Corporate taxation - ensuring a fair system for all
In crisis Europe, the debate over tax loopholes and what level of taxes corporations really pay continues. What steps can be taken, and how can political agreement be reached to take action? This briefing outlines some of the options available. This briefing is part of the follow up on the event “Corporate taxation – ensuring a system fair to all”, organised by the Green European Foundation with the support of the Green Foundation Ireland which was held in Dublin in November 2013. You can read the event report at: http://bit.ly/taxdubreport This briefing is written by Javier Pereira, a consultant with A&J communication.
The European Commission estimates that approximately €1 trillion are lost every year due to tax evasion and avoidance in Europe – that is, approximately €2,000 per every European citizen. A significant share of this amount is directly related to company taxation. The rise of multinational companies and the gargantuan size some of them have achieved pose important challenges for tax authorities. For example, the combined revenue of the four largest European companies is greater than the economy of 24 out of the 28 European Member States.1
The four largest European companies by revenue in2012 were Royal Dutch Shell, BP, Total and Volkswagen. The 2012 GDP of the EU member states was extracted from Eurostat.
While many companies have become international or even global, tax policies are generally determined and implemented at the national level. This is the case in the European Union, with only a few exceptional regulations which have been adopted to reduce tax obstacles to the single market. In this context, it is very difficult for tax authorities to ensure companies pay a fair amount of taxes. Differences in tax systems, tax loopholes, the existing lack of cooperation at international level and the size of the operations of many multinational companies, make it possible for unscrupulous multinational companies to evade and avoid taxes. These problems are compounded by the reckless behaviour of territories which have deliberately chosen to facilitate tax evasion and avoidance. Some states with scarce economic resources have economies almost entirely based on the business of tax evasion and avoidance. Regardless of whether they levy small or no direct taxes, the fact of attracting thousands of companies brings money in in the form of administrative fees, services and employment. Obviously, the economic advantage of these territories comes at the expense of tax revenues in other countries. The Greens strongly believe that multinational companies should pay their fair share of taxes. We are aware that the decentralisation and complexity of tax systems, together with the influence, resources, structure and economic clout of multinational companies, make it challenging to reduce company tax avoidance and evasion, but it is not an impossible task.
Box 1. A few definitions Tax evasion is the illegal non-payment or underpayment of taxes, usually resulting from a false declaration or the absence of declaration of taxes due to the relevant tax authorities (adapted from Tax Justice Network http://bit.ly/1kTZYH0 ). Tax avoidance is bending the rules of the tax system to gain a tax advantage that the policy-maker never intended. It often involves artificial transactions that serve little or no purpose other than to produce a tax advantage. It involves operating within the letter –but not the spirit – of the law. Aggressive tax planning is often used as synonym of tax avoidance (adapted from HMRC http://bit.ly/1dMeFrw ).
Corporate taxation - ensuring a fair system for all
The objective of this briefing is to discuss some of the main initiatives and proposals sponsored by the Greens to tackle the problem. The briefing starts by introducing some of main mechanisms that make it possible for companies to evade and avoid taxes. Subsequently, it reviews the main solutions proposed by the Greens. Finally, the briefing assesses existing policy proposals at the European and international level and discusses their strengths and weaknesses when it comes to combating company tax evasion and avoidance.
Mechanisms facilitating tax avoidance and evasion There are a number of different factors that make it possible for companies operating in Europe to evade and avoid taxes. Some of them are directly related to intended or unintended consequences of the application of national tax codes, while others - such as secrecy - can be considered as enabling factors that prevent the detection of tax evasion and avoidance. The classification below does not intend to be comprehensive, it focuses on mechanisms that are relevant and can be tackled at European level and does not include many techniques which are too complex to be explained here.2 Moreover, companies that evade or avoid taxes do not use just one of the mechanisms discussed below, but tend to combine several of them, thus making their detection and investigation even more difficult. Although important from a tax avoidance perspective fundamentally bilateral mechanisms, such as tax treaties negotiated between two countries, are not included below.
