Tax scandals: an opportunity?

The political and social upheaval created by the ‘LuxLeaks’ scandal (tax rulings between Luxembourg and given companies) provided the necessary impetus for the creation in February 2015 of a special committee on fraud and tax elusion in the European Parliament. The TAXE Committee has been drawing up a diagnostic for the urgent problem of tax fraud Europe suffers from. Debates in TAXE laid bare the lacunas of a national perspective in tackling an international problem. Divergent fiscal systems, a lack of coordination among member states and an unfair fiscal competition among them has increased the likelihood of tax fraud by large corporations. At their disposal, one finds a plethora of different jurisdictions and fiscal treatments to distribute among the different entities that make them up the benefits generated on European soil. It is unacceptable that, in a union enjoying free circulation of capital and a common monetary policy, the convergence on fiscal policy is glaringly absent.

Last month, another scandal unfolded. The European Commission published the results of its investigations on a variety of tax rulings signed between Ireland and Apple. It concluded the rulings gave a selective and favourable fiscal treatment allowing the American giant to pay only 1% of its European benefits made in tax (the effective rate descended to 0.005% in 2014). Recall that ‘LuxLeaks’ revealed that almost 400 multinationals benefited from similar custom made suits tailored by Luxembourg, a fact that allowed them to contribute on average only 2% of the massive sums channelled through the Grand Duchy.

The main measure articulated against those practices is the obligation by member states to inform ‘in good faith’ the rest of EU countries when it signs such a fiscal deal with a company. But, as evidenced by the Apple case, this basic obligation in not observed. It will have to become mandatory then, and member states will have to communicate their tax rulings, including those of retroactive nature.

Another measure proposed by the TAXE committee revolves around the opacity of financial reports of large companies. It was proposed to the Commission and the Council that multinationals of all sectors make public certain key figures to clearly know where their business is done and how much taxes they pay in each country where they operate. The “country by country reporting” in Integrated Annual Reports of Companies would become an essential pillar of corporate responsibility. After all, there can be no Corporate Social Responsibility without fiscal responsibility.

The special committee has been very critical of the race-to-the-bottom member states created by proposing a panel of deductions, exemptions and ‘ad hoc’ fiscal incentives to large companies in the hope of attracting their neighbour’s tax base. It appears much more sensible, as the discussions in the special committee concluded, to calculate a taxable base on a European, consolidated and common basis for all transnational activity on Union soil. Added to that is the need for a harmonised system to tackle the thorny issue of tax abatements. Commissioner Moscovici promised to shortly present a package on the issue although it will also require the tacit support of the European Council.

In September, a special committee to investigate the Panama Papers was set up. It aims to give continuity to the previous TAXE committee on tax evasion. As a first reaction to this latest scandal will be the elaboration of a common definition of tax haven. This in turn will allow for an exhaustive list of European tax havens to be drawn, accompanied by a battery of agreed sanctions. These sanctions will have to be equally deterring for listed jurisdictions (by, for example, envisaging to suspend free trade agreements with the EU), companies using those jurisdictions (barring them from being eligible for Union funds), and all intermediaries that contributed in elaborating elusive fiscal plans (by withdrawing their licences). Measures against tax havens should also be accompanied by a high fiscal tax on bank transfers to those countries, as a deterrent for such transfers.

There will be many obstacles on the way. Chief amongst them is the lack of international organisation to manage such issues. The OECD is insufficient. The UN is called upon for this task, and the EU needs to head these initiatives, but all too often, member states block advances in the Council for national interests. At the end of the day, many still argue that fiscal policy is the competence of sovereign nations and that it is legitimate to use it in the global race. We must end such views, supported by individuals of the right and of the left alike, because its application leads us into a frantic race towards the disappearance of corporate taxes to the sole detriment of our public finances. (José Luis Escario y Ramón Jáuregui)