Europeans were shocked when, in November 2014, the International Consortium of Investigative Journalists stared to release the LuxLeaks files. It was not just that this type of state-sponsored tax avoidance was happening, but its size and formal entrenchment within the system. The European Union is, after all, supposed to be about cooperation, not undercutting one another.
In the post-2008 era of austerity, ordinary EU citizens have had to face cuts to public services while their governments bailed out the big banks. The revelation during this time that many large and well-known multinationals were paying close to no tax in a number of the countries where they do business sparked public outrage, especially in the UK. As a result, the G20 asked the OECD to look into the international taxation system. Through its so-called Base Erosion and Profit Shifting (BEPS) project, the OECD last year came up with an Action Plan for the G20. Among the most important progressive measures is a new exchange of information between tax authorities in participating countries. Sadly, the adopted measures are still a far cry from the action needed to stop the massive non-taxation of multinationals and wealthy individuals furthering society’s inequality.
“Tricks to avoid billions in tax have names like ‘Double Irish’ and ‘Dutch Sandwich’ for a reason”
As Denis Healey, the UK’s former Chancellor of the Exchequer, once said, ‘the difference between tax avoidance and tax evasion is the thickness of a prison wall.’ Problematic in this distinction, though, is the presumption of innocence, which allows the non-payment of taxes to be seen as legal avoidance until deemed evasion in court. This puts huge pressure not only on the courts presiding over such cases but even more on the authorities that need to identify and build a case against suspected wrongdoers. All it takes is a ‘cooperating’ government issuing special tax rulings for companies to skip their taxes in a fully legal way.
The real issue is the rules of this game, and the European Union is a key part of the problem just as easily as it could be the key to the solution. There is classic stereotype of a tax haven as a blissful Caribbean island with white beaches and clear skies. Yet tax havens are also as nondescript as any dull office building in Rotterdam, or Luxemburg. The tricks allowing companies like Apple or Google to avoid billions in tax have names like ‘Double Irish’ and ‘Dutch Sandwich’ for a reason. But among all the member states with provisions to facilitate tax avoidance, the UK stands out for its network of Overseas Territories and Crown Dependencies including those picturesque Caribbean tax havens. As the Panama Papers have showed again this week, they play an important role in the system. The EU and its member states have a duty to act and start shutting down their tax havens. Doing so as a union would make the bloc stronger and greatly increase its service to, as well as its popularity with, the citizens.
“Shutting down tax havens as a union would greatly increase its service to, as well as its popularity with, the citizens”
The massive enterprise of tax avoidance is not only depriving EU countries of the revenue they need to provide public services, it is also undercutting the small and medium-sized businesses that cannot afford to perform the same tricks as multinationals or ‘high net worth’ individuals. Some of the large companies exposed in LuxLeaks enjoyed an effective tax rate of less than 1%. And while tax avoidance and evasion have a big impact on tax revenue in the EU, ask the Greeks for example, it is even worse in developing countries, where the state is more dependent on tax income from multinationals as they make up a larger share of formal economy. The IMF estimates that the percentage of corporate income tax in national tax revenues for low-and-middle-income countries is double that of developed countries.
To bring the EU to the forefront of the effort to curb tax dodging requires transparency about how much in taxes companies are paying. To make this information public, and not just available to tax authorities, will not only make it harder for companies to hide, but also improve corporate governance. It would also go a long way for the EU to recognise that multinational companies, even if they have a myriad of sub businesses, are essentially one global entity, and they should taxed as such. The proportions of corporate taxes to be paid to each individual country will of course need to be worked out, but the EU as single bloc is the best actor to instigate this much-needed process.
IMAGE CREDIT: CC / FLICKR – Chris Potter