European Union member states lose 170 billion euros (£143 billion) a year due to tax avoidance and evasion, a Polish state think-tank said in a report due to be discussed later on Wednesday at the World Economic Forum annual meeting in Davos.
The report, from the Polish Economic Institute, also proposed that the European Commission should have powers to sanction as “EU tax havens” countries that benefited from what it called artificial profit-shifting by companies.
“Losses resulting from the use of international transactions for tax fraud and tax avoidance reduce EU Member States’ revenues by around 170 billion euros annually,” Piotr Arak, the director of the Polish Economic Institute, said in a statement.
“The Union should take integrated measures to seal the tax system in order to have an additional source of financing for the new budget, to be constructed without the United Kingdom, a major payer,” the institute said.
The report is to be discussed on Wednesday evening in Davos, with speakers including Polish Prime Minister Mateusz Morawiecki and French Finance Minister Bruno Le Maire.
The broader issue of tax has been high on the agenda at Davos, with a battle brewing between the United States and Europe over how the world’s biggest technology firms are taxed.
Out of 170 billion euros the EU loses every year 60 billion euros comes from artificial profit-shifting by multinational companies – moving earnings from a higher tax jurisdiction to a country with a lower tax rate – 46 billion euros due to moving wealth by rich individuals, and 64 billion euros due to cross-border VAT fraud, the institute said.
The countries worst-hit by losses due to artificial profit shifting were: Germany (18 billion euros), Britain (14 billion), and France (11 billion), it said.
“Some EU Member States benefit from the artificial profit shifting process and should be called EU tax havens,” the report added. “These are: the Netherlands, Ireland, Belgium, Luxemburg, Malta and Cyprus.”
Overall tax losses for EU countries over seven years add up to 1,190 billion euros, or a quarter more than the whole EU budget for 2014-2020 which amounts to 960 billion euros, the institute said.
The Polish Economic Institute’s remit is to supply the government with analysis to support its development plans for the country. Since 2015 Poland has been ruled by the Law and Justice (PiS) party and remains at loggerheads with the EU over judiciary reforms, rule of law, environment and migration policy.
The free movement of capital
The structure of the European Union, with its free movement of capital, facilitates tax evasion
The six European champions in tax evasion are the Netherlands, Ireland, Belgium, Luxemburg, Malta and Cyprus. Ireland has played an active role in lowering its tax rates to favour large enterprises, but the extent of its impact is lesser than the other four. The problem is that the structure of the European Union, with its free movement of capital, facilitates tax evasion. Added to this is the problem of fiscal devaluation and dumping; at which Holland and Ireland are excellent. The Luxleaks have revealed much concerning the Netherlands, but nothing has changed.
The Luxleaks revealed bilateral agreements between companies and Luxembourg —the famous “Tax Ruling”. The Paradise Papers have exposed that Nike, for instance, had an agreement with the Netherlands to avoid paying tax for ten years. Is Europe taking any actions to put an end to such agreements?
The failure to investigate the Luxleaks by the EU after all its promises speaks volumes and further blemishes its already tainted financial history adding to the warranted cries of a corrupt EU.
The EU tried to demonstrate and give the appearance that it is doing something. We have seen some trivial sanctions, such as the rule by the ‘European Commission for Competition’ against Apple. However, the problem is yet to be tackled seriously. In fact, in several cases, the supposedly remedial legislation has been in favour of businesses.
November 2019 EU Tax avoidance draft bill fails in Council vote
12 EU countries reject move to expose companies’ tax avoidance.
The proposal would have forced firms to reveal profits made and taxes paid in each EU country.
Effort to force global companies to publish tax details torpedoed in Brussels as Luxembourg lead the charge against the EU tax transparency legislation, Luxembourg on Thursday successfully spearheaded an effort to block a draft bill that would force multinational companies to publish where they pay taxes and make profits.
Tax-dodging companies deprive national coffers of between €50 billion and €70 billion a year, the European Commission said when laying out the so-called public country-by-country reporting directive (CBCR), which would target companies with global revenues exceeding €750 million a year.
But Luxembourg, Cyprus, Ireland and Malta were among 12 governments to torpedo the draft plans at a meeting of EU industry ministers in Brussels.
Remain myths helped tax avoiders by deflecting from the truth
The remain camp in the UK muddied the waters by claiming the entire referendum was brought about to avoid scrutiny and legislation to bring tax avoiders to justice. This stopped real debate on the issue that could have helped bring about pressure on the EU to clamp down on the 170 billion euros a year lost. That’s 170 billion euros that could have been spent on social projects, job creation and green innovation.
There have been posts on Twitter for over a year claiming that Brexiteers’ enthusiasm for a swift departure from the European Union (EU) is because of new tax rules that are about to come into force.
Here’s a recent example from actor and writer David Schneider.
But the rules are, in fact, all already part of UK law. A small number of them will not come into effect until 1 January, but that would have happened anyway whether or not the UK was a member of the EU.
The EU’s Anti-Tax Avoidance Directive (Atad) is an attempt to make sure companies (especially big digital companies and other multinationals) pay enough tax.
There are five aspects to the rules. Three of them were largely already part of UK law before the EU started working on its directive (a few tweaks have been needed to bring them into line with the EU version). They are:
- General anti-abuse rule – makes complicated plans to reduce tax bills ineffective, even if there are no specific rules against the particular scheme
- “Controlled foreign companies” – means if companies shift profits to companies they own in lower-tax countries, the profits will still be taxed in the country of the parent company
- Exit tax rules – stops EU-based companies moving new products to lower-tax countries just before their development is completed to avoid tax
The other two parts were added to UK law in response to the directive and have already been passed. They are:
- Corporate interest restriction – stops a company reducing the tax it has to pay by paying excessive interest charges to another company, usually one that it owns in a different country
- Anti-hybrids rule – stops companies exploiting differences between countries’ tax rules
While the UK is still in the EU, the EU could decide that the way the UK has implemented Atad is not consistent with the directive, but any changes would be unlikely to be huge, experts say.
So it’s hard to find anything happening in January 2020 to these rules that looks significant enough to influence the speed at which some people might want to leave the EU.
The directive was produced in response to recommendations from the Organisation for Economic Co-operation and Development (OECD), and the UK will remain a member of that group after Brexit.
It should be noted that leaving the EU will mean future governments could remove any of these laws that they could get a majority for, but there has been no suggestion that the current government plans to do so.
Where it came from
The idea seems to have originated in this article from August 2018 with the headline: “Is this the real reason why Farage and Rees-Mogg want a speedy Brexit?”
It was written by two members of Lawyers Against Brexit, who were asked to comment for this piece but have declined to do so.
The piece was still being linked to in March by Labour’s David Lammy MP.
The original article talked about the deadline in January 2019, which was when the interest restrictions, controlled companies and the general anti-abuse rules had to be in place. During 2019, the focus of the memes has turned to January 2020, which is the deadline for the other two areas (exit tax and anti-hybrids).
It’s also been referred to by Oliver Murphy. And it has been debunked a few times along the way by this extended blog post, and by Full Fact, which cited the claim being made by presenter Terry Christian.
Meanwhile the efforts made by tax campaigners have been undermined allowing the smoke and mirror effect to take place with misdirection.
Wealth inequality has increased over the last decade. Despite the growing importance of inequalities in policy debates, it is still difficult to compare inequality levels across European countries and to tell how European growth has been shared across income groups.
There is a widening gap between the haves and the have nots, with wealth inequality increasing over the last decade. Key points include:
- The wealthiest 10% now have at least five times more wealth than the bottom half of households;
- London and the North East of England are the regions with the greatest wealth inequality.
- Wealth inequality is double that of income inequality.
Meanwhile, new figures from the OECD show that the UK is in the middle of the pack when it comes to how much tax the government raises, with 33.5% of UK GDP raised as tax revenue. The UK ranks 20 out of 36 wealthy countries, behind Spain and Germany.
Robert Palmer said: “As well as being a fundamental building block of a decent society, tax has a crucial role to play in rewiring the economy so it is more equal. The OECD’s league table shows that there is plenty of scope for higher levels of tax as a proportion of GDP if you compare the UK to similar countries.”
The EU must get its own house in order, according to Oxfam’s analysis five EU countries
Tax havens are fuelling an inequality crisis that sees 8 people own the same wealth as the poorest half of the planet. We must work together and call on world leaders to end their use, once and for all.
Tax havens deprive countries and their citizens of hundreds of billions of dollars, fuelling inequality and poverty. The EU will soon release a blacklist of tax havens operating outside the EU, and issue sanctions for those listed.
However, power politics means that several significant tax havens could be missing from the list. The blacklist is being drafted in secret, putting citizens in the dark and leaving tax havens free to use their political and economic leverage to get themselves off the EU blacklist.
Oxfam shadowed the EU blacklist, using the EU’s own criteria to shine a light on which countries should be on the list if it applied its own criteria objectively, without bowing to political pressure. We also identified the EU countries that would be blacklisted if the EU didn’t exclude its own member states from the list.