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

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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.

A tsunami of truth exposes the need for tax justice

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By Tove Maria Ryding

While our ministers have been delivering speeches about the importance of a healthy financial system, transparency and global tax justice, it seems an international group of financial experts, bankers, lawyers and middlemen have been busy racking their brains to solve the riddle: “How do you make trillions of dollars disappear into thin air?”

They’ve come up with a lot more than the good old “stuff your money in your mattress”. In fact, when it comes to doing magic tricks with money, the financial industry has proven to be a regular group of Harry Potters.

Golden opportunity to fix flawed EU regulation

It has long been known that companies and other legal structures that are anonymously owned and controlled are a key mechanism used to launder money and hide fortunes in tax havens. Despite this, the political leadership and will to take action has so far been limited, even though the EU’s Anti-Money Laundering Directive – a key directive and an opportunity to close the loopholes that make financial secrecy and illicit financial flows possible – was opened up for revision some months ago. But the political opportunity is still there and the directive review provides the key moment to ensure public registries of the real owners of companies, trusts and foundations. Armed with this information, governments, researchers, media and citizens will gain insights into our financial system through public registries, instead of through scandal stories on the front page of the world’s newspapers.

A flood of secrets

Scandal stories were exactly what started hitting the newspapers all over the world last week, revealing very intimate details about the magic tricks up the sleeves of the financial industry, as well as the identity of the people who used them to hide their secret money. After digging through more than two million leaked documents, summarising up to 260 gigabytes of information concerning more than 170 countries globally, the International Consortium of Investigative Journalists (ICIJ) has documented the artificial shell companies tied together in structures designed to confuse, mislead and create a dead end for anyone searching for the truth.

This global financial scandal, which quickly got nicknamed ‘offshore leaks’, includes details about how major European banks, including the French banks PNB Paribas and Crédit Agricole, as well as Germany’s largest bank, Deutsche Bank, have been setting up shell companies in offshore tax havens to offer clients financial secrecy and low or no taxes. The same is true for several Swiss banks and more than 100 Swiss lawyers.

In France, the former campaign treasurer of French President François Hollande, Jean-Jacques Augier, was one of the individuals revealed as an investor in offshore business in the Cayman Islands. In the UK, The Guardian has launched a so far unsuccessful search for an unknown woman who, as the official director of more than 1,200 companies, is apparently running what would have to be one of world’s biggest business empires. And in crisis-hit Greece, journalists found more than 100 Greek-owned offshore companies that the Greek authorities had never heard of.

Outside Europe, many more outrageous facts were published, involving convicted criminals, high-level ministers and even heads of state all over the world.

The state of the offshore world shouldn’t come as a surprise to anyone. For years, broad coalitions of non-governmental organisations (NGOs), including Eurodad, have been pointing out this problem and explaining the technicalities of the tax dodging world as well as the extremely negative impacts it is having on the world’s poorest. We have been calling for political action to stop it but the response from governments has been very limited and insufficient. However, this often very technical discussion has now been brought to life as rich people’s dirty laundry is suddenly spilling out through newspaper headlines.

ICIJ has made it clear that much of the exposed activity (although far from all) is in fact legal. But that is actually one of the central points in the discussions about the EU’s Anti-Money Laundering Directive: should tax crimes be included on the list of crimes that qualify as money laundering offences? So far, this proposal has not received support from EU member states. However, as the stories about how the mega-rich are violating our tax laws and hiding their billions continue to pour out, it’s clear that public patience is running out and the call for consequences is growing.

Governments feeling the heat

Responding to the offshore leaks, French President François Hollande yesterday called for “eradication” of the world’s tax havens. Together with the Belgians,  Germans and several other governments, the French have also demanded access to the leaked data. This, however, only raises the obvious counter-question:

Why haven’t you governments collected this information yourselves?

Other governments are also feeling the pressure. In Luxembourg, which has otherwise been known to resist EU initiatives on increased transparency, the government has now expressed a willingness to strengthen the EU exchange of bank information. The rumour about increased financial transparency seems to be causing nervousness among rich tax evaders. For example, the Danish paper Politiken reports Danes urgently withdrawing their fortunes from Luxembourgian banks and driving off with the cash in the back of a car. The European Commission responded to the message from Luxembourg by asking Austria to follow their example – a request that has clearly turned up the heat on the Austrian government.

