Pulling the Plug: How to stop corporate tax dodging in Europe and beyond | Taxes | Tax Avoidance

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Tax dodging is receiving increasing political attention in Europe. From corporate transparency legislation to early reflections on a European wealth tax, European institutions are promoting tax reforms that have the potential to reduce economic inequality in Europe and beyond – if they are well designed and implemented. The need to find financial resources to restore European growth, combined with recent media scandals, have opened up opportunities for progressive reforms to fight tax evasion and tax avoidance which costs the European Union around €1 trillion a year. The European and global political context has never been so favourable, with new European institutions having to deliver on fighting tax havens, harmonizing corporate taxation, improving tax transparency and ensuring greater tax cooperation. This briefing explores some of the solutions for fighting corporate tax avoidance that the European Union should present in 2015, and explains why it is important to adopt them as soon as possible.
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  OXFAM INTERNATIONAL How to stop corporate tax dodging in Europe and beyond BRIEFING NOTE MARCH 2015 PHOTO © OXFAM / ABBIE TRAYLER-SMITH  Tax dodging has received greater political attention over the past few years in Europe. From enacted corporate transparency legislations to early reflections on a European wealth tax, the European institutions are promoting tax reforms that can potentially reduce economic inequality in Europe and beyond (if well designed and implemented). Recently, the Luxleaks and Swissleaks media scandals, combined with the need to find financial resources to restore European growth, have opened up opportunities for progressive reforms to fight tax evasion and tax avoidance - which costs the European Union around €1 trillion a year 1 . The European and global political context has never been so favourable, with new European institutions having to deliver on fighting tax havens, harmonising corporate taxation, improving tax transparency and ensuring greater tax cooperation. This document explores some of the solutions to fight corporate tax avoidance that the European Union should present in 2015, and why it is so timely to adopt them as soon as possible. Oxfam is calling upon the European institutions, especially the European Commission in its two tax-related proposals for 2015, to: 1.Support the creation of a UN inter-governmental body on tax cooperation, by calling for a Ministerial roundtable on tax during the Financing for Development Conference in Addis Ababa in July 2015. 2. Increase corporate tax transparency by adopting public country by country reporting rules for large companies in all sectors, to build on what has been decided for the European banking sector.3. Increase corporate tax harmonisation in Europe by ensuring a compulsory common consolidated corporate tax base in all 28 countries, which makes certain that taxes are paid where profits and real economic value is created.4.Analyse the negative impacts one member state’s tax system can have on other European and developing countries, and provide public recommendations for change. 1 pulling the plug:How to stop corporate tax dodging in Europe and beyond 1.INTRODUCTION In a world where 80 people own as much wealth as the poorest half of the global population 2 , the recognition that growing inequality is a threat for everyone is slowly starting to emerge 3 . The consequences of this extreme inequality are corrosive to society worldwide. It corrupts politics, hinders economic growth and stifles social mobility. Crucially, the rapid rise of extreme economic inequality is standing in the way of eliminating global poverty. The European Union (EU) remains one of the less unequal regions in the world 4 , but there are worrying signs that inequality has increased in many European countries - even before the 2008 economic crisis. 5 Making tax fair is one of the key solutions if we want to tackle the growing problem of inequality. Data from 40 countries shows the potential of well-designed, redistributive taxation and corresponding investment by governments to reduce income inequality driven by market conditions. Finland and Austria, for instance, have halved income inequality thanks to progressive and effective taxation accompanied by wise social spending 6 . Unfortunately, at present, almost all countries suffer from increasingly large scale tax dodging schemes used by big multinationals and wealthy individuals. This deprives all governments of much needed resources to finance essential services, but especially affects developing countries 7 . The European Union has been at the forefront of the fight against tax dodging over the past five years. Since 2011, several tax reforms have been adopted as first steps towards greater tax fairness. Relatively good progress has been made to tackle tax evasion of private wealth (including issues such as automatic information exchange in Europe, and transparency of beneficial owners in the anti-money laundering legislation). However, less attention has been given to putting in place the right legislative measures to tackle corporate tax avoidance, including knowing where companies pay taxes, harmonising tax bases in Europe and supporting ambitious reforms at an international level. Recent corporate tax dodging scandals have unequivocally reminded us that despite some progress, plenty remains to be done if we truly want ‘banking secrecy to be over 8 ’, ‘the end of tax havens’ 9  and a definitive end to tax evasion and avoidance.  