Tuesday

16th Jul 2019

Opinion

Tax havens: need for an EU response to global problem

  • The current discrepancy of different corporate tax rates per member state (ranging from 12.5 percent in Ireland to 34 percent in France) distorts the internal market competition and creates all forms of 'mini tax heavens' within the EU (Photo: ptmoney.com)

The last decades were characterised by significant changes in international financial relations.

Growing financial flows and increasingly sophisticated financial instruments bear witness to the phenomenon.

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The mobility of capital on an international and unprecedented degree inspired the phrase 'financial globalisation'.

Financial globalisation is not only characterised by the use of sophisticated financial instruments worldwide, but also the gradual decoupling between financial flows and production.

We live in an age when the financial sector is becoming increasingly detached from the productive sectors, which is also one of the main reasons for the financial crises that have repeatedly shaken our societies.

In the process of financial globalisation, tax havens play a central role.

According to the United Nations Conference on Trade and Development (UNCTAD), about half of all the investments made by multinational companies originate in tax havens.

To quote an example, the Channel Islands (Jersey and Guernsey) have invested more in China than have Japan and the USA, whilst Mauritius was India's largest foreign investor.

As reported by ATTAC Switzerland, there are currently more than 700 tax havens around the world concentrated in three geographical areas: the Caribbean, western Europe and South Asia.

'Mini tax havens' within EU

The right to levy taxes is a necessary attribute of each sovereign state, hence collecting taxes is the competence of each individual EU member state.

It is also for national authorities to deal with those who do not pay the taxes they owe. However, tax evasion is a complex problem which extends beyond borders. EU countries need to work closely together to tackle these problems at home and abroad.

A determined policy response is needed at all levels to crack down on tax havens or at least reduce their effects.

From a strategic and long-term perspective, the EU must finally take steps to adopt common rates for corporate and income taxes, as well as VAT.

This should not be a national competence any more. The current discrepancy of different corporate tax rates per member state (ranging from 12.5 percent in Ireland to 34 percent in France) distorts the internal market competition and creates all forms of 'mini tax heavens' within the EU.

Moreover, the EU should adopt common incentives for re-investment of corporate profits within its territory, and also harmonised incentives to attract foreign direct investment.

Simple and predictable taxation is the best incentive against tax evasion.

In the shorter term, Europe must take action to tackle all forms of tax havens within its own territory.

The EU and the individual member states must adopt frameworks to exchange all information they possess on the income or financial accounts of individuals residing in them.

The EU member states must become more effective in recovering claims for taxes, customs duties and certain fees, as well as taxes on income, capital and insurance premiums.

They must cooperate to combat VAT fraud through the use of information exchange systems to alert other EU countries of fraudulent activities.

Most important, the EU and its member states must take decisive action at international level.

They should not hesitate to impose sanctions on overseas countries that promote tax evasion against its own interests.

The EU is a global economic giant, it posses immense negotiating powers and has huge leverage on smaller countries all over the world.

Europe should further make best use of the instruments of international organisations. For instance, the Organization for Economic Cooperation and Development (OECD) has set up a global information-sharing scheme, the Common Reporting Standard.

That standard calls on jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis.

Apart from sticks, European countries must also use carrots in a co-ordinated manner.

They should offer a time limited tax amnesty to all funds repatriated to its member states from tax havens.

Overseas countries that drop their tax evading regimes should be rewarded through preferential trade and investment terms. Whistle blowers and all parties revealing off-shore fraud should also be rewarded in a generous manner.

Political gains

The actions proposed above might seem politically difficult, but might also prove a boon for the ones who would realise them.

They could appeal to voters on the left, who are appalled by corporate greed, and also voters on the right who wish a stronger reaction against crime and corruption.

They could further ensure additional public revenues to be allocated for social policies and public investments. In the bigger picture, they could help to reverse the tide of populism, anti-elitism and euroscepticism which has swept our continent.

Author bio

Yannis Karamitsios is co-founder of Alliance4Europe.eu, which is attempting to get three million previous non-voters to vote in the May 2019 European elections, and Elina Morhunova is a international business lawyer based in Vilnius.

Disclaimer

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

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