering Group, which deals in luxury goods, was also present.

Although the session was held to discuss alleged aggressive tax planning schemes within the EU, the conversation naturally turned to the need to tax the digital economy and how to do this.

In response to the companies’ opening statements, Czech MEP Luděk Niedermayer said: “I fully understand you are not enthusiastic about unilateral changes, but we must find a reasonable trade-off. That’s why I appreciate especially statements by Facebook about local distribution that I guess is the minimum required.”

“Together we should work out a good solution,” he added.

Facebook’s Lee underlined the importance of a coherent system to the committee, first explaining the level of investment Facebook has made in the EU in recent years and suggesting this figure will drop should the bloc’s plans to tax the digital economy irk the social network.

“Our ability to continue to invest in Europe, and innovate, relies on an international tax system that is simple to administer and provides long-term stability for all businesses, particularly as all businesses are moving to digitalise,” he said.

Many companies speaking to International Tax Review have made similar assertions, warning that a poor decision at the EU or OECD level poses a significant risk to government revenues because companies may simply choose not to invest in jurisdictions with complex or uncertain tax rules.

However, like Cohen, Lee said he is “encouraged” by the collaborative work being undertaken at the OECD and looks forward to engaging in that process.

The session did turn to tax planning, however, with Google and Facebook subjected to the brunt of the early questions. Nevertheless, they reiterated their stances that any changes to profit allocation rules, or moves toward a system of formulary apportionment, should be made only with international consensus.

“We are happy to have an ongoing conversation about what the right profit allocation rules are, but we do have most of our workforce in California,” said Lee. “Our product is designed and largely engineered in California.”

“Fundamentally we have a system that allocates the majority of taxing rights to where products are created, rather than where they’re consumed,” said Cohen. “It’s perfectly legitimate to shift that system, but it has to be done in concert with global governments... [or] there will be conflict in the international tax system.”

Danish MEP Jeppe Kofod responded that it’s clear that value is created by users and that they are not just consumers, but Cohen disputed this, giving the example of Google’s search function.

The value of the service, he said, is created by the algorithm which searches the internet. He likened user queries in the search engine to a person walking into a shop and asking to buy a pair of shoes.

Questions asked by several MEPs highlighted their lack of knowledge in the area of tax and transfer pricing. Cohen found himself explaining the basics of transfer pricing and the arm’s-length principle to MEP Dariusz Rosati, leaving Maddaloni to be a forgotten woman in the session until the final few questions.

But some MEPs did provoke some revealing answers. Paul Tang, who recently spoke at ITR’s Taxation of the Digital Economy summit, noted that most of the two tech companies’ EU revenue is booked in Ireland. “You have all of your revenue booked in Ireland, but none in Germany or France,” he said. “Do you think that is fair?”

He also noted that the countries where Facebook has subsidiaries – Ireland, Sweden and Denmark – are those which are against the digital service tax, and asked if this was a coincidence. He quoted Facbeook’s US Securities and Exchange Commission (SEC) filing and asked if Facebook had tax rulings in place in these countries.

“Tax rulings are a natural part of tax administration,” said Lee, confirming that the company does use them in these jurisdictions. “We do not have special tax rulings.”

Irish MEP Matt Carthy wanted to know if Google was still tax-resident in Bermuda – a hangover from the ‘double Irish’ structure. He also asked about intellectual property (IP) in Bermuda and whether any had been relocated to Ireland, and in which jurisdiction Google wants to hold its IP in in the future.

Cohen explained that some changes had been made as a result of the US Tax Cuts and Jobs Act. “What [the old] system allowed was deferred taxation on international profits. As I explained to this committee in 2016 when I was here: Our tax structure fundamentally reflected those unique features of the US tax system.”

“Because of the Tax Cuts and Jobs Act, those historical profits have all been taxed. It increased our US tax liability by $10 billion in 2017. It was a tax on both overseas cash and overseas assets.

“Our IP, fundamentally, is owned by our American parent company,” he continued. “There is a cost-sharing arrangement with Google Ireland Holdings for the development of that intellectual property on an international basis. To be very clear, this was designed to reflect unique features of the US tax system, and that system has fundamentally changed.”

Carthy pressed on whether IP would be moved from Bermuda, and Cohen confirmed that, as a result of the TCJA and the BEPS project, Google’s old structure will be phased out.

Responding to a later question, Lee elaborated on the local selling model Facebook is moving toward. “We expect […] this [complex] process … to take at least two years to accomplish throughout the globe. As for the amount of taxes, I can’t predict the amount of taxes we will pay. There are changes in domestic law that occur regularly.”

“What I can say is that this model will result in more risk being attributed to the market jurisdiction as our local entities will be contracting with local advertisers.”

Swedish Green MEP Max Andersson then moved on to the Kering Group. He asked questions about Luxury Goods International (LGI), a Swiss subsidiary of Kering.

“According to investigative reporting, LGI only pays 8% tax, which is a lot less than the tax in the countries where the people who ultimately buy the product live. This is quite profitable. I understand that LGI makes 70% of Kering’s profits, even though it only employs 3% of its staff working in the luxury section.”

“You said that your group does not contain any form of aggressive tax planning, but what do you call LGI if not aggressive tax planning? Is it a happy accident of logistics? You made €900 million net profit in LGI in 2016.”

According to figures on Kering’s website, the average profit per employee is around €13,000. But in LGI, this figure is €1.5 million. Andersson asked Maddaloni to justify this as anything other than profit shifting.

“LGI, this company is a central hub within the activity of Kering,” responded Maddaloni*. “It was set up over 20 years ago and it brings together a number of activities. These are follow-up activities of all the production and logistics, but also distribution. That is where all the risk we have around distribution [is] concentrated. Really, it is the hub of the group in a way.”

“It has 850 staff. It is a real company [and its operational activity] cannot be called into question. Without LGI, I don’t think our brands would be able to develop in the way that they have. It is not possible to say that LGI was a system that was set up for profit shifting. All the brands in the group, whether they are in profit or in loss, are companies that use the considerable know-how that we have within this particular company.”

She said that her company also chose Switzerland for reasons of safety and security due to the company’s very expensive stock. The answer provoked some incredulity from Andersson, but Maddaloni emphasised that in the 1990s, when LGI was set up, there was no country close enough to Italy that could provide the level of security as Switzerland. Many big jewellery companies have their stocks of precious stones and gold in Switzerland, she pointed out.

“The reasons for going to Switzerland were operational ones. Switzerland is in the very heart of Europe. Its geographic location is strategic for luxury brands… When LGI was set up in the 1990s, our market was [mostly] a European one.”

*Maddaloni was speaking French. The comments used here come from the live translation to English provided by the European Parliament.