2 THE FIGHT IS ON: EARLY GAINS OF EU TAX POLICY Fighting tax evasion and avoidance is not easy. There is no magic formula and it requires a combination of several approaches – from adequate transparency standards to efficient sanctions that end complicated schemes allowing tax dodgers to prosper. The European Union has recently made progress in some of these areas, especially tax transparency and exchange of information. ãTAX TRANSPARENCY : In 2013, new legislation 10  was adopted to strengthen the regulation of the European banking sector. It includes a requirement for each credit institution and investment firm to publically disclose on an annual basis key financial information on their economic activities 11 . The objective is to have enough information to check whether taxes are paid where real economic value is created (and not in tax havens where profits can be artificially shifted). A study authorized by the European Commission confirmed that making this information public will also have a slight positive effect on the economy 12 . Unfortunately, an attempt in 2013-2014 to extend this transparency provision beyond the banking sector was not successful. More recently, the EU updated its regulations to fight money laundering and called on Member States to adopt national registries where information on who really owns companies is made available 13  (to prevent tax dodgers from hiding behind shell companies). However, only a few States have agreed to make this information fully available to the public in order to maximise the deterrent effect. ãEXCHANGE OF TAX INFORMATION : The EU has been a driving force in promoting automatic exchange of tax information between national tax administrations. This has become the new EU standard for a lot of tax information thanks to the revision of the Directive on Administrative Cooperation 14  in 2014. Automatic information exchange is one of the long-awaited requests from civil society organisations to ensure tax dodgers having offshore accounts can no longer use secrecy jurisdictions to hide their money. Unfortunately, little is currently being done by the EU to support developing countries benefiting from this new system. This carries the risk of creating a two-tiered system separating those who will receive information and be better equipped to fight tax dodging and those who won’t - mainly developing countries. ãFIGHTING AGGRESSIVE TAX PLANNING : The European Commission is now starting to use a wider range of tools at its disposal to combat tax dodging, namely under European competition law. The current investigations against Luxembourg, Ireland and the Netherlands for alleged cases of state aid 15  explain how tax dodging is not only diminishing governments’ resources, but creating unfair competition in the EU and disturbing the internal market. The request of information by the European Commission in December 2014 to all 28 Member States on their tax rulings 16 , and new investigations into Belgium’s tax rulings system 17  are welcome initiatives. However, more proposals are necessary to prevent companies and governments from signing these rulings in the first place. Tax dodging knows no borders, as with the Luxleaks case we have a perfect illustration of why we need greater European coordination on fiscal policies. The recommendation on aggressive tax planning annexed to the European action plan to strengthen the fight against tax fraud and tax evasion 18 , from December 2012, is not ambitious enough and has received little appetite for implementation by member states. Some of them are currently involved in a tax race to the bottom which is not sustainable in the long term and drives away vital tax revenues in European countries, where citizens already find it hard to cope with the consequences of the financial crisis. Such a race also has negative ‘spillover’ effects in developing countries, depriving citizens from enjoying basic human rights like universal access to healthcare or education.Corporate tax avoidance is now under the spotlight, which provides the European Union with a good opportunity to lead by example in the fight against these shocking practices. It must remain committed to end corporate tax avoidance in Europe but should also seek greater coordination beyond its borders so that ultimately all countries and regions act together to end corporate tax dodging and harmful tax competition. This document looks at three main areas of corporate tax avoidance: 1. Greater transparency of multinationals’ identity, activities and tax payments2. Greater tax cooperation in Europe and at an international level3. Greater attention to the spillover effect of European tax policies on third countries to ensure policy coherence with development commitments.  