Wednesday

24th Jan 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.

Thank you for reading EUobserver!

Subscribe now for a 30 day free trial.

  1. €150 per year
  2. or €15 per month
  3. Cancel anytime

EUobserver is an independent, not-for-profit news organization that publishes daily news reports, analysis, and investigations from Brussels and the EU member states. We are an indispensable news source for anyone who wants to know what is going on in the EU.

We are mainly funded by advertising and subscription revenues. As advertising revenues are falling fast, we depend on subscription revenues to support our journalism.

For group, corporate or student subscriptions, please contact us. See also our full Terms of Use.

If you already have an account click here to login.

  • 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

EU blacklists 17 tax havens, avoids sanctions

Finance ministers pointed out 'non-cooperative' entities and set up a second 'grey' list of more than 40 countries that have promised to improve their tax practices.

LuxLeaks whistleblower Deltour acquitted

The court confirmed a sentence of €1,000 fine for Deltour's fellow leaker Raphael Halet, raising pressure on the European Commission to come forward with proposals to protect whistleblowers.

Lessons for EU from the Greek tragedy

The Greek crisis showed the euro is more robust than people thought and that profligate states can write off public debt without leaving the currency.

Ten Commandments to overcome the EU's many crises

A series of missteps - from the faulty institutional infrastructure of the euro, to the migration crisis - have left the EU battered and in near crisis. Here are ten steps to re-democratise the union.

EU's 'old men' must pressure Poland on abortion rights

Despite fresh crackdowns on Poland's already restrictive abortion laws, EU commission president Juncker did not raise the issue with the new Polish PM Morawiecki - perhaps because it was an all-male event?

Stakeholders' Highlights

  1. European Free AlllianceNo Justice From the Spanish Supreme Court Ruling
  2. Nordic Council of MinistersNordic Solutions for Sustainable Cities: New Grants Awarded for Branding Projects
  3. Mission of China to the EUTrade Between China, Belt and Road Countries up 15%
  4. Nordic Council of MinistersOresund Inspires Other EU Border Regions to Work Together to Generate Growth
  5. Mission of China to the EUTrade Between China, Belt and Road Countries up 15%
  6. AJC Transatlantic InstituteAJC Calls on EU to Sanction Iran’s Revolutionary Guards, Expel Ambassadors
  7. Dialogue PlatformRoundtable on "Political Islam, Civil Islam and The West" 31 January
  8. ILGA EuropeFreedom of Movement and Same-Sex Couples in Romania – Case Update!
  9. EU2017EEEstonia Completes First EU Presidency, Introduced New Topics to the Agenda
  10. Bio-Based IndustriesLeading the Transition Towards a Post-Petroleum Society
  11. ACCAWelcomes the Start of the New Bulgarian Presidency
  12. Mission of China to the EUPremier Li and President Tusk Stress Importance of Ties at ASEM Summit

Latest News

  1. Lessons for EU from the Greek tragedy
  2. A new dynamic on the Macedonia name issue
  3. Berlusconi in Brussels on pre-election charm offensive
  4. ECJ should rule against Austrian online censorship lawsuit
  5. EU states loosen grip on tax havens
  6. Facebook promises privacy reboot ahead of new EU rules
  7. Europe is lacking tech leadership
  8. Spitzenkandidat system here to stay, MEPs warn capitals

Stakeholders' Highlights

  1. EU2017EEVAT on Electronic Commerce: New Rules Adopted
  2. European Jewish CongressChair of EU Parliament Working Group on Antisemitism Condemns Wave of Attacks
  3. Counter BalanceA New Study Challenges the Infrastructure Mega Corridors Agenda
  4. Dialogue PlatformThe Gülen Community: Who to Believe - Politicians or Actions?" by Thomas Michel
  5. Plastics Recyclers Europe65% Plastics Recycling Rate Attainable by 2025 New Study Shows
  6. European Heart NetworkCommissioner Andriukaitis' Address to EHN on the Occasion of Its 25th Anniversary
  7. ACCACFOs Risk Losing Relevance If They Do Not Embrace Technology
  8. UNICEFMake the Digital World Safer for Children & Increase Access for the Most Disadvantaged
  9. European Jewish CongressWelcomes Recognition of Jerusalem as the Capital of Israel and Calls on EU States to Follow Suit
  10. Mission of China to the EUChina and EU Boost Innovation Cooperation Under Horizon 2020
  11. European Gaming & Betting AssociationJuncker’s "Political" Commission Leaves Gambling Reforms to the Court
  12. AJC Transatlantic InstituteAJC Applauds U.S. Recognition of Jerusalem as Israel’s Capital City

Stakeholders' Highlights

  1. EU2017EEEU Telecom Ministers Reached an Agreement on the 5G Roadmap
  2. European Friends of ArmeniaEU-Armenia Relations in the CEPA Era: What's Next?
  3. Mission of China to the EU16+1 Cooperation Injects New Vigour Into China-EU Ties
  4. EPSUEU Blacklist of Tax Havens Is a Sham
  5. EU2017EERole of Culture in Building Cohesive Societies in Europe
  6. ILGA EuropeCongratulations to Austria - Court Overturns Barriers to Equal Marriage
  7. Centre Maurits CoppietersCelebrating Diversity, Citizenship and the European Project With Fundació Josep Irla
  8. European Healthy Lifestyle AllianceUnderstanding the Social Consequences of Obesity
  9. Union for the MediterraneanMediterranean Countries Commit to Strengthening Women's Role in Region
  10. European Heart NetworkThe Time Is Ripe for Simplified Front-Of-Pack Nutrition Labelling
  11. Counter BalanceNew EU External Investment Plan Risks Sidelining Development Objectives
  12. Dialogue PlatformThe Turkey I No Longer Know