By Javier Pereira and Alex Marriage
DG TAXUD, the taxation and customs department of the EU civil service, is working on a strategy on tax havens and unfair tax competition to be released in the last quarter of the year. This is an extremely welcome step, as the communication addresses several key issues. It recognises that not only double taxation but also double non-taxation is a problem when working out how to tax cross border wealth and income; proposes the introduction of automatic information exchange at EU level; and explores several concrete measures against non-cooperative tax jurisdictions and aggressive tax planning. However, in many ways the outline strategy that is being proposed looks incomplete, it seems that this strategy would not be capable of fully addressing the problem unless some omissions and weaknesses are addressed. The communication, was the subject of a seminar held in Brussels on 17 July. This article outlines some of the highlights of the discussion, both civil society and private sector had with the Commission.
Developing countries are largely absent from the current discussion, despite being particularly vulnerable to the problems this communication seeks to address. Moreover, their tax authorities usually lack the resources and regulation to effectively battle against unscrupulous tax planning, as recognised by the European Commission in the Communication on tax and development from 2010). In addition, the impact of EU tax regulation on developing countries is something that should be considered under the EU’s commitment to Policy Coherence for Development.
Turning a blind eye to EU tax havens? TAXUD Communication focuses on non-EU countries and territories. Although a very political issue, several major tax havens are found within the borders of the EU. It is important that any measures adopted by the EU also apply to these jurisdictions. If not, the effect would be a relocation of financial flows from international to European tax havens.
More focus on the specific role of multinational companies. During the discussion there seemed to be a broad acceptance that Automatic Information Exchange (AIE) is necessary. However, there is still a long way to go TAXUD appealed to the European Council to finally agree on the extension of the European Savings Tax Directive (EUSD) to other legal entities and capital gains. However this is threatened by the Rubik deals a set of agreements devised by Switzerland based financiers in order prevent automatic information exchange from being applied to other income streams.
The EU is moving forward with the Common Consolidated Corporate Tax Base. This is a very welcome initiative in that it is based on the idea of calculating tax bases where there is actual economic activity is taking place. This would help to prevent companies from using techniques such as profit shifting to minimise taxation. However, the fact that this is optional will allow companies to only chose to use it over national systems when it is cheaper for them, rendering it counter-productive for revenue collection.
Towards a European definition of tax havens? Having a strong EU definition of tax havens would be a significant step towards tackling the problem. In terms of the technical definition of a tax haven, the Commissions should build on the wording of the AIFM Directive’s. Secrecy, including failure to collect information on the human beings, who own and control, corporations, trusts, foundations and other legal entities must be a key consideration. Measures which give foreigners preferential treatment to attract their money should also be essential criteria. It must be remembered that Tax havens specialise, some focus on secrecy and some on low tax rates but most tax havens do not tick all the boxes.
Implementing a toolbox of carrots and sticks for tax haven reform. The idea was raised at the 2009 G20 for a package of measures to punish and reward non-cooperative jurisdictions into compliance. This is a useful idea but it depends on the detail, the EU toolbox cannot limit itself to incentives and defensive measures. The EU also needs to introduce legislation such as the formal adoption of unitary taxation for multinational corporations (now a voluntary measure under CCCTB, see above) introducing full country-by-country reporting for European companies and adopting automatic information exchange as the default option (see above).
In general the EC should aim to put in place measures to prevent Member States benefiting from tax havens, including the prevalent practice of using tax havens to channel investments made by their development finance institutions. This toolbox should also be put to use within the EU.
The idea of using double tax conventions to address tax fraud is problematic as developing countries are often excluded from these treaty networks and when they are included do not have the power to negotiate terms which are not detrimental. Equally many tax havens do not participate in these treaty networks. Instead the EU should use its considerable economic clout, to forge workable multilateral frameworks whilst making non participation by tax havens increasingly unviable.
Overall, the language is encouraging and TAXUD is making laudable efforts to offer solutions. However, TAXUD’s hands are probably tied. According to the EU treaties, all tax decisions to be taken at European level are subject to the unanimity rule. This means that any member state can veto any proposal made by the EU institutions.
All these issues and a few more would be part of a joint submission by European CSOs. For more information on this matter, please contact.