can be found in Ireland and Cyprus (12.5%), while some of the highest rates are applied in Belgium (34%) and France (34.4%). Although corporate tax revenues as a percentage of GDP have remained fairly constant due to the growth of corporate activity, European countries have foregone billions of Euros in taxes, while governments have increased other taxes with a significant impact on individual citizens such as Value Added Taxes (VAT). While corporate tax rates are the most obvious example, European tax codes contain many other measures that can be the subject of harmful tax competition between countries. Some examples include tax reductions or differences in the accounting of certain types of expenses, such as company cars or expenditure in R&D that can lead to much lower effective corporate tax rates. Tax advantages granted to non-residents or that do not require the performance of a real economic activity in the country, and lack of transparency around tax issues are also considered as tax competition. One can also define as tax competition the failure of EU Member States, such as Ireland and the Netherlands, to close existing and widely known tax loopholes (see tax loopholes below).
Differences in the fiscal policies and the tax codes of European Member States can sometimes offer opportunities to avoid taxation that were not intended by legislators in any of the countries. In most cases, exploiting such loopholes requires complex structures, but this is not usually a problem for large multinational companies which can tap into large amounts of resources and expertise. Some of the most common tax loopholes include:
Tax competition between countries
Multinational companies are important economic and social actors and countries often try to facilitate their presence within their territories because of their potential contributions to their economy, employment and even taxes. One of the easiest ways of attracting or convincing multinational companies to stay in a given country is by lowering corporate tax rates. This has triggered a race to the bottom across the world, including Europe. The average corporate tax rate in the EU-15 countries decreased from 49.1% in 1984 to 26.7% in 2013.3 Within the EU, the lowest corporate tax rates
For more information, please, see: http://ccfdterresolidaire.org/IMG/pdf/ed_english_bdrectiftableau111116_2. pdf ; or http://www.taxjustice.net/cms/upload/pdf/tuiyc_- _eng__web_file.pdf
Hybrid loans: complex financial instrument that that are in between debt (e.g. company bonds) and equity (e.g. stocks). For example, some companies issue convertible bonds, which is debt (a promise to return the funds plus and interest rate) that the investor can convert into stock if he wishes to do so. Due to their dual nature, some Member States treat hybrid loans as debt and others as equity. As a consequence, hybrid loans involving companies in two different countries may be treated as a tax deductible expense (loan) in one Member State and as a tax exempt dividend in another Member State. By using hybrid loans between companies in the right countries,
Figures extracted from the OECD tax database
Corporate taxation - ensuring a fair system for all
multinational companies can escape taxation in both territories. Double Irish: this mechanism allows companies from the United States to shift profits out of Europe exploiting a particularity in the Irish tax code that allows incorporated companies in Ireland to be considered as resident in another country for tax purposes. A double Irish requires two Irish companies, one that is tax resident in Ireland, and another one that is tax resident in a low-tax territory. The company that pays taxes in Ireland collects payments from goods and services sold either in Ireland or across Europe (by other subsidiaries). This company accumulates profits which are offset by the Irish company based in the low-tax territory because it charges the former for the use of an intangible asset such as brand, a patent or other type of intellectual property. As a consequence, profits accumulate in the Irish company in the low-tax jurisdiction. In 2012, this mechanism allowed Facebook’s subsidiary in Ireland to pay only €1.9 million in taxes in Ireland, despite a gross profit of €1.75 billion. While the official corporate tax rate in Ireland is 12.5%, the Double Irish allowed Facebook to pay an effective tax rate of just a little over 0.1%, and Ireland failed to collect €217 million in tax. Dutch Sandwich: this mechanism is a complication of the Double Irish in which transactions with a Dutch company are introduced between the two Irish companies in order to reduce the tax bill even further. 4 This practice has allowed Google to shift €8.8 billion in profits to a subsidiary based in Bermuda, 5 depriving Europe of over €2 billion in taxes. 6
Estimates suggest that between 40% and 60% of the world trade happens between subsidiaries belonging to the same multinational company.7 Companies can easily play with the prices of goods or services traded within
