After the Luxleaks scandal, there is still no proper response to the industrial scale tax avoidance the scandal exposed a year ago today, writes Aurore Chardonnet. But a simple vote by finance ministers could change that.
Aurore Chardonnet is Oxfam EU’s policy advisor for inequality and taxation.
A year ago, the news came as a bombshell: the global economy had fallen victim to one of the largest robberies of all time. The release of confidential information on Luxembourg’s tax rulings benefitting over 350 multinational companies shone a light on secret deals agreed between governments and some of the largest companies in the world.
Luxleaks, as it became known, showed that tax rulings are misused in a way allowing multinationals to dodge millions in tax. Yet this type of industrial-scale tax avoidance is still missing a proper response.
It’s not citizens or small businesses which duly pay their taxes that benefit from tax avoidance. It is surely not public services, such as healthcare and education, which lack vital investment.
And it is certainly not developing countries, which are hit hardest by corporate tax dodging. A recent UN report calculated that profit-shifting by multinational companies costs developing countries $100bn a year in lost corporate income tax, nearly as much as the total global official development assistance (ODA). As developing countries rely on corporate taxes for a greater proportion of their revenue than developed countries, these figures are especially dire.
The only ones benefiting from this large scale robbery are giant multinationals, big audit firms and secrecy jurisdictions.
There has never been so much wealth sitting in tax havens as there is today, says economist Gabriel Zucman in The Hidden Wealth of Nations, estimating that 8% of the world’s financial wealth is held offshore.
Just a month ago, world leaders gathered at the United Nations to adopt the sustainable development goals (SDGs). They called for an end to extreme poverty and to reduce inequality. But when it comes to fair taxation, it seems the wealthiest countries are not putting priorities of developing countries even on the table. However, SDGs will hardly be achieved if we do not put end to a system that allows tax dodging and prevents developing countries to legitimately retain the tax revenue they deserve.
Cautious first steps
Despite signs that the European Union is taking Luxleaks seriously, we are still waiting to see a fully fledged response to this scandal.
MEPs showed willingness by setting up the ad-hoc special committee TAXE. But due to a lack of support from the major party groups, it has very limited powers. The European Commission proposed a set of actions to tackle tax avoidance, including a so-called ‘tax transparency package’, followed by an action plan. Also, the Commission’s competition department started to investigate tax rulings which may involve illegal state aid and declared last month that members states had provided illegal tax rulings to Starbucks and Fiat.
Still, this set of actions in no way tackles the root causes of the scandal. Not a single measure proposed by the Commission so far would effectively prevent another scandal of tax dodging.
In fact, member states continue to water down whichever cautious measures are brought forward. In early October, finance ministers agreed to make some tax rulings “transparent”, suggesting a ‘tax revolution’ was on its way. At the same time, only tax rulings entered during the last five years will be subject to these new rules. Worse still, tax administrations can access it, not the public.
And most importantly: harmful tax rulings will not be stopped. That is clearly not a ‘tax revolution’.
Let us know where you are earning your money and where you are paying your taxes
A year has passed since Luxleaks broke, but European leaders are yet to deliver. So far they’ve been all talk and very little action.
Firstly, real transparency is needed on tax rulings of states favouring multinational corporations.
Secondly, we need to know where companies really make their profits and where they are paying their taxes. This would allow countries to fairly tax multinationals where their profits are. To achieve this, a simple solution is on the table. Country-by-country reporting, as it is called in tax jargon, would require multinational companies to publish exactly this information.
Some member states have announced they are ready to implement it but are reluctant to make this information public. However, country-by-country reporting can only be successful if information is publicly available and easily accessible to all countries. If it remains confidential, the public and civil society will not be able to hold multinationals to account for their tax practices. Moreover, developing countries will be unable to scrutinise the global tax arrangements of multinationals operating in their territory.
The European Union has already adopted public country-by-country reporting for the banking and extractive sectors. In its own impact assessment, the European Commission concluded that this is “unlikely to have a significant negative economic impact, and could have a small positive economic impact”.
The necessary steps for transparency are easy to take: the European Parliament already voted in favour of legislation which obliges large companies across all sectors to publicly declare their earnings and taxes in all locations where they operate. This means a simple vote by the EU finance ministers could make public country-by-country reporting become reality.
All it takes is one vote for us to be able to scrutinise whether multinationals are paying their fair share. It’s high time for European leaders and their finance ministers to take action for tax justice.