Tax Havens – Pike & Hurricane

Moving money out of the public eye: tax evasion in the EU

Isa Tiilikainen and Jasmin-Leyla Virta — Sun, 29 Sep 2019 13:49:02 +0000

Tax fraud and tax evasion within the European Union (EU) form a big problem that concerns all EU citizens. For instance, in 2017 the EU lost 137 billion euros in value-added-tax revenues, but taking also other types of tax frauds into account, the estimates of lost revenues due to tax evasion and avoidance go all the way up to 1 trillion euros.

Tax avoidance and evasion can be carried out in different ways, such as aggressive tax planning by taking advantage of loopholes in legislation or by transferring money to tax havens. Tax havens are often associated with remote and foreign states but, despite the close economic integration of the EU, can also be found within the Union.

Today, tax avoidance is a recognized problem in the EU, so how is it still possible?

Free movement of capital facilitating tax avoidance

The free movement of capital is one of the EU’s four freedoms and the basis of the European Single Market meaning that all restrictions and limits on the movement of capital – for example, on buying and selling shares and assets, as well as foreign investments between member states being prohibited. This freedom, related to banking secrecy, has created an opening for tax frauds – or at least made the monitoring of tax compliance trickier.

The EU has been working on harmonizing taxation and legislation in the member states, but still there are big differences regarding state provided tax reliefs and tax transparency. This has offered more room for systematic tax planning, tax avoidance and, eventually, tax evasion. As the taxation differs from one member state to another and the tax rates can be notably lower, tax payers, investors and companies might consider directing their income and profits through a different member state that is not their country of residence. Due to this, a total of seven EU member states, Belgium, Cyprus, Hungary, Ireland, Luxembourg, Malta and the Netherlands, are considered tax havens.

In recent years, this action has been closely observed through the Luxembourg Leaks – a major investigation revealing that over 300 foreign companies avoided taxes by channelling the taxation through Luxembourg where companies pay significantly lower corporate taxes than in other European states as the state’s legislation makes offers of substantial tax relief and deduction deals in privacy.

Several multinational companies, such as Disney, Pepsi and IKEA, profited financially by centralizing their income stream on European market through Luxembourg where they had to pay less than 1% taxes of their profits whereas taxation in other EU countries could have cost them billions of euros more, as the average corporate income tax rate in the EU countries is currently around 21,3%. Similar taxation deals are found for example in Ireland with Apple and in the Netherlands with Nike, as revealed by an investigation of the so-called Paradise Papers.

Zero-sum game?

Free movement of capital and tax planning within legal framework can create healthy competition and maximize profits for all actors, the EU, the member states, the companies, as well as individuals. However, at worst, harmful tax competition can unbalance the equality between the member states.

According to Spanish Member of the Parliament, Miguel Urban, the problem with tax evasion is the lack of fiscal unity in Europe which leads to fiscal competition and dumping aimed at attracting companies and capital. One can even argue that free movement of capital facilitates tax evasion. Miguel Urban states: “We are returning to a feudal system, where the feudal lords don’t pay any tax. This aristocratic class and modern feudalism is called Bono, Messi, Christiano Ronaldo as well as Nike, Apple and Amazon. It’s a class that positions itself not only above the middle class but also above small and medium-sized businesses. It’s a new nobility that believes to be above the law.’’

States’ right to choose their form of taxation is an argument often referred to by the tax-avoiding nations. For example, many Luxembourgers have publicly expressed this opinion, as a spokesman for the Luxembourg Finance Ministry says: “Each country should be free to fix taxes according to its national priorities”. Many lobby organisations promote this view as well, as Nicolas Mackel from Luxembourg’s financial lobby puts it: “Competition is healthy. And it is legitimate. To align the rules would certainly increase taxation. And that is not necessarily the most appropriate thing”.

These opposing views have created some contradictory outcomes mainly associated with the President of the European Commission, Jean-Claude Juncker. Previously Juncker has been the Finance Minister of Luxembourg, meaning that he has been one of the main actors preparing the tax relief deals with multinational companies, but as the President of the Commission he has been forced to fight against these deals and tax evasion.

However, with regards to the internal market system of the EU, it is evident that when one country offers tailored tax deals to multinational corporations, it steals the revenue from all the other countries. When multinationals dodge taxes, the gap has to be somehow compensated for and this often means increasing taxes on small and medium-sized enterprises, lower- and middle-income households and cutting back on public services.

