Private
finance
Debt
Tax
justice
Aid
Financial
architecture

EU finance ministers talk tough on tax evasion, but agree on little

Added 16 May 2013

This week’s European Union (EU) meeting of finance ministers in Brussels for the Economic and Financial Affairs Council (ECOFIN) produced strong rhetoric about the importance of tackling tax evasion and tax fraud, but offered little in the way of concrete action. Important decisions to tackle financial secrecy were also delayed.

The ECOFIN – which is made up of EU finance and budget ministers – meets monthly and discusses many issues. This month’s meeting focussed largely on tax issues, partly spurred on by the upcoming G8 meeting, which also promises to put tax issues centre stage. The list of items covered at the meeting were impressive – savings tax reform, and a host of issues relating to tax evasion and tax fraud – but the outcomes were minimal.

Tax evasion and tax fraud

The formal agreement of the meeting – or ‘Council Conclusions’ – recognises that transparency measures today are not sufficient to be effective against tax evasion and tax fraud. The ministers highlight that “it is necessary to encourage Member States to take all necessary steps to tackle aggressive tax planning, where appropriate, which would help diminish existing distortions”.

One easy first step for EU leaders would be to end secrecy around who owns companies, trusts and other corporate vehicles.

Although the ministers support “improving the implementation and enforcement of standards of beneficial ownership information that is relevant for tax purposes”, they fail to mention the golden opportunity they have this year to make concrete progress. This year the EU is revising its Anti-Money Laundering Directive, which provides the perfect opportunity to put the real – or ‘beneficial’ - owners of companies, trusts and foundations on public record.

Today, tax evaders and other criminals can hide their identity behind a company or another legal entity, and they can easily use bank accounts to transfer their untaxed and illegally gained money. The EU can end this by requesting real owners to identify themselves and recording them in a public register.

EU finance ministers highlight the importance of “automatic exchange of information” on tax, and they note that the EU has a key role to play in “supporting and promoting the acceptance of such standards globally”, which is welcome. However, one of the few concrete actions mentioned in the Council Conclusions is that the “Presidency intends to write to the International Consortium of Investigative Journalists asking them to supply Member States through the relevant competent authorities with the names and details regarding all EU citizens on the offshore leaks list”.

Surely the EU can think of more effective means of making sure that information is available? For instance, they welcome that automatic exchange of tax information is again on the table after five EU Member States agreed on an initiative for multilateral and automatic information exchange, also called the EU FATCA – named after the US Foreign Account Tax Compliance Act. This would be a significant first step towards increased transparency and would ease tax collectors’ jobs in the countries in question. However, while the ECOFIN recognised the global scale of tax secrecy, proposals for information exchange are so far exclusively for EU Member States and other countries from the global north. Developing countries risk being excluded. When EU leaders meet next week they should recognise the need for true multilateralism in tax matters. This is not the moment to make half-hearted reforms that only benefit the minority; the EU must throw its weight behind a multilateral solution.

Savings taxes – more delay and developing countries left out

Top of the news agenda was the much-delayed EU Savings Tax Directive. Hopes had been high that opposition in Austria and Luxembourg would be overcome. As Richard Murphy of the Tax Justice Network has said, the proposed directive “would represent very real progress in the fight against tax haven abuse because this demands real transparency on trusts and companies as well as on individuals”.  However, in the end, the ministers agreed to “revert to the matter at a forthcoming meeting”, heralding further delays.

In a comment about the disappointing outcome, Murphy said, “In the meantime the criminals are in charge in Austria and Luxembourg, and it’s right to name them as such”. Members of the European Parliament (MEP) were also disappointed about the further delay. Sven Giegold, spokesperson for economic and finance issues for the Green Group of MEPs, said:

“The shameless obstructionism by Luxembourg and Austria, which [is] continuing to block efforts to ensure proper transparency of bank accounts as part of EU action against tax avoidance, must be overcome. I call upon the heads of states to do so during their summit next week. If these two member states refuse to get out of the way of efforts to tackle tax avoidance in Europe, they must be bypassed.”

Don’t miss another opportunity: country-by-country reporting

Another step towards ending financial secrecy would be to implement country-by-country reporting of companies’ profits, sales, staffing levels, assets and tax payments. This will be a requirement for the banking sector and should be extended to all sectors. While EU Member States failed to use the Accounting Directive to take this step, the European Parliament has been more progressive. French President François Hollande has also said, “I am in favour of country-by-country accounting disclosure by quoted companies in France, whatever their sector of activity and not only in [the] extractive sector”. The Norwegian government is also supportive of the measure and recently launched a working paper suggesting full country-by-country reporting for the extractive and logging industries.

Taking these two steps towards ending corporate secrecy would not only help to curb tax evasion in the EU. These two simple measures would also help developing countries to keep and tax the billions of dollars that are being illicitly transferred from their coffers every year.

Defining tax havens?

In December 2012, the European Commission published an Action Plan to strengthen the fight against tax fraud and tax evasion (see Eurodad’s analysis). The Action Plan recommends that the EU should develop a set of criteria that would help produce a ‘black list’ of tax havens, or – in EU language – “to encourage third countries to apply minimum standards of good governance in tax matters”.

While France has expressed support for developing EU criteria and a blacklist of “non-cooperative jurisdictions”, this is a sensitive area because explicit criteria would also shed light on EU Member States with harmful tax practices, although the blacklist would only apply to non-EU countries. In a letter to the President of the European Council, Herman Van Rompuy Eurodad, Oxfam and 26 other NGOs encourage the EU to agree on a common binding definition of tax havens and effective non-compliance sanctions. “Unlike previous failed attempts, these criteria must be binding and comprehensive, combining as a minimum, features of secrecy of banks and legal entities, non-cooperation and harmful tax measures,” the letter states.

EU finance ministers this week decided to postpone the discussion and “invite consideration of whether developing a European list of third country non-cooperative jurisdictions is appropriate”. They also referred to ongoing work at the Organisation for Economic Co-operation and Development (OECD). While this keeps the item on the table, the link to the OECD is worrying because the OECD’s process of identifying tax havens has so far produced few results. While the indicators are going in the right direction, the OECD’s blacklist so far suggests there are no tax havens in the world.

So while it is positive that EU finance ministers are recognising the urgency of cracking down on tax havens and harmful tax practices by companies and governments, we need real political action to stop tax evasion. We need politicians to change laws, and to sanction misbehaviour. When meeting in Brussels next week, EU heads of states should therefore take the challenge from the 28 non-governmental organisations and agree on concrete measures including:

  • multilateral automatic information exchange;
  • disclosure of beneficial owners through public registries;
  • country-by-country reporting for transnational corporations in all sectors;
  • and a common binding definition of tax havens and effective non-compliance sanctions.

See more on what the EU should do to respond to tax scandals.