The Luxleaks scandal has exposed the methods used by many multinationals to avoid or minimise their tax payments. The time is right for the EU to end corporate secrecy through a public register of beneficial owners of companies, writes Christian Hallum.
Christian Hallum is senior policy analyst at the European Network on Debt and Development
Last week’s revelations from Luxembourg – “Luxleaks” – shone some rare light into the secret world of how transnational companies get away with dodging their tax bills. Transnational companies have saved billions of dollars in taxes by shuffling money through Luxembourg, some enjoying effective tax rates of less than 1%. Massive as the leak is, however, it is just the tip of the iceberg. The true scale of tax dodging around the world, not just in Luxembourg, is absolutely mindboggling.
According to the European Commission, around €1 trillion in tax revenue is lost every year in the EU alone. At one number per second, it would take you roughly 31,709 years to count to 1 trillion. The former European Tax Commissioner Algirdas Šemeta has rightly called this “a scandalous loss of much-needed revenue” as well as “a threat to fair taxation”. And the threat is no less serious for developing countries, where losses from transnational companies that dodge taxes are estimated at around $160 billion every year, surpassing what they receive in development aid.
Uncovering hidden profits
How is it possible to keep so many billions out of sight of the tax inspector? Corporate secrecy in the form of anonymous companies and trusts is one of the key answers to this question, according to a new report Hidden Profits coordinated by the civil society network Eurodad.
Anonymous companies and trusts are the financial equivalent of stuffing money in the mattress. They are a tool for concealing funds and keeping them away from the eyes of the authorities. These companies and trusts are primarily used by rich, transnational corporations, perhaps in acknowledgement that the amounts involved are a bit too much for the average-sized mattress.
Governments can also hide behind corporate secrecy to avoid exposing the murky deals that go on within their borders. For example, before Lux Leaks did the job for them, the European Commission struggled to get any information from Luxembourg, as the government argued that they could not disclose the owners or identity of companies referred to in internal tax documents handed over to the Commission in relation to investigations into the possible breach of state aid rules.
Of course, the majority of funds flowing through anonymous corporate structures represent legitimate business proceeds and wealth. But secrecy tends to attract those with secrets to keep. And when it comes to finances, this includes the world’s tax dodgers, money launderers, terrorist financiers, drug lords, corrupt dictators and other shady characters.
As the Organisation for Economic Co-operation and Development (OECD) notes, “almost every economic crime involves the misuse of corporate entities”. This is also the case for developing countries, where a World Bank review of more than 200 instances of grand corruption found that anonymous companies were used in more than 70% of cases.
Transparency is the solution
However, the system of damaging corporate secrecy is under pressure these days. The EU’s current review of its Anti-Money Laundering Directive provides a unique chance to put an end to these practices. The solution would be to ensure that all member states have a publicly accessible register of the real – or beneficial – owners of companies and trusts.
This is a solution that studies by the European Commission and the UK’s Companies House have found to be the most cost-effective. It is also a solution that has brought diverse actors such as the European Banking Authority and civil society together in acknowledgement that it would be the best and simplest way to expose illegitimate uses of corporate secrecy. And it is a solution that is strongly supported by the European Parliament. In a landmark vote of 643 for and only 30 against, MEPs showed in March this year that support for public registries can be found across political and national divides.
The end of corporate secrecy does seem to be within reach, but we are not there yet. In early October the European Parliament, Commission and EU Member States started having regular negotiations to finally agree on the details of the Anti-Money Laundering Directive, which they hope to conclude by December. But the negotiations seem to have gotten off on the wrong foot.
According to credible sources there is currently pressure on the Parliament to exclude the wider public from any meaningful access to information on beneficial owners of companies and trusts. This would be disastrous for transparency and less likely to deliver on the aim of rooting out the rot exposed in scandal after scandal.
Hidden Profits revealed that some of the main opponents of public registries are Germany, Spain, the Netherlands, Sweden and Luxembourg. Those in favour of a public register include France and Denmark, which also joined the chorus of calls for public registries as recently as last week. There is hope that Denmark’s move could inspire others to follow suit.
It is time we put an end to the absurd practice of not knowing who is behind our companies. In a modern market economy where money laundering, terrorism financing, tax dodging and other murky practices are unfortunately still rife, we cannot allow criminals to hide behind a shell of secrecy. They must be exposed. And the EU must take the lead by adopting the most effective way to fight the secrecy: a public register of beneficial owners.