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01/10/2016

Brussels mulls clampdown on tax avoidance after Luxleaks

Euro & Finance

Brussels mulls clampdown on tax avoidance after Luxleaks

The European Commission intensified efforts to fight rampant tax avoidance by multinationals on Wednesday (18 March), in its first major effort to counter the LuxLeaks scandal that embarrassed President Jean-Claude Juncker just days after he took office.

The EU executive said its ambitious plan would force the EU’s 28 countries to share details of any tax deals agreed with some of the world’s biggest multinationals, ending the secrecy that allowed member states to often compete against each other to attract business and investment.

“Tolerance has reached rock-bottom for companies that avoid paying their fair share of taxes, and for the regimes that enable them to do this,” said EU Economics Affairs Commissioner Pierre Moscovici, as he announced the plan.

“We have to rebuild the link between where companies really make their profits and where they are taxed,” he said.

http://www.euractiv.com/video/commission-steps-fight-against-corporate-tax-evasion-313015

The plan targets so-called tax rulings, secret deals at the heart of the LuxLeaks scandal which revealed last year that some of the world’s biggest companies — including Pepsi and Ikea — had lowered their tax rates to as little as one percent in secret pacts with tax authorities in Luxembourg.

The revelations, unearthed by a consortium of investigative journalists, were an especially huge embarrassment to Juncker, the then-newly installed Commission head who presided over the tax pacts for almost 19 years as Luxembourg prime minister.

French centre-right MEP Alain Lamassoure, the European Parliament’s Special Committee on Tax Rulings’ chairman, said that transparency among member states is a first step.

“The next must be the maximum possible transparency among economic players themselves and consumers. The ultimate objective is justice, tax fairness among states and companies”.

Under the new regime proposed by the Commission, member states would be forced to reveal tax rulings made with companies to other bloc members automatically every three months.

This transparency, Moscovici said, would deny companies the ability to secretly shift profits and avoid taxes, at least within the EU.

The plan, however, did not question the perfectly legal practice of offering companies tax rulings, Moscovici said, this being the strict responsibility of member states.

Critics said the plan was too narrow in scope, and the transparency too limited, to truly address corporate tax avoidance they said occurs on a massive scale.

Relative transparency

“Though this tax transparency package is supposed to be a response to the Luxembourg Leaks, it’s only addressing a fraction of the problem,” said Koen Roovers of the Financial Transparency Coalition in Brussels.

“Over 150 companies in the leak were associated with the United States, but they will simply be out of bounds under this proposal,” he said.

Activists also criticised the fact that the tax ruling would remain out of the public eye, remaining privileged information for tax authorities.

“This is not tax transparency or tax justice. The veil of secrecy remains in place,” said Tove Maria Ryding, of the European Network on Debt and Development.

Jacques Fabre, Administrator for Transparency in Paris, said “it is too much to talk of tax transparency when we know that none of this information will be available to the public”. The idea of publicising of tax rulings has not been completely ruled out by the Commission, but it is proceeding with caution on the matter.

A source in the Commission told EurActiv “We will carry out an impact assessment on the matter of publishing tax rulings,” but added that publicising the agreements signed between states and companies would not necessarily be a more efficient way of tackling the issue than transmitting the information to the tax authorities.

This view is not shared by many NGOs, who call for greater protection for the interests of developing countries. Lucie Watrinet from CCFD-Terre Solidaire said “publicising information on tax rulings or on the activities and taxes paid by European businesses would allow other non-European countries access to data that could be very useful in understanding complex tax systems”.

New EU legislation, prosecutions in Luxembourg

The Commission has refused to pass judgement on tax rulings, stating that they are not illegal in themselves, but that a distinction should be drawn between legitimate and harmful rulings. “Even I negotiated them as Finance Minister of France,” said Pierre Moscovici.

