Fifty Shades of Tax Dodging: How EU Helps Support Unjust Global Tax Systems

Yves here. Tax is a major way to create incentives. New York City increased taxes dramatically on cigarettes, and has tough sanctions for trying to smuggle meaningful amounts of lower-taxed smokes in. Rates of smoking did indeed fall as intended.

Thus the debate about whether corporations should pay more taxes is not “naive” as the plutocrats would have you believe; in fact, they wouldn’t be making such a big deal over it if it were. In the 1950s, a much larger percentage of total tax collections fell on corporations than individuals. And the political message was clear: the capitalist classes needed to bear a fair share of the total tax burden. Similarly, what has been the result of the preservation of a loophole that allows the labor of hedge fund and private equity fund employees to be taxed at preferential capital gains rates? A flood of “talent” into those professions at the expense of productive enterprise.

And the result of having lower taxes on companies has been a record-high corporate profit share of GDP, with none of the supposed benefits of giving businesses a break. Contrary to their PR, large companies have been net saving, which means liquidating, since the early 2000s. The trend has become more obvious in recent years as companies have borrowed money to buy back their own stock.

Originally published at the Tax Justice Network

In the past year, scandal after scandal has exposed companies using loopholes in the tax system to avoid taxation. Now more than ever, it is becoming clear that citizens around the world are paying a high price for the crisis in the global tax system, and the discussion about multinational corporations and their tax tricks remains at the top of the agenda. There is also a growing awareness that the world’s poorest countries are even harder impacted than the richest countries. In effect, the poorest countries are paying the price for a global tax system they did not create.

A large number of the scandals that emerged over the past year have strong links to the EU and its Member States. Many eyes have therefore turned to the EU leaders, who claim that the problem is being solved and the public need not worry. But what is really going on? What is the role of the EU in the unjust global tax system, and are EU leaders really solving the problem?
This report – the third in a series of reports – scrutinises the role of the EU in the global tax crisis, analyses developments and suggests concrete solutions. It is written by civil society organisations (CSOs) in 14 countries across the EU. Experts in each CSO have examined their national governments’ commitments and actions in terms of combating tax dodging and ensuring transparency.
Each country is directly compared with its fellow EU Member States on four critical issues: the fairness of their tax treaties with developing countries; their willingness to put an end to anonymous shell companies and trusts; their support for increasing the transparency of economic activities and tax payments of multinational corporations; and their attitude towards letting the poorest countries have a seat at the table when global tax standards are negotiated. For the first time, this report not only rates the performance of EU Member States, but also turns the spotlight on the European Commission and Parliament too.
This report covers national policies and governments’ positions on existing and upcoming EU level laws, as well as global reform proposals.

Overall, the report finds that:

• Although tweaks have been made and some loopholes have been closed, the complex and dysfunctional EU system of corporate tax rulings, treaties, letterbox companies and special corporate tax regimes still remains in place. On some matters, such as the controversial patent boxes, the damaging policies seem to be spreading in Europe. Defence mechanisms against ‘harmful tax practices’ that have been introduced by governments, only seem partially effective and are not available to most developing countries. They are also undermined by a strong political commitment to continue so-called ‘tax competition’ between governments trying to attract multinational corporations with lucrative tax reduction opportunities – also known as the ‘race to the bottom on corporate taxation’. The result is an EU tax system that still allows a wide range of options for tax dodging by multinational corporations.
• On the question of what multinational corporations pay in taxes and where they do business, EU citizens, parliamentarians and journalists are still left in the dark, as are developing countries. The political promises to introduce ‘transparency’ turned out to mean that tax administrations in developed countries, through cumbersome and highly secretive processes, will exchange information about multinational corporations that the public is not allowed to see. On a more positive note, some light is now being shed on the question of who actually owns the companies operating in our societies, as more and more countries introduce public or partially public registers of beneficial owners. Unfortunately, this positive development is being somewhat challenged by the emergence of new types of mechanisms to conceal ownership, such as new types of trusts.
• Leaked information has become the key source of public information about tax dodging by multinational corporations. But it comes at a high price for the people involved, as whistleblowers and even a journalist who revealed tax dodging by multinational corporations are now being prosecuted and could face years in prison. The stories of these ‘Tax Justice Heroes’ are a harsh illustration of the wider social cost of the secretive and opaque corporate tax system that currently prevails.
• More than 100 developing countries still remain excluded from decision-making processes when global tax standards and rules are being decided. In 2015, developing countries made the fight for global tax democracy their key battle during the Financing for Development conference (FfD) in Addis Ababa. But the EU took a hard line against this demand and played a key role in blocking the proposal for a truly global tax body.
Not one single EU Member State challenged this approach and, as a result, decision-making on global tax standards and rules remains within a closed ‘club of rich countries’.

A direct comparison of the 15 EU countries covered in this report finds that:

• France, once a leader in the demand for public access to information about what multinational corporations pay in tax, is no longer pushing the demand for corporate transparency. Contrary to the promises of creating ‘transparency’, a growing number of EU countries are now proposing strict confidentiality to conceal what multinational corporations pay in taxes.

• Denmark and Slovenia are playing a leading role when it comes to transparency around the true owners of companies. They have not only announced that they are introducing public registers of company ownership, but have also decided to restrict, or in the case of Slovenia, avoided the temptation of introducing, opaque structures such as trusts, which can offer alternative options for hiding ownership. However, a number of EU countries, including in particular Luxembourgand Germany, still offer a diverse menu of options for concealing ownership and laundering money.

• Among the 15 countries covered in this report, Spain remains by far the most aggressive tax treaty negotiator, and has managed to lower developing country tax rates by an average 5.4 percentage points through its tax treaties with developing countries.

• The UK and France played the leading role in blocking developing countries’ demand for a seat at the table when global tax standards and rules are being decided.

To read a summary of the report, please click here.

A summary of the report is here.

The full report is here or here.

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  1. tegnost

    “The broader issue seems to go unspoken: what we are willing to pay someone is a reflection of how much we value them, not just their work, but as people. And we are seeing that many are willing to risk a personal catastrophic failure rather than accept the certain subjugation of a badly-paid job.”
    I’ll just tweak this a little and say it;s already a catastrophic failure and a badly paid job doesn’t change that.
    Hopefully this doesn’t double post, another longer version disappeared into the ether when I tried to post it…oops and this is meant to be in a different thread sorry

  2. flora

    In effect, the poorest countries are paying the price for a global tax system they did not create.

    The expression “it’s turtles all the way down” could be rephrased as “it’s neoliberalism all the way down.”

  3. Carlos

    In my opinion we all have to face up to the facts.

    It is not possible to effectively tax corporations and wealthy individuals when there is freedom to move capital willy nilly around the world and they have the freedom to establish multiple residences in several tax jurisdictions simultaneously.

    We can dream about international cooperation and a WW tax regime, but that’s all, it’s just a pipe dream. In reality the only viable solution is to regain national sovereignty and effectively put a tax ring fence around your own currency zone.

    At least 30% of the tax can easily come from a well implemented Georgist land value tax (LVT) which has very beneficial side effects for the general population, but retired/ incapacitated householders need some tax reliefs.

    All transactions and services conducted on your own territory in your own currency should be taxed moderately, (preferably a socially responsive progressive GST). The GST rate can be adjusted up and down if needed as an effective macro economic control.

    No corporate taxes. Instead tax all income (including dividends and capital gains) equally. Corporate tax just intercepts dividends before they are paid to shareholders. That’s why companies don’t pay dividends much.

    Capital gains should be amortised over the period of the investment, the yearly gains can be treated as income and backdated taxes can be calculated. (This is easily done with good tax records and computers).

    Don’t tax your own residents overseas income. Overseas investment income acts effectively as an export for your nation. Let the overseas countries manage their own farm.

    Tax overseas companies moving profits to another currency zone at a nominal corporate tax rate. Make the transfer pricing accounting more transparent and restrict the cost allowances to more acceptable standards. Arrest non-compliant executives.

    Tax dividends and capital gains paid to overseas investors at a nominal rate roughly equivalent to the average rate of taxation.

    Don’t allow overseas financial entities access to your CB, make them use a properly regulated proxy. Make Google style parallel currency transactions illegal and fine the domestic entity of corporations found practicing this dark art.

    Only sign bilateral trade deals. Never enter into regional trade agreements and treaties. Call the bilateral trade agreements “free” trade deals if that grabs your bag.

    This is also a pipe dream and any country attempting this will have a full blown corporate, financier and reactionary backlash. If in the US sphere of influence they will feel the full wrath of CIA pysops and other sanctions, if not invasion.

    A country such as Brazil, Japan or Australia could maybe/possibly pull this off if China and Russia act as a counterweight to the US/UK axis of evil.

  4. alex morfesis

    50 greys in shades…surprise, surprise surprise…the notion that the crocodile tears of eu taxing authorities is nothing more than window dressing is so sad…but as a greek…must confess…we probably invented this too…or I should say onasis and niarchos…it was the shipping world that came up with fantasy structures to run to the lowest common denominator and most countries let it happen…but…I am always the optimistic cynic and figure the players club is running out of countries to run to…that is why the talk of Myanmar and other places…but just like during the Great War…the war to end all wars…the paris gun and big bertha…creating weapons that look great on paper and sitting there for a photo op…but useless in the end…these brilliant ones have outdone themselves and if anyone wanted to look behind the curtain of the IP tax jumps made…they would notice a little part of the law…IP law that allows anyone with 300 bux to challenge the IP rights…seems the good folks have gotten sloppy with their paperwork…that’s what happens when a big 8 becomes a limping 4.5…IP has different categories….thus there is more than one entity using a “MERS” trademark…there can be many trademarks for the same name but for different products…foolishly, these brilliant ones shining on the top of the ivory topped hills…have stretched the IP into areas they never filed for…and in the case of MERS and others who “license” out the names…they have allowed certain “agents” to operate with limited supervision opening themselves up to massive awakenings…

    all mobbed up and no place to run…great report…

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