Also the private sector seems to be responding the growing pressure. In Switzerland, several banks have now given German customers an ultimatum: Prove to us you’re not evading taxes, or find yourself another bank.

In Denmark, the government has offered a 60% reduction in fines, no jail time and full discretion for all tax evaders who confess to the authorities before 30 June 2013 – an offer that many wealthy Danes are expected to make use of.

Meanwhile, in the UK, the fact that a major part of the documented activities have centred around British overseas territories (such as the British Virgin Islands and Cayman Islands) has raised questions about the role of the UK government, which is otherwise known for its progressive rhetoric on action against financial secrecy.

Another tragic chapter in the global financial system

‘Offshore leaks’ also adds another scary twist to the financial crisis, which has already become a Greek tragedy, in more than one sense of the word. After learning how bad practices and irresponsible behaviour in the financial industry served as the fuel that kicked off the global financial crisis, citizens all over the world have seen their hard-earned tax money being channelled into political packages to bail out our banks. Meanwhile the global economy keeps on spinning downwards. Many ordinary people have already had to pay for the crisis with their jobs and their homes. And in the world’s poorest countries, the financial crisis is the key argument presented to explain why the amount of official development assistance keeps dropping.

But this is where offshore leaks enter the stage, shining the spotlight on a very sad fact. While the rest of the world is struggling, members of the very same banking sector that was bailed out with our tax money has teamed up with a global web of lawyers, accountants and middlemen to help the world’s mega-rich, corrupt politicians and other criminals hide away their billions of dollars from tax authorities and, in some instances, prosecutors.

It is a relief to hear governments express a will to take strong action and solve these problems. However, it’s now crucial to remind our governments that time is of the essence. The more time we leave for tax evaders to come up with new and even dodgier ways of hiding their billions, the longer this sad chapter in the history of our financial system will continue. In this case, time really is money – and now is the time for global transparency and tax justice.

Cyprus – the next chapter of dysfunctional EU debt crisis management

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By Costas Todoulos and Bodo Ellmers 

After more than a week of messy negotiations, the Troika (made up of the European Union, the International Monetary Fund and the European Central Bank) and the government of Cyprus agreed on a bailout package for Cyprus on 24 March. Cyprus is set to receive a €10 billion loan, on the condition that it shrinks its financial sector and implements austerity policies. Private bank deposits above €100,000 will be taxed at 40% in order to raise the additional €5.8 billion needed to stabilise the country’s de facto bankrupt banks.

Euro banking crisis chapter four  

Cyprus has become the fourth European nation to fall victim to a banking crisis that was caused by irresponsible lending and lax financial regulation – following on the heels of Iceland, Ireland and Spain. Cyprus’ status as a de facto tax haven also played a role in attracting huge amounts of foreign deposits, mainly from Russia and the UK, which inflated the banking sector to such an extent that lending reached 900% of Gross Domestic Product (GDP) in 2011.

Dysfunctional debt crisis management

As the bubble burst and Cypriot banks teetered on the verge of bankruptcy, the EU tried to avoid a disorderly default. However, the chaotic crisis management tragedy we witnessed over the past few weeks was obviously everything but an orderly debt work-out procedure. It is a striking fact that, five years into the Euro crisis, the EU has still not developed clear criteria, mechanisms and institutions to deal with debt crises in a fair and transparent manner.

EU crisis management continues to be a rather random process. Dodgy decisions are made in backrooms, with no transparency and accountability to the European citizens who ultimately have to foot the bill – either because they live in crisis countries and have to suffer from austerity programmes, or because their tax payments will ultimately fund the bank bail-out deals.

Severe governance gaps

Little support have come from the global level as the international financial architecture still lacks effective debt work-out mechanisms, a point that Eurodad and other debt campaigns criticised again and again over the past decade when developing countries suffered from debt crises. Such a debt work-out mechanism would be independent from creditors, cover all categories of debt and make binding decisions for all, in order to find a sustainable solution to debt crises as they arise. It would also assess the legitimacy of creditor claims, and pursue a human rights-based approach to debt restructuring, thus ensuring that public spending for essential services is safeguarded. The Cyprus case provides new evidence about how urgently such a new debt work-out mechanism is needed.

