Tuesday

4th Aug 2020

Opinion

The unlearned lesson of LuxLeaks

  • Luxembourg: a little Dutchy with big secrets. But why is Germany blocking EU transparency? (Photo: Jimmy Reu)

Last week it happened again: a giant cache of confidential tax files from Luxembourg was leaked.

Now that even Disney is named among the hundreds of companies that used Luxembourg to create magically low tax bills, the impression of a broken international tax system is becoming clearer and clearer.

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But, judging from the political response to the first leak a month ago, we are nowhere near having learned the lesson that should be learned: to fix the tax system we need corporate transparency.

Corporate transparency is key

Before the leaks, the European Commission (EC) had been struggling in its recent investigation of the Duchy’s tax system. Luxembourg would not even provide the EC with the identity of corporations based in the country.

Luxembourg argued that their domestic laws prohibited them from disclosing this information. Now, the commissioner for competition has made it clear that she intends to use the leaks in her investigations.

And it is of course not only investigators that benefit from public information.

Making tax information public means that transnational companies can be held to account by the public – without this sort of transparency, we’re simply reliant on a continuation of leaks and whistleblowers.

Transnational companies, like all other centres of power and wealth, should be open about their actions and willing to discuss them in public. As the Africa regional director for the United Nations Millennium Campaign warns us “the very concept of a jurisdiction selling secrecy as its competitive advantage is killing democracy”.

But perhaps most importantly, making information public allows the whole world to reap the benefits. Developing countries are some of the most affected by tax dodging.

Kenya illustrates the scale.

According to the Swiss National Bank, Kenya’s elite have stashed away €640 million in secret bank accounts in the alpine tax haven alone.

Several transnational companies who have invested in Kenya also try to duck their tax responsibilities, with the country’s revenue authority having recouped more than 250 million from transnational companies’ manipulation of intra-company trading.

If the Kenyan Revenue Authority found that much in the limited information available now, how much more would be uncovered if the veil of secrecy was lifted?

In short, if there is one thing we should learn from the LuxLeaks, it is the power of transparency.

Going nowhere fast

Politicians have been scrambling to announce swift actions on tax dodging since the first round of LuxLeaks were published 6 November. Unfortunately, it seems to be a classic case of going nowhere fast.

The first disappointment came with the EU commission and parliament’s response. While former Luxembourg prime minister and newly elected commission president Jean-Claude Juncker did face some tough questions, the main response from him was a plan that would still keep tax rulings out of the public domain.

The move signaled that, while reform was going to happen, transparency would not be part of that reform.

Members of the European Parliament did succeed in keeping the issue in the spotlight, but due to resistance from the leadership of certain political parties, parliamentarians have yet to set up an inquiry committee to follow up on the leaks.

The second disappointment came a week after the leak at the G20 summit in Australia.

There, the leaders of the world’s 19 largest economies plus the European Union approved the tax reform proposals developed by the Organisation for Economic Co-operation and Development (OECD) – a rich country think tank – among which was a proposal for transnational companies to report on a country-by-country basis.

Country-by-country reporting means that transnational companies will have to break down their earnings, profits and other key information in their financial reporting for each country they operate in, making it clearer if profits are being artificially shifted from one subsidiary to the next.

But crucially, the G20 fell short by deciding that this information would not be made publicly available.

There is a danger that the EU could fail for a third time this week in its negotiations of the Anti-Money Laundering Directive (AMLD).

The European Parliament has forcefully argued that the directive should be used to create a public register of who actually owns companies and other legal entities, which would be a key tool to fight tax dodging.

However, MEPs have met resistance from certain member states who argue that the public has no business having access to this information.

One of the countries most actively blocking the public registries is Germany.

This is although Germany recently called on the commission in a letter to do more about tax dodging. More than 40 investigative journalists have also called on the EU to deliver the public register.

What Europe needs

Policymakers may not have learned the lesson the first time around, but they now have another chance to get it right.

First, Europe needs public registers of the real owners of companies and other legal entities. This will be the first test, as the European Parliament and Council could decide on this as early as 16 December in a meeting to discuss the EU’s Anti-Money Laundering Directive.

Second, Europe needs public country-by-country reporting. Lastly, Europe needs publicly transparent tax rulings. Taken together, these initiatives would create the financial transparency that’s badly needed to address tax dodging.

Failure to act will mean we, as Europeans, have not learned any lessons from the Luxembourg leaks.

Koen Roovers is the EU lead advocate for the Financial Transparency Coalition (FTC)

Disclaimer

The views expressed in this opinion piece are the author's, not those of EUobserver.

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