The EU loses around 20% of its corporate tax revenue to tax havens. The woeful part about tax evasion is its clear connection to inequality between citizens all over Europe. Had the correct amount of corporate taxes been paid accordingly, there would be no need for any budgetary cuts.

Time to act

Recently the EU has taken measures to combat tax evasion as one of the focus points of its agenda.

One of the most effective and recent actions of the EU in the fight against tax evasion is the Anti Tax Avoidance Package based on the recommendations of The Organisation for Economic Cooperation and Development (OECD). The package was introduced in 2016 and aims at achieving fairer and more coherent corporate taxation by increasing transparency and helping the member states to act united against tax frauds. As a part of this package the Anti Tax Avoidance Directive, creating a minimum level of protection against tax avoidance, was applied on 1 January 2019. The directive includes rulings against profit shifting to low-tax countries, to prevent double non-taxation and to discourage artificial debt arrangements.

Even though these measurements are now applied, the fight against tax evasion is still in its early stages. Like with many other major issues within the EU there seems to be more talking than taking action. One reason for this is the fact that taxation is still very highly associated with member states sovereignty. As a consequence, policies and rulings related to taxes are handled in the Council of the European Union with unanimity which means that one single member state can obstruct the proposed changes and legislation if it collides with their own national interest.

Issues with a cross-border dimension, like aggressive tax-planning and evasion, are hard to tackle with only domestic policies. The EU’s internal market structure between 28 member states can both be the accelerator of the problem, as well as the key to a possible resolution.

Written by Isa Tiilikainen & Jasmin Virta

Photo Credits

Bad Weather, Frédéric Schneider, CC BY-NC-ND 2.0

Commission President Jean-Claude Juncker debated the last EU summit, Pietro Naj-Oleari (European Parliament), CC BY-NC-ND 2.0

Members making statement during vote on motion of censure against the Commission, Pietro Naj-Oleari (European Parliament), CC BY-NC-ND 2.0

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From the Silk Road to Paradise Papers: Tax Havens and Economic Inequality

Laura Korte — Tue, 12 Dec 2017 20:14:06 +0000

When talks of the wealth gap begin, images of class wars start forming in minds of some. However, other contributors to the wealth gap––globalisation and tax havens––seem to be left out of the debate.

Wealth gap, by definition, refers to the unequal distribution of capital within a population––in other words it is economic inequality. As this inequality is growing, several NGOs and institutes are doing more and more research on the topic. According to The Guardian, “half of world’s wealth [is] now in hands of one percent of population.”

From the Silk Road we have travelled a long way, to the era of opulence and luxury brought to us by modern day globalisation. Globalisation––the flow of capital, cultures and services––has gotten us adjusted to the myriad number of options, but we have now come to see the perhaps unavoidable side effect of globalisation; the global wealth gap. The continuity of its existence is much clearer for those who connect the dots between the wealth gap and its factors. So let us talk about one which tends to not be talked about; the impact of tax havens on economic inequality.

Different Rules in Taxes

The recurring topic of tax havens has surfaced on the front page of many newspapers with titles like ‘Paradise Papers’ and ‘Panama Papers’. Off-shore tax havens with their no-tax or low tax policies appeal to many wealthier individuals and companies as they create more or less lawful migration of capital which in return destabilises the economy. Keep in mind that legality is not the problem here, but rather ethicality.

Tax havens and companies, such as Appleby which helps the super-rich to “hide” their wealth, have been scrutinised for several reasons. Investigative journalists have done their duties and brought up issues such as the connections between individuals who are involved in for instance terrorism, illegal mining, human rights abuses and corruption.

It is believed that on a global level the use of tax havens results in approximately 255 billion US dollars loss in tax money annually. After a quick search you will find multiple research papers and journals talking about how tax havens hold between five and seven trillion US dollars. The 2016 US presidential candidate, Bernie Sanders, stated that it is time for the biggest US companies to “pay their fair share of taxes so that our country has the revenue we need to rebuild America.” It does seem like there are different rules for the super-rich and for the rest of us; the financially mortal.

A Gulf in Wealth

Rich individuals and multibillion-dollar companies avoiding taxes in poorer countries, and even wealthy countries like the United States, bereave these countries from providing its citizens with public services.Bad tax schemes in countries also support the existence of economic inequality. According to Tax Justice Network, an example of this is tax competition, where governments try to lower taxes on the rich to keep the tax revenue in their country rather than it ending up in a tax haven, but simultaneously end up increasing the taxes on the poor. This in return, