Small businesses getting into the tax optimization game

PARIS — Tax optimization is no longer a matter just for the multinationals. A number of market players are now tailoring strategies originally drawn up for the corporate whales to the minnows, or small businesses and independent entrepreneurs.

Whether the businesses are active in imports and exports, or in services, recent scandals involving document leaks, such as the so-called “Paradise Papers” earlier this month, show that a wider variety of companies are trying to lower their tax bills.

“When people talk about tax evasion, they think about multinationals. But the problem affects smaller companies, too,” said Oxfam France spokeswoman Manon Aubry, noting that owners of several small and medium-sized firms have also been caught up in scandals recently.

While tax evasion is illegal, there are a number of strategies that experts have devised for firms to structure their business operations to avoid tax.

Called tax planning, tax avoidance, or tax optimization, these strategies stay within the letter of the law, if not the spirit.

Nevertheless, they are spreading.

“These are practices that are going mainstream,” said Christian Chavagneux, an editorialist at the French magazine, Economic Alternatives, who has written a book on tax havens.

He dubbed it “the democratization of fiscal optimization,” noting that the majority of the firms caught up in the Luxleaks scandal in 2014 were medium-sized.

Nevertheless, given the opacity of the practice, it can be difficult to measure exactly how widespread it has become.

Jean-Eudes du Mesnil du Buisson, head of the French confederation of small and medium-sized businesses, CPME, said there was “no doubt some small and medium-sized businesses involved, but it is far from being a common practice.”

By contrast, Paul Duvaux, a Paris-based tax lawyer, said he has seen “frequent use” of these tax schemes by owners of small businesses.

“Multinationals don’t have anything on small businesses,” he said. “These are legal practices. They only have to use the tools available to them.”

Cold calling

Manon Aubry of Oxfam France said that, in reality, the use of such schemes was somewhere between commonplace and niche.

“For multinationals, what is at stake financially is much greater. But the cost of access to these schemes is sufficiently low to make them interesting to small and medium-sized businesses, as well,” she said.

Aubry pointed to a number of firms offering tax optimization services that advertise on the internet, including helping businesses create subsidiaries in Luxembourg, or a European headquarters in Ireland, or creating offshore companies.

One firm, Bethel Finance, says on the French version of its website that “all of these techniques are used by big groups and they are perfectly legal. Our goal is to offer them to small and medium-sized businesses.”

And it isn’t just business owners looking to lower their taxes. These tax advisors are known to prospect as well.

“When I created my company, the first letter I received proposed an offshore account to bill my foreign clients,” one IT entrepreneur told AFP on condition of anonymity.

His accountant then suggested he arrange his work as a subcontractor to a firm, which then bills his clients, that is located in low-tax Ireland.

“It’s a fairly widespread practice” in the sector, he said.

‘Tax havens for everyone’

Given the differences in their operations, the strategies don’t work for the all businesses.

“Tax havens are mostly for professions where the work can be done at a distance and no physical place to work is needed, such as consulting and mail order,” said Duvaux, the tax lawyer.

“Tax evasion is easier when one works on the internet than when one is a betting office,” noted Oxfam’s Manon Aubry.

The increasing digitalization of the economy poses risks, with Oxfam calling for more transparency and regulation, in particular verification of intermediaries.

The increasing offer of tax optimization services hasn’t gone unnoticed.

In July, an employee of the France Offshore firm was handed a two-year jail sentence.

The firm, which operated from 2008 to 2012, advertised itself as offering “tax havens for everyone” via tax schemes that ran through Latvia.

“There is still progress to be made, but things are advancing,” said Christian Chavagneux at Economic Alternatives.

The arguments of defenders of these tax optimization schemes shouldn’t be taken at face value, he insisted.

“Their defense is to say that ‘it’s legal’. But often that legality hasn’t been tested in court,” noted Chavagneux.