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Survival of the richest: Europe’s role in supporting an unjust global tax system 2016

Added 07 Dec 2016
After a wave of international tax scandals, the group of European governments in favour of greater tax transparency is finally beginning to grow. However, the battle is not yet won, as a number of governments remain opposed.

Meanwhile, on the issue of stopping tax dodging by multinational corporations, the picture is more worrying.
Despite the LuxLeaks scandal, the number of secret ‘sweetheart deals’ between European governments and
multinational corporations is skyrocketing.

European governments also continue to sign very problematic tax treaties with developing countries. These treaties can help to facilitate corporate tax dodging and impose restrictions on tax systems in developing counties. The bottom line is that these countries keep paying a high price for a global tax system that they did not create. 

Sadly, this report shows that the vast majority of decision makers in Europe remain strongly opposed to the idea of giving the poorest countries a seat at the table when global tax standards are decided.

You can find the report briefing here.

Specifically, this report finds that:


Transparency

  • Following the Panama Papers scandal, a soft breeze of growing political will in favour of transparency seems to be blowing, at least over some parts of Europe. Compared with 2015, there has been a significant increase in the amount of countries that have either expressed support for public registers of beneficial owners (Finland, the Netherlands, Norway), or already started introducing them at the national level (UK, France, Denmark, Slovenia). The group of countries opposed to ownership transparency is now significantly smaller than the group of countries in favour. And it seems the positive development might continue in future. In both Germany and the Czech Republic, there are clear signs of movement towards increased support for transparency.
  • A similar, but weaker, tendency is seen on the issue of whether multinational corporations should publish data on a country by country basis showing the amount of business activity taking place, and tax payments made, in each country where they operate. On this issue, the group of countries opposing such a proposal (Austria, Czech Republic, Denmark, Germany, Latvia, Slovenia and Sweden) remains larger than the group that have expressed support for it (France, Netherlands, Spain and potentially the UK). However, compared with 2015, support has grown substantially, and it seems this will become one of the major political battles of 2017.
  • Contrary to the developments on transparency, the picture remains bleak when it comes to taxation.

Taxation

  • Following the LuxLeaks scandal and several ongoing state aid cases concerning so-called ‘sweetheart deals’, which governments have made with multinational corporations, one might have thought that fewer deals would be signed by European governments. But on the contrary, the number of sweetheart deals in the EU has soared from 547 in 2013, to 972 in 2014, and it finally reached 1444 by the end of 2015 – which is an increase of over 160 per cent between 2013 and 2015 (and an increase of almost 50 per cent from 2014 to 2015). The most dramatic increases have occurred in Belgium and Luxembourg, where the amount of sweetheart deals skyrocketed after the LuxLeaks scandal, increasing by 248 per cent and 50 per cent respectively in just one year.
  • While the LuxLeaks scandal does not seem to have placed a constraint on the number of sweetheart deals in the EU, it has had another consequence. The two whistleblowers, together with one of the journalists, who brought the scandal to the public, are on trial in Luxembourg. This trial serves as a stark reminder of the fact that Europe is still much more committed to protecting dirty corporate secrets than those who act in the public interest and expose injustice.
  • European governments continue to sign very problematic tax treaties with developing countries. An analysis of the countries covered by this report shows that they on average have 42 treaties with developing countries, and that these treaties on average reduce developing country tax rates by 3.8 per cent. Of all the countries analysed, Ireland has on average introduced the highest amount of reductions of developing country tax rates – 5.2 percentage points. Analysis by ActionAid has also revealed that even among the countries that do not, on average, have treaties which impose high restrictions on developing country taxing rates, there are a significant amount of ‘very restrictive’ tax treaties which impose strong constraints on the individual developing countries that have signed them. Among the countries covered by this report, Italy, the UK and Germany are the countries with the highest amount of those very problematic tax treaties with developing countries.

Global solutions 

  • The vast majority of the countries covered by this report remain opposed to the proposal to create an intergovernmental UN tax body, which would grant developing countries a seat at the table when global tax standards are negotiated. Some governments might have thought that this issue would fall off the international political agenda, after a dramatic year in 2015, when developed countries managed to block a strong push from developing countries to get an intergovernmental UN tax body. However, the developing countries are showing no intention to let this issue go.

This report recommends that governments: 

1. Adopt registers of the beneficial owners of companies, trusts and similar legal structures, which are in an open data format that is machine readable and fully accessible to the public without conditions. 

2. Adopt full country by country reporting for all large companies and ensure that this information is publicly available in an open data format that is machine readable and centralised in a public registry. 

3. Carry out and publish spillover analyses of all national and EU-level tax policies, including special purpose entities, tax treaties and incentives for multinational corporations, in order to assess the impacts on developing countries and remove policies and practices that have negative impacts on developing countries. 

4. Ensure that the new OECD-developed ‘Global Standard on Automatic Information Exchange’ includes a transitionperiod for developing countries that cannot currently meet reciprocal automatic information exchange requirements due to lack of administrative capacity. Furthermore, developed country governments must commit to exchange information automatically with developing countries by establishing the necessary bilateral exchange relationships. 

5. Undertake a rigorous study, jointly with developing countries, of the merits, risks and feasibility of more fundamental alternatives to the current international tax system, such as unitary taxation, with special attention to the likely impact of these alternatives on developing countries. 

6. Establish an intergovernmental tax body under the auspices of the UN with the aim of ensuring that developing countries can participate equally in the global reform of international tax rules. 

7. Publish data showing the flow of investments through special purpose entities in their countries. 

8. Remove and stop the spread of existing patent boxes and similar harmful structures. 

9. Publish the basic elements of all tax rulings granted to multinational companies and move towards a clear and less complex system for taxing multinational corporations, which can make the excessive use of tax rulings redundant.
 
10. Adopt effective whistleblower protection to protect those who act in the public’s interest, including those who disclose tax dodging practices. 

11. Support a proposal on a Common Consolidated Corporate Tax Base (CCCTB) at the EU level that includes the consolidation and apportionment of profits, and avoid introducing new mechanisms that can be abused by multinational corporations to dodge taxes, including large-scale tax deductions. 

12. When negotiating tax treaties with developing countries, governments should ensure a fair distribution of taxing rights between the signatories to the treaty; desist from reducing withholding tax rates; and ensure transparency around treaty negotiations, including related policies and position of the government, to allow stakeholders, including civil society and parliamentarians, to scrutinise and follow every negotiation process from the inception phase until finalisation.