An international tax and transparency doctrine of the European Union

Tax and financial transparency in international relations : the new frontier

Tax and financial transparency have been for long abandoned to vague commitments and free riders behaviour from the States. Illicit flows of capitals, tax evasion and tax elusion are undoubtedly a global matter, and while they have not emerged with globalization, globalization has multiplied it exponentially. The free movement of capitals and the growing disconnection between management entities and productive entities of companies have raised the competition between States and shaken the traditional distribution of incomes. An increased and changing list of small countries is living now with public and private revenues disconnected with their real economy. And old developed countries are splitting administratively to create artificial tax clusters : free ports, free tax zones and specific jurisdictions.

“Taxes are what we pay for a civilized society” — Henry Morgenthau, U.S. Secretary of the Treasury of F.D. Roosevelt

For instance, British Virgin Islands invest more in China than… the USA. In the latter, Delaware is hosting not less than 50% of companies on the American stock markets.

And whereas other worldwide policy goals such as global warming, environment or even development are now included in binding multilateral agreements, tax and financial transparency should be considered as the new frontier in multilateral and bilateral relations. On that matter, as Joseph Stiglitz stated before the PANA committee of inquiry of the European Parliament: “Europe alone can do a lot”.

Tax elusion, financial secrecy and tax competition : a lose-lose game

Tax evasion, tax elusion and money laundering are not a zero-sum game. The Panama Papers are the last and best example of it. The location of the companies in Panama rely on close to zero tax regimes, thus, are not a source of income for Panama’s budget that is fuelled by the Canal’s activities rather by their corporate tax. In the meantime, according to the European Parliament Research Service, there have been serious costs for European countries, and African countries have lost up to 60% of the tax revenues expected from the people and companies involved in the scandal.

It is then difficult to correct the shift of money. On average, only 1% of illicit flows of capital are seized or frozen per year. And tax evasion and tax elusion are estimated to be worth 100 billion $ in the United States and 1 000 billion € in the European Union.

Multilateral negotiations of European Union should set tax transparency first

Until now, recommendations of the Financial Task Force (an expert panel created under the authority of the G20) and even multilateral agreements of the OECD are not entailed in bilateral and multilateral negotiations of the European Union.

Trade agreements and partnership agreements between EU and other countries or federations are filled with vague clauses of good will. This is the severe observation of the ex-post Impact assessment on that matter conducted by the research services of the European Parliament for International Trade committee. No proper binding clause ensures the endorsement of international standards, nor is there proper review of the progress made by the other party.

S&D MEP Emmanuel Maurel during a public hearing of the “Panama Papers” inquiry committee in 2016

Such loopholes and challenges require the Union to urgently shape an external tax doctrine. We have set up a strong corpus of principles and norms inside the Union, which needs to be translated at international level. The aim of such a doctrine is furthermore to shift the geopolitical economic policy of the Union in order for it to meet our international commitments. While supervision on banking secrecy remain crucial, the new approach should focus on transparency standards, enforcement and ownership of tax international norms. Member States and the Commission should fully use the power of trade and partnership agreements for monitoring the respect of such a doctrine.

The core of a Union’s external tax doctrine : conditionality

In any formal economic agreement between the European Union and a third country, a horizontal clause should be included, in which both parties commit to respect a set of international standards in terms of financial transparency and corporate taxation governance. The clause must be binding : any non-binding clause would not represent a significant improvement to the status quo.

The work conducted until now by international bodies, NGOs, and by the European Parliament through hearings and reports from the TAXE, TAXE 2 and ECON committees, makes the case for a comprehensive corpus of standards to be integrated in such a clause. In particular, it should include, at least :

  • Full compliance with the OECD Common Reporting Standard
  • Full compliance with OECD BEPS action plan (Base Erosion and Profit Shifting)
  • Compliance with major recommendations of the FATF (Financial Action Task Force)
  • No tax regimes under 5% for companies and trusts.
  • A transparent tax regime for Controlled Foreign Companies (CFCs).
  • Presence of a central register of beneficial ownership of companies and trusts potentially engaged in money laundering.

The second pillar of the doctrine, in order to avoid debates and technical difficulties to enforce an exit tax, should be a European legislation inspired by the American FATCA law and the existing rules of the Anti-Tax-Avoidance directive on CFCs. Indeed, the only sustainable solution to the challenge of double non-taxation is an efficient safety net.

Last, but not least, the 3rd pillar of this approach tackles financial services. They are presently liberalized in dedicated chapters of trade agreements, which are not focusing enough on the misuse of some financial services for money laundering or tax elusion. Indeed, the European Union nor any administration can be up to date with the last financial innovations dedicated to, or used for tax elusion and money laundering. The liberalization of financial services in “financial services” chapters of trade agreements or “investment” Chapters of Partnership agreements should be only liberalized following the positive list approach.

This comprehensive doctrine could be set up involving all institutions, including the European Parliament in co-decision with the Member States. In the context of growing number of scandals, and while Member states will not provide sufficient impulse, the EU as a whole needs to restore its credibility on that matter.