Saturday

21st Apr 2018

Opinion

Panama Papers - start of sensible revolution in EU tax affairs?

  • Individual EU member states have lost billions in tax revenue through 'letterbox' companies in places like Luxembourg and the Bahamas (Photo: Fotolia)

On Tuesday (12 December) the European Parliament is discussing the recommendations of the PANA Committee, set up to investigate what actions the EU could take to prevent money laundering, tax avoidance and tax evasion in the wake of the Panama Papers.

On Wednesday, they will vote on those recommendations. Since the committee started their work, we have also seen the release of the Paradise Papers. Their work could not be more current or necessary.

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  • The initial Panama Papers revelations were quickly followed by the Paradise Papers - suggesting tax avoidance by global corporations is widespread but under the radar (Photo: European Parliament)

The Panama Papers and the Paradise Papers after them were not just about the activities of a few rogue lawyers thousands of miles away; they went to the very heart of the global financial system, and how it is used and abused.

For the EU, one of the most important issues raised by the scandals is how the fundamental freedoms of the Union have been abused by global corporations to undermine nation states.

A number of corporate scandals in recent years have demonstrated how companies have set up structures within the European Union designed to take money out of profitable operations in EU states tax free, and funnel the cash to shell companies in other EU countries where backroom deals have allowed them to keep the money or move it on to another tax haven.

A key example is provided by the recent release of the Paradise Papers.

Nike - 'Just Do It'?

The documents published by the International Consortium of Investigative Journalists (ICIJ) showed how Nike used the Netherlands to collect revenues from stores around Europe, where it was then shipped off to Bermuda. Little or no tax was paid in the country where the purchases were made, or the Netherlands, or Bermuda.

This kind of practice, of concentrating European revenues in one lightly-taxed EU member state, and concentrating all the costs where the real money is made, was pioneered by Amazon.

The company collected all of their revenues in Luxembourg whilst only incurring costs in the countries where the majority of their products were actually being sold.

It is now widely recognised that these kinds of structures undermine fair competition and good business, as they allow a select few companies to gain an unfair advantage, which they then use to undercut the competition, robbing them of their opportunity to succeed.

However, although these structures have been around for a long time, for many years European governments have found taking action against such schemes to be difficult.

One of the founding legal principals of the European Union is the free movement of capital across borders, and the free establishment of business.

Companies have used this to successfully challenge attempts by governments to attack tax avoidance schemes that use EU companies in their structures.

Although occasionally, such as with the Vodafone judgment in the UK Court of Appeal, judges took the view that the free movement of capital within the EU was not a free ticket to set up abusive tax structures, other cases resulted in a different interpretation of the law and the courts came down on the side of tax avoiders.

The PANA committee recognises that as long as tax havens exist within the European Union, the freedom of movement for capital will mean that nation states will find their potential to engage in independent tax policy is limited. This conflicts with another founding principal of the EU, the strengthening of democratic nation states though co-operation.

Sensible proposals

The committee proposes several sensible and much-needed reforms to ensure that the European dream of peaceful co-operation is not torn apart by corporate greed and a few aggressive nations trying to tear a hole in the tax system.

Firstly, it seeks to recognise that Europe has a problem. Contrary to the ill-judged declaration of commissioner Pierre Moscovici that there are 'no tax havens' in the EU, it accepts that there are European states that have made it their policy to create and profit off loopholes in the international tax system, and requests that the European Commission produces a list of EU tax havens to complement its external list published last week.

Secondly, having established that there is a problem in the EU, it calls on the commission to help put our house in order, calling for legislation to prevent the establishment of 'letterbox companies' and make sure that when a business is established in the EU it is a real business and not just a paper-based tax avoidance factory.

Thirdly, it seeks to address the conflicts that have emerged between the free movement of capital and the freedom of nation states to set appropriate policy on the finance of public services by rebalancing the European Union towards its co-operative roots.

It calls for a review of European legislation to ensure that fair taxation is not put at risk by the way in which the free movement of capital has been interpreted. It also calls for states to agree a level playing field in tax and agree a minimum effective tax rates for business across the Union.

There will no doubt be some free-market fundamentalists who will argue that the freedom of movement of capital must be defended at all costs. They should consider what that cost really is.

The many corporate scandals that have rocked the EU have created a real sense of injustice with the European public.

Not only has tax avoidance wounded nation states, forcing them to cut valued public services, but the long period of inaction by governments has undermined confidence in political and economic elites, which in turn has allowed some to attack institutions like the EU.

The parliament has the opportunity tomorrow to adopt a set of perfectly sensible recommendations which address some of the real issues confronting our economies.

These are measures which are proportionate, necessary and strike the right balance between preserving the freedoms of the European market, and the freedom of democratic governments to chose and fund social polices which provide for their citizens.

Let's hope the commission take up these ideas with urgency.

George Turner is a researcher for the Tax Justice Network

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