Towards evidence-based crisis management

The time has come for an evidence-based debt work-out. Cyprus received harsh treatment at the hands of its European partners, as they argued the crisis was self-inflicted. The small Mediterranean island has been the preferred destination of many overseas depositors over many years. Banking secrecy was high, tax rates were low. KPMG ranked Cyprus’ corporate tax regime as the most attractive in Europe. Some nicknamed the island the ‘unsinkable washing machine’, given that the origins of the deposits were in many cases unclear and illicit flows may have contributed a substantial share to its bad reputation.

A thorough debt audit would have shed clearer light on the origins of Cypriot debt and the Cypriot debt crisis. It would also have supplied decision-makers with better information for making sound decisions. Not least, it could have traced where all the money ended up and who profited from it. This should have been a prerequisite for fair burden sharing in crisis management, and for protecting the ordinary Cypriot citizens and EU taxpayers from footing the bill for a crisis they did not cause.

Safeguarding development from debt

The solution that was chosen for Cyprus will have negative impacts for the country’s population and development in future. The imposed austerity programmes will affect the living conditions of ordinary Cypriot citizens, in particular the most vulnerable people who are dependent on public services. Moreover, while the EU rightly stressed that the economic future of Cyprus cannot be based on a bloated financial sector, it forgot to provide an alternative. We have had better proposals for debt crisis management in a developing country context, where the international community asked affected countries to draft national development plans, and committed to support their implementation.

The solution chosen for Cyprus is neither optimal from a developmental point of view, nor is it sustainable. The bail-out loan will drive up Cyprus’ debt by an additional 60% of GDP, while GDP is expected to shrink due to the harsh austerity measures. It is just a question of time when the next round of crisis management is due. The only good news is that the EU will soon get its chance to prove it can do a better job next time.   

No more shifty business: Campaigners call for new tax rules

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In a response to the OECD’s February report Addressing Base Erosion and Profit Shifting, 58 campaigning organisations say it’s time to make multinationals pay their fair share of tax. Eurodad, Christian Aid and others call on the OECD and G20 to work with the United Nations Tax Committee and governments in developing countries to define new rules for the taxation of multinational companies.

The international system for taxing multinationals is broken and out of date, with many loopholes which allow unscrupulous companies to avoid paying their fair share – as the recent Google, Ikea, Amazon, Glencore and Starbucks scandals have clearly shown.

Outdated rules

The OECD identifies aggressive tax planning by multinationals as a fundamental cause of base erosion, which includes tax avoidance and evasion. But countries such as the UK, Germany, France and the US have only asked for solutions when their own economies have felt the consequences. For many years, however, unfair tax rules have been seriously undermining efforts to tackle poverty in developing countries.

The current tax rules, which were written 80 years ago, assume that the different entities that form multinationals exchange goods and services as if they were mutually independent. But this is a fiction. These different subsidiaries follow an overall business strategy. The truth is that the tax system has not kept pace with the way multinationals operate.

Need global solution

Eurodad and the other organisations agree with the OECD that the fundamentals of the current tax system need revisiting. And because this is a global problem that requires a global solution, developing countries cannot be excluded from the process. We need tax justice for everyone, not just for rich countries. So far, the OECD seems not to have understood.

The new briefing paper, No more shifty business, calls on the OECD and G20 to work with the United Nations Tax Committee and governments in developing countries to define new rules for the taxation of multinationals.

The new rules must

  • Ensure that each country is able to tax a fair share of the profits earned by multinationals operating within its territory.
  • Treat multinationals as what they really are: complex structures bound together by centralized management, functional integration and economies of scale.
  • Require multinationals to pay their taxes where their economic activities and investment are actually located, rather than in jurisdictions where their presence is fictitious and explained by immoral tax avoidance strategies.

The current tax system raises serious issues of fairness and compliance. Aggressive tax planning by unscrupulous multinationals hinders development and increases inequality. That is why civil society organisations across the world are calling on the OECD, G20 and UN Tax Committee to work together and find an alternative that reflects how multinationals actually operate today – and to make them pay their fair share of tax in all countries where they operate.

Read the full briefing.

It’s time to tackle tax havens – video

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Half of the world’s trade passes through tax havens. Right now, they are hiding billions of dollars on behalf of criminals, dictators, wealthy individuals, and corporations.

Watch this video by Tackle Tax Havens, then find out what tax havens are, why they’re so damaging and what we can do about it.