The fate of the issue depends on the good will of the member states. But while the current Latvian presidency appears highly motivated on the subject, in July the Council presidency will be handed over to… Luxembourg. In charge of the Council agenda, the country will be unlikely to push the issue of tax rulings to the forefront.

A former employee of PricewaterhouseCoopers, Luxleaks whistleblower Antoine Deltour, is currently on trial in Luxembourg for violating trade secrets law.

Positions

"Everyone has to pay their fair share of tax. This applies to multinationals as to everyone else. With today’s proposal on the automatic exchange of information, tax authorities would be able to better identify loopholes or duplication of tax between Member States. In the coming months, we will put forward concrete actions to tackle such loopholes or overlaps. We are committed to following up on our promises with real, credible and fair action," said Commission Vice-President Valdis Dombrovskis, responsible for the Euro and Social Dialogue.

"A positive first step has been taken by the EU Commission to defend the rights of European citizens from tax fraud and tax evasion. Our aim is to prevent further cases, such as #LuxLeaks, which remain morally unacceptable but legally permitted. Transparency is the first step," said S&D Group president, MEP Gianni Pittella.

"We want transparency and light in the dark, but not only this. We also want to tackle the problems which have been in the dark until now", said Burkhard Balz, EPP Group Spokesman in the European Parliament's Committee on Economic and Monetary Affairs and the newly set-up Special Committee on Tax Transparency. 

"We do not want letterbox companies," he said, explaining that the compulsory and automatic exchange of information about every single tax deal between Member States and individual companies is absolutely necessary and must be adopted as soon as possible. "This will shed light on the hidden practices of some Member States", he insisted.

However, Balz called for prudence. "Fighting tax evasion must not increase red tape. If every single company which does business in other Member States must report its activities in every country, we will start an avalanche of new bureaucracy. This might even become an obstacle to the Single Market", Balz warned.

Commenting on the proposals, the Greens in the European Parliament slammed the proposal saying it was 'a pretty empty package' which does not recognise that tax competition or dumping undermines the EU's internal market

"It shows the Juncker Commission has still not grasped the seriousness of the situation and the need for a comprehensive EU-level response," said Greens/EFA co-president Philippe Lamberts.

"The proposal on information exchange between member states is necessary and welcome, clarifying an obligation which has existed since the 1970s but not been properly applied. If it had been applied, it would have ensured that odious 'tax rulings' could not have been kept concealed. However, this is only one of a number of measures that could and should be introduced to improve transparency on taxation. New legislation to increase transparency on all tax matters must be prioritised, so as to make unholy deals like those uncovered by Lux Leaks impossible to conceal. Specifically, country-by-country reporting should be extended to all transnational companies. The Greens have tabled proposals to this end in the ongoing review of EU rules on shareholder rights and we would urge all parties to support this," he insisted.

"The Greens will continue to push the Commission, EU governments and the European Parliament to ensure a credible EU response. We also finally need agreement on implementing a binding common consolidated corporate tax base (CCCTB). This should be accompanied by proposals for a European minimum corporate tax rate and minimum standards for double taxation agreements," added Greens' economic and finance spokesperson Molly Scott Cato.

"Improving transparency is urgently needed to put an end to sweetheart tax deals between governments and multinational companies. We must ensure that companies across Europe pay their dues and do not steal a competitive advantage over small businesses. However, mandatory exchange of information between national governments is not enough.To prevent a race to the bottom, tax rulings must be brought out into the open where they can be subject to proper public scrutiny," said Liberal Democrat MEP Catherine Bearder.

"When it comes to aggressive tax planning we believe that sunlight is the best disinfectant," said European Conservatives and Reformists (ECR) MEP Morten Messerschmidt.

?"Improving transparency is one area where the EU, G7 and G20 can make a useful contribution. However, there is a strong drive by Mr Juncker and many MEPs to exploit the Luxleaks saga and fulfil their fantasies of EU tax harmonisation. The ECR group will stand firm against any efforts to harmonise taxation. It is a competence that must remain at the Member State level and any efforts towards harmonisation would sound the death knell for Europe's competitiveness," added Messerschmidt.