An good explanation is available here: http://www.finfacts.ie/irishfinancenews/article_1026675.shtml 4 See: http://www.ft.com/intl/cms/s/0/89acc832- 31cc- 11e3a16d- 00144feab7de.html#axzz2nGlKmEIj 4 See: http://www.ft.com/intl/cms/s/0/89acc832- 31cc- 11e3a16d- 00144feab7de.html#axzz2nGlKmEIj 6
The €2 billion figure results from multiplying the €8.8 in profits shifted by Google by the average European Corporate tax rate mentioned on page X of this briefing. 7 OECD Economic outlook, “Intra –industry and intra-firm trade and the internationalisation of production”, 2002. See: www.oecd.org/dataoecd/6/18/2752923.pdf
subsidiaries based in different countries in order to shift profits from a high-tax country to a low-tax country and minimise their tax bill. Although there are rules against the manipulation of trade prices between related companies which stipulate that transactions are to be conducted at market prices, such rules are based on the existence of comparable transactions and are often difficult to implement. Subsidiaries trade any imaginable type of goods and services, from raw materials to be processed somewhere else to finished products, and from insurance policies to consultancy or legal services. Some transactions such as those of raw materials can often be compared with international market prices. However, processed goods, assembled parts or legal advice are very difficult to price accurately. In these cases, multinational companies that want to shift profits to a subsidiary in a low-tax jurisdiction can play with a rather flexible price range for goods and services. Especially challenging is the case of transactions related to the use of intellectual property such as trademarks (brands), copyrights or patents. Intellectual property is usually owned by one of the companies of the group and all the others have to pay a fee in order to use it. Multinational companies can use intangible goods to shift profits with relative ease because it is very hard for tax authorities to make a strong case against these practices due to their subjective nature and the lack of comparable transactions. A similar trick is the use of intra-group financing to reduce tax bills in high-tax territories and accumulate profits in low-tax territories. Many multinational companies have set up financing companies in low-tax territories as part of their tax avoidance strategies. These companies provide loans to fund the operations of the subsidiaries in high-tax territories that help to reduce their tax bill while shifting funds to low-tax territories. Most tax systems across the world allow the deduction of loans for tax purposes, so the use of intra-group financing leads to tax benefits in the high-tax territory. At the same time, the repayment of the loan equals a transfer of funds form the high-tax territory to the lowtax territory where benefits will be taxed at a lower rate. In practice, the level of debt as well as the interest rates can be adjusted within reasonable margins to optimise tax payments and, since the interests are paid to a company of the same group, paying high interest rates is not a concern.
Corporate taxation - ensuring a fair system for all
Opacity and secrecy
In the context of tax evasion and avoidance, the terms secrecy and opacity are usually applied to define the features of territorial entities. Secrecy is defined as the intentional enactment by territorial authorities of legislation that protects information from third parties. Opacity is a broader concept that is defined on the basis of the level of transparency of tax information. Opacity is partially the result of secrecy, but also of other aspects such as a lack of information disclosure requirements or the unwillingness to share tax information with foreign tax authorities. Territories with high levels of secrecy and opacity are usually defined as tax havens (see section on tax havens below). Although companies do not derive any tax advantages directly from opacity and secrecy, they allow companies to conceal many of their tax evasion and avoidance mechanisms from tax authorities in other countries and obstruct their investigations. Even if opacity and secrecy usually refer to territorial entities, companies can also intentionally generate opacity around their structure to facilitate tax evasion and avoidance. For example, a similar effect in the case of beneficial ownership can be achieved artificially by using complex and opaque ownership structures. Some of the most common tools used in this process include the use of nominees, or slicing the ownership of a company among several companies in different countries a few times over. Hiding the beneficial ownership of a company makes it more difficult to detect and investigate tax evasion or avoidance practices such as shifting money from one country to another. Opacity and secrecy do not only enable tax evasion and avoidance, but are also key in other illegal practices such as money laundering that are not dealt with in this report.