2.ADOPT A COMPREHENSIVE TRANSPARENCYREPORTING FRAMEWORK FOR LARGE COMPANIES In the past, greater corporate tax transparency has been limited by European decision-makers to certain sectors, like banks or extractive companies 19 . Moreover, there is a growing and worrying trend to interpret transparency in a restricted way, as information is only available to tax authorities and not publicly available, despite European citizens having a right to know who pays and who doesn’t pay taxes. Two main issues urgently require the attention of decision-makers when it comes to corporate tax transparency - the transparency of tax rulings granted to big multinationals, and transparency on their economic activities to ensure profits are taxed where they are really made. 2.1 TRANSPARENCY OF TAX RULINGSTHE LUXLEAKS SCANDAL: THE TIP OF THE ICEBERG In November 2014, the International Consortium of Investigative Journalists (ICIJ) revealed 548 tax rulings signed between over 300 multinationals and the Luxemburgish tax authorities between 2002 and 2010, with the help of the accountancy firm PricewaterhouseCoopers 20 . Journalists showed how large companies have created subsidiaries in Luxembourg, with the purpose of shifting profits to this country where they could be taxed as low as 0.5 percent - eroding the tax base of other countries in Europe and beyond. The scandal triggered many debates at the European level on tax avoidance in Luxembourg and on aggressive tax planning generally, and the controversy involved the new President of the European Commission Jean-Claude Juncker, who was Luxembourg’s Prime Minister at the time these rulings were signed. The European Parliament set up a special committee in February 2015 to look into these tax avoidance schemes and the European Commission has announced a legislative proposal to ensure tax rulings will be exchanged automatically between all Member States in the future. Tax rulings are a tool for big companies and individual taxpayers to obtain a written interpretation of tax laws by tax authorities in order to know how much tax they will have to pay in a specific country. While tax rulings  per se  are necessary for companies to have legal certainty on what and how much taxes they will pay, a line is crossed when such rulings are misused to minimize corporate taxes, as in the case of the Luxleaks scandal.Reacting to Luxleaks, the European Commission included in its 2015 work programme a legislative proposal to make all Member States automatically exchange the tax rulings they sign with big corporations 21 . We believe this proposal does not go far enough and will barely help to improve the situation. Tax rulings should actually be made publicly available for three main reasons: ã The public has a right to know about companies’ tax practices. Corporate social responsibility guidelines include provisions on tax behaviours, and citizens and consumers can make more informed decisions if they are provided with information about a company’s tax practices. Similarly, shareholders or investors can also make better decisions if they are informed on the risks linked with corporate tax avoidance taken by some large companies.ã There is no obstacle to the publication of tax rulings after a certain deadline (e.g. one year after the ruling is made by the tax authority) as tax information can hardly be considered commercially sensitive. Furthermore, rulings are granted to specific companies, which could be seen as privileged treatment (as the European Commission is currently investigating). Competitors or small and medium businesses should know if they are put at a disadvantage by these decisions.ã This is also beneficial for companies themselves. Companies that come under scrutiny for allegations of tax dodging, like McDonalds 22  and Amazon 23 , can face enormous reputational risk and consumer outrage. Tax rulings not being public perpetuate the culture of secrecy our European leaders have promised to fight. If a multinational is negotiating its tax rate to a minimum in a European country, it should at least do this publicly and be expected to answer criticism. In addition, with the current fiscal consolidation period, only suggesting automatic information exchange bears the risk that European tax administrations may not have the sufficient means to scrutinise and detect abusive tax rulings. This is especially true considering some tax administrations in Europe already have difficulties dealing with an increasing amount of citizens’ requests to regularize their tax situation 24 . 3
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