Tove Maria Ryding, head of Tax Justice at the European Network on Debt and Development (Eurodad), said, “This is not tax transparency or tax justice. The veil of secrecy remains in place. The lack of public information also means that tax administrations in developing countries cannot identify corporate tax dodgers. 

?“The European Commission has the chance to make a real difference in June, when it releases its Corporate Tax Package. We hope that the baby steps taken in this package will turn into strides for real change in the summer.”

"Though this tax transparency package is supposed to be a response to the Luxembourg Leaks, it's only addressing a fraction of the problem," said Koen Roovers, EU Advocate for the Financial Transparency Coalition. "Over 150 companies in the leak were associated with the United States, but they will simply be out of bounds under this proposal.

“If all EU tax rulings were made public, companies would have a harder time negotiating the types of tax deals that don’t stand up to public scrutiny”. 

Catherine Olier, Oxfam’s EU policy advisor, complained that the European Commission is still not addressing the issue head on. "This feeble proposal fails to confront tax dodging by big business, and does nothing to stop sweetheart tax deals, such as those exposed by the recent LuxLeaks scandal. By not including country by country reporting – information on where companies really employ people, hold assets and pay taxes – in the transparency proposal today, the European Commission is deceiving citizens while big business runs amok with cash needed to finance essential services. This level of transparency is desperately needed to spot multinationals deliberately shifting profits to dodge tax,” she said, calling a meaningful action plan on corporate taxation in June.

?"The overall aim of this package is to increase tax fairness; what is important is that the mechanisms used do not make EU businesses less competitive or impose unreasonable burdens. Trust in tax systems is currently very low and we need to rebuild it. At the same time it is also vital that businesses are encouraged to continue to grow, providing the resources for public finances," said Ian Young, ICAEW International Tax Manager, adding that tax administration needs to be workable at both a national and international level.

“Making this detailed information available will help the public make an informed judgement about a company’s contribution to the society in which it operates, flag up corruption risks by shedding light on special arrangements between companies and governments, and deter aggressive tax avoidance. Given that EU leaders agreed on the merits of this legislation in 2013, and considering the Commission’s own positive assessment last year of the benefits of such transparency requirements, we expect rapid progress in the coming months,” Nienke Palstra, Senior Policy Officer at Transparency International. 

Chas Roy-Chowdhury, head of taxation at Association of Chartered Certified Accountants said, "ACCA, albeit in principle in favour of the automatic exchange of information in the area of tax rulings, is nevertheless concerned by the volumes of complex information which are likely to be exchanged between member states. There is a potential for the whole process to become a bureaucratic nightmare for participants. We would also have concerns around the leakage of sensitive commercial information during the process.

"ACCA therefore recommends that the scope of tax rulings information to be exchanged is very tightly defined so as to ensure a streamlined process together with a standardised template for the information to be conveyed."

Background

More than 300 companies, including PepsiCo Inc, AIG Inc and Deutsche Bank AG, secured secret deals from Luxembourg to slash their tax bills, the International Consortium of Investigative Journalists (ICIJ) reported on 5 November, quoting leaked documents.

The companies appear to have channeled hundreds of billions of dollars through Luxembourg and saved billions of dollars in taxes, the group of investigative journalists said, based on a review of nearly 28,000 pages of confidential documents.

Luxembourg has faced international criticism following the revelations.

The leaks put pressure on European Commission President Jean-Claude Juncker, a prime minister of Luxembourg, to explain his role in the country's tax policies.

Juncker has defended the country's tax practices, but is now promoting a plan for a common EU system to share tax information. 

>> Read: Juncker admits he is 'weaker' after fresh batch of Luxleaks revelations and Schäuble urges EU to boost transparency on tax deals

Further Reading