Tax havens are territories that facilitate tax evasion and tax avoidance. Although no agreed definition exists, it is generally accepted that tax havens are territories that have one or more of the following characteristics: secrecy and opacity, low or no taxes and enacted regulation that makes these facilities available to nonresidents. Tax havens therefore enable many of the behaviours mentioned above and are crucial intermediaries of many tax evasion and avoidance strategies used by multinational companies.
Solutions to corporate tax evasion and avoidance in Europe, how could they work? It is clear from the previous sections that company tax evasion and avoidance rely to a large extent on the ability of multinational companies to exploit differences in fiscal codes among different countries to their own advantage. The scale and complexity of the problem has increased in line with globalisation and has been amplified by the significant growth of international trade and financial flows. Whereas multinational companies and their subsidiaries operating across the world are driven by the common goal of maximising profits for their investors, the will of individual countries is much more fragmented and they still have to learn how to cooperate more effectively on fiscal issues, instead of competing among them. As seen above, this is also the case within the European Union. The European Union is the largest trade and economic block and many multinational companies are based or operate in Europe. Thus, actions adopted by the European Union can play a major role in combating tax evasion and avoidance. This section summarises some of the key policy proposals supported by the Green political movement across Europe. It looks exclusively at initiatives that can be implemented at the European level and excludes purely bilateral issues such as tax treaties. In general, the proposals are designed to with one or more of the following aims:
Increasing the transparency and traceability of company structures and financial flows within multinational companies; simplifying and harmonising fiscal policies to eliminate tax loopholes; adopting measures against territories that enable tax evasion and avoidance; and advancing European and international cooperation on tax issues.
Every year, European companies have to file their annual accounts in the countries where they are registered. These accounts can be accessed by the public, either for free or for a small fee, through company registries managed by the government. Obviously, annual accounts contain a lot of financial information about the company, but they offer little information about the international structure of the company and are of little use to detect cases of aggressive tax planning structures. The problem
Corporate taxation - ensuring a fair system for all
is that annual accounts only contain consolidated figures for the entire group and the list of subsidiaries they include is not comprehensive. It is therefore very difficult to get an overall picture of the companyâ€™s structure from the annual accounts.
rate in a European CCCTB scheme would contribute to prevent tax competition among European Member States.
Public registry of beneficial ownership
Country-by-country reporting aims at tackling this problem by requiring multinational companies to release basic financial and accounting information in every country where they operate. It is generally accepted only a few key pieces of information are necessary for the mechanism to be effective, namely: turnover, profits, number of employees, tax and other payments to the government, assets and name and location of subsidiaries. Country-by-country information would help to understand the international structure and financial flows within multinational companies. It will also help to identify tax evasion and avoidance structures. For example, countryby-country reporting would reveal the existence of subsidiaries in tax havens with one or few employees, significant profits and small or no tax payments.
Common Consolidated Tax Base (CCCTB)
CCCTB is an alternative mechanism for company taxation in Europe. It has two main features. Firstly, it introduces a single set of corporate taxation rules across the EU and allows companies to deal with a single tax administration. This would result in important savings for European companies because it will result in substantial reductions in the costs of complying with tax requirements in several different countries. Secondly, CCCTB includes a system that calculates and aggregates the tax liabilities of all subsidiaries in EU Member States (common tax base) and redistributes the results among subsidiaries on the basis of their real economic activity. The result is then taxed according to national tax rates. This makes CCCTB very effective at combating tax avoidance because it ignores all internal transactions and it would prevent companies from exploiting loopholes arising from differences in national tax codes. The Greens strongly believe in the potential of CCCTB to tackle tax evasion and avoidance within Europe. They are working to make this innovative approach mandatory across Europe and to couple it with a minimum tax rate. Most of the companies engaged in tax avoidance and tax evasion are unlikely to sign up for a voluntary initiative which would inevitably lead to fair, but greater tax payments. Making CCCTB compulsory would help to tackle this problem. In addition, including a minimum tax
As discussed above, companies can create opacity by setting up complex company structure that hide the real ownership of a company. This frustrates tax investigations because it is difficult for tax authorities to know exactly who to exchange or request tax information from. Opacity also helps to hide the origin or destination the funds. This made it possible to create a network of companies that manipulated the European market of carbon credit and resulted in losses of â‚Ź5 billion in tax revenues in EU Member States.8 A public registry of beneficial owners would force all companies and other legal structures such as foundations to identify who is actually in control, while centralising ownership information. This would contribute to prevent the use of complex ownership structures to shield tax avoidance or evasion strategies from tax investigations and would simplify the work of tax authorities. Moreover, difficulties in identifying the beneficial owner of a company or other types of legal structures could be used as a flag for potential tax avoidance or evasion.
List of tax havens
A common European list of tax havens would contribute to fighting tax evasion and avoidance in Europe in different ways. Firstly, a list of tax havens can be used to put pressure on companies so that they stop using them to avoid taxes. For example, if the presence in tax havens cannot be explained, money flowing into listed tax havens can be exempted from tax benefits or subjected to higher tax rates. Public administrations can also put pressure on companies by excluding firms using tax havens from public contracts. Secondly, a list of tax havens can also be an effective tool to put pressure on tax havens so that they increase their collaboration in ongoing tax enquiries. The cases of France and Helsinki help to illustrate how a list of tax havens can help to tackle tax evasion and avoidance in Europe. Back in 2010, France adopted a nonexhaustive list of tax havens based on whether the territories cooperated with the information requests 8
See: https://www.europol.europa.eu/content/press/carboncredit-fraud-causes-more-5- billion-euros-damage-europeantaxpayer-1265
Corporate taxation - ensuring a fair system for all
issued by the by the French authorities during the course of tax investigations.9 Companies operating from those tax havens have to pay a 75 percent tax on funds flowing from France into those territories, and they are also exempt from some tax benefits. This measure helps to prevent the erosion of France’s tax revenues and puts pressure on multinational companies to stop using tax havens. The list has also proven very effective at increasing information exchange and cooperation on tax issues. For example, in 2013, France removed the Philippines form the list after the signing of mutual administrative assistance agreements on tax issues. The French list has also been used by regional and local authorities, including the Region of Île-de-France, to make sure public authorities do not work with companies which are based or use tax havens to avoid paying taxes in Europe. A similar initiative has been adopted by the city of Helsinki, which in 2012 voted a Resolution making companies with subsidiaries in tax havens non-eligible for procurement contracts.
A Common European Tax Policy – Treaty reform
The solutions discussed above are designed to tackle specific mechanisms enabling the evasion and avoidance of taxes by multinational companies and, as a consequence, they all have a limited scope of application and a restricted potential to prevent tax competition. The most coherent and comprehensive solution in the long term would be to introduce a common European tax policy that harmonises tax codes, closes existing and future tax loopholes and prevents tax competition. Such a policy would require a reform of the European Treaties. Fiscal policy is one of the few exceptions in the Treaty on the Functioning of the European Union to the co-decision procedure between the Council of the EU (EU Council, for short) and the Parliament. European legislation on fiscal policies are adopted under the special legislative procedure in which the Parliament only provides an opinion, but all the weight of the decision making lays with the EU Council which has to vote unanimously for the legislation to be adopted. This makes adopting common fiscal policies very complex in the European Union because any given country can block the decision. Measures to tackle tax evasion and avoidance are particularly challenging because some European countries such as the Netherlands, Luxembourg, Cyprus and Austria, or dependencies of European Countries, such as the United Kingdoms’ Islands of Guernsey, 9
Jersey or the Isle of Man are often defined as tax havens. This explains why initiatives such as the CCCTB Directive (see below) remain blocked at the EU Council level and why many of the other measures discussed below refer to pieces of legislation outside the realm of fiscal policy. As seen above, tax evasion and avoidance has a very strong international dimension and often rely on complex company structures using subsidiaries in several different countries. As a consequence, Common European Tax Policy cannot only focus on addressing the internal problems of the EU, but should also have a strong global component that promotes a fairer global tax system through international cooperation. The benefits of such approach would extend beyond Europe and would for instance be of key importance for developing countries which have far less resources to tackle tax evasion and avoidance effectively.
The state of play: EU tax policy initiatives The Treaties of the European Union provide only a restricted mandate to the European Union when it comes to tax and fiscal policy. In general, European legislative initiatives in this area are restricted to measures required to ensure the smooth functioning of the single market. Some examples include the harmonisation of value added taxes (VAT) returns or the removal of protectionist measures. Nonetheless, this does not mean that the European Union cannot propose and adopt direct or indirect measures to make progress against company tax evasion and avoidance. Below is a summary of legislative proposals which have a significant potential to tackle tax evasion and avoidance by multinational companies.
Advancing country-by-country reporting
To date, the European Union has introduced country-bycountry reporting requirements for multinational companies in three different sectors. The Accounting Directive requires companies in the extractive and forestry sectors to disclose payments they make to governments in their annual report. The Capital Requirements Directive requests European banks to disclose as of 2015 for each subsidiary: the location, number of employees, profit (or loss), taxes paid, assets owned and subsidies received. Both these directives do not deal directly with fiscal policy and were therefore subject to the ordinary legislative procedure in which both the Parliament and the EU Council of the EU share the decision power.
Corporate taxation - ensuring a fair system for all
Despite the recent review of the Accounting Directive concluded in early 2013, the European Commission has proposed the amendment of the Directive to, among other things, expand the information disclosure requirements of country-by-country reporting and to make it mandatory for multinational companies in all sectors. At the Parliament level, the measure was actively supported by Green Members of the European Parliament (MEPs). Unfortunately, due to the opposition of conservative forces in the European Parliament, the official report adopted only includes a review clause asking the Commission to consider the possibility of strengthening country-by-country reporting in the future. Meanwhile, the position adopted by the EU Council fails to make any reference to the amendment of the countryby-country reporting requirements. The original proposal of the Commission faced strong opposition from the UK, Germany and Poland, and it was thus blocked in the EU Council. Since both the report of the Parliament and the position of the EU Council will define the starting point for the negotiations to agree the final wording, the review of the directive is unlikely to result in a stronger country-by-country reporting requirement.
Closing existing loopholes
As discussed above, the lack of harmonisation among European tax codes enable companies to evade taxation by exploiting differences in the treatment of certain revenues to avoid or evade taxes. In 2013, the Commission has made two different proposals to close very specific loopholes. In both cases, the proposals are directly related to fiscal policies and therefore the special legislative procedure applies, meaning that the final decision is made by the EU Council and that any single country can block the legislation.
review of the Directives on Interest and Royalties with similar goals, but the proposal had not been released at the time of writing this briefing. Earlier in 2013, the Commission also released a proposal to amend two directives in order to introduce changes to tackle VAT fraud in the EU. European tax authorities have detected cases of multiple international transactions over a short period of time designed to avoid VAT payments or claim VAT refunds. Due to the large number of transactions among EU Member States, these operations can be difficult to detect. The proposal of the Commission, which has already been passed into law by the EU Council, introduces a quick reaction mechanism to tackle tax fraud and the possibility of reversing the liability of VAT payments from the supplier, which is the common practice, to the recipient of the goods in order to prevent fraudulent claims.
Revision of the EU Anti-Money Laundering Directive
The European Union is currently revising the Anti-Money Laundering Directive.11 The Directive is not directly related to fiscal policies and therefore the ordinary legislative procedure involving a co-decision between the EU Council and the European Parliament applies. The original proposal made by the Commission requires companies to hold and provide to the competent authorities information about their beneficial owners. It also defines beneficial ownership as a natural person owning 25% or more of the property. In addition, the proposal also offers opportunities to strengthen the legal framework around tax evasion so that the participation in or contribution to a tax crime is treated more strictly.
In November 2013, the Commission presented a proposal for a Council Directive on the taxation of parent companies and subsidiaries of different Member States.10 The proposed Directive tries to prevent the use of hybrid loans to evade the payment of taxes by multinational companies. As mentioned above, hybrid loans receive a different tax treatment in different Member States. The proposal of the Commission is designed to prevent the use of artificial structures to claim tax benefits in two countries when companies engage in hybrid loans. The Directive has yet to be discussed by the EU Council. In addition, the European Commission has planned the
The European Parliament is still working on their position and proposing amendments to the text. The Greens see some limitations in the text proposed by the Commission and are working to strengthen the Directive. In particular, they believe that, in order to tackle tax evasion and avoidance, it is essential to create a public registry of beneficial ownership that is easily accessible. In fact, the European Parliament has called for such a measure to be introduced on multiple occasions. In addition, the Greens would also like to amend the definition of beneficial owner so that it is not defined on the basis of a 25% ownership. The rationale is that it is very easy for companies or of individuals to dilute the ownership of a company or legal entity under the 25%
See: http://ec.europa.eu/taxation_customs/common/legislation/prop osals/taxation/index_en.htm
See: http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52013PC00 45:EN:NOT
Corporate taxation - ensuring a fair system for all
threshold by using several companies or legal instruments based elsewhere, something which could prevent the identification of the beneficial owner. The Parliament should adopt a final position on the issue in early 2014. At the EU Council level, the issue has been discussed on a number of occasions, but no common position has been agreed. From the discussions that have taken place to date, only France and Austria seem to support the idea of having public registries, while the most favoured solution appears to be the creation of national registries with information available to relevant authorities. The EU Council has not discussed specific changes to the beneficial ownership threshold.
Code, Member States committed to “roll back tax measures that constitute harmful tax competition” and to “refrain from introducing any such measures in the future”.13 To date, the Code of Conduct for Business Taxation has been partially successful at tackling harmful tax competition, but it has some important drawbacks. The Code has helped to roll back around 60 measures but has failed to prevent the emergence of re-engineering of a number of other measures. The main problem with the Code of Conduct is that it is not a legally binding instrument. Moreover the Code of Conduct groups operates in a rather secretive environment. The deliberations of the group are not accessible to the public, while the reports issued to the EU Council are only disclosed to the public previous consent of the latter.
Commission’s proposal for a Common Consolidated Corporate Tax Base
The European Commission proposed a Directive on a Common Consolidated Corporate Tax Base (CCCTB) in 2011. The Directive is subject to the special legislative procedure. Although the Directive proposes to introduce CCCTB on a voluntary basis, it remains blocked at the EU Council due to the opposition or reticence of a number of countries, including Ireland, Germany, United Kingdom, the Netherlands, Malta and Cyprus.12 The EU Council has created a High Level Working Party to review the proposal, but it has not yet developed an alternative proposal for political discussion.
A European List of tax havens
Creating a list of tax havens and devising a number of defensive measures was one of the proposals in the European Commission’s Action Plan to strengthen the fight against tax fraud and tax evasion. However, this proposal faced strong opposition from countries such as Luxembourg, the Netherlands and Austria and was not endorsed by the EU Council when it discussed the Action Plan in May 2013 and no further progress has been made.
Code of conduct for business taxation
The Code of Conduct for business taxations is an initiative introduced by the EU Council in 1997. By adopting the 12 12
OECD’s initiative on Base Erosion and Profit Shifting (BEPS)
Following the request of the G20, the Organisation for Economic Co-Operation and Development (OECD) launched an Action Plan on Base Erosion and Profit Shifting (BEPS).14 The Action Plan contains a total of fifteen actions designed to identify solutions to a number of problems in six different areas: differences in tax codes that generate tax avoidance opportunities; problems related to tax residency in the context of the digital economy; use of internal financing to shift profits out of high-tax countries; manipulation of internal trade prices; implementing effective anti-avoidance rules; and the problem of tax havens. The six areas addressed by the BEPS initiative comprise at least in a partial manner, the whole range of tax evasion and avoidance mechanisms described in chapter 2. The final goal is to agree a number of policy initiatives to tackle each of these problems. The BEPS initiative is possibly the most comprehensive effort to address tax evasion and avoidance at the international level. Nonetheless, civil society and developing countries have raised concerns about whether the OECD is inclusive enough to lead an international initiative against tax evasion and avoidance. The OECD is an international organisation with only 34 countries, the majority of the developed western economies and other allied developed countries. Since the BEPS initiative was the result of a request by the G20, members of this body have been invited to participate on
The Action Plan is available at: http://www.oecd.org/ctp/BEPSActionPlan.pdf
Corporate taxation - ensuring a fair system for all
an equal footing with OECD members, while other countries might be invited to attend the process but without having a say over decisions. However, this still prevents the large majority of developing countries from playing an active role in the process. Eleven out of the twenty members of the G20 are also members of the OECD, one is the European Union and the remaining eight are Brazil, Russia, India, China and South Africa, Argentina, Indonesia and Saudi Arabia. The OECD has also been criticised for adopting a conservative approach when it comes to proposing solutions. The contents of the BEPS initiative seem to be predominantly aimed at fixing the current international tax system, rather than exploring new fiscal models or alternatives such as CCCTB.
main obstacle is possibly the limitations imposed by the Treaties of the European Union on the Commission. With fiscal policies subjected to the special legislative procedure that requires unanimity and excludes the Parliament from having a say in the legislation, a minority of countries have been able to block progress and prevent the adoption of innovative proposals such as CCCTB. The Greens and many European citizens find it hard to understand why a single EU Member State can block initiatives to tackle a problem that undermines tax revenues at the expense of European tax payers and the competitiveness of companies that pay the taxes they are due. It is essential to ensure European citizens can decide how to tackle this problem through their elected representatives at the European Parliament.
The BEPS initiative runs in parallel to other proposals to tackle similar problems made within the EU. Even if both the OECD and the EU address the same root problems the approaches are very different. The OECD is a much wider forum where, the majority of EU Member States are represented, but which also includes all other major developed economies as well as, in the case of BEPS, emerging countries. The potential to address the problem of tax evasion and tax avoidance at a global level is therefore greater within the OECD. Nonetheless, the outcomes of BEPS are more uncertain and distant because the OECD can make policy proposals, but unlike the EU, the OECD has no legislative power. It is up to individual members to implement any agreed measure and the OECD monitors and reports progress in order to put pressure to ensure compliance.
The European Union needs to take steps towards a fiscal union, starting with a revision of the European Treaties. Pushed by the financial and debt crisis, European leaders have shown it is possible to make progress in areas that were previously considered as the exclusive turf of national governments such as banking and financial regulations. Some voices are even starting to request a review of the Treaties in order to enable a closer integration of those countries which are part of the euro zone. We might not call tax evasion and avoidance a crisis, but with loses of approximately â‚Ź1 trillion a year in public revenues, they are certainly an emergency that requires immediate and coordinated political and legislative action. If the European Treaties are reviewed in the near future, it is important to seize the opportunity to make progress against tax avoidance and tax evasion, a problem that affects us all.
Conclusion The European Union has adopted a number of proposals designed to tackle some aspects of company tax evasion and avoidance, but the pace of progress is too slow. The
The views expressed in this article are those of the authorâ€™s alone. They do not necessarily reflect the views of the Green European Foundation. With support of the European Parliament. Green European Foundation asbl 1, rue du Fort Elisabeth 1463 Luxembourg Brussels Office: 15 rue dâ€™Arlon, 1050 Brussels, Belgium Phone: +32 2 234 65 70 - Fax: +32 2 234 65 79 E - mail: firstname.lastname@example.org - Web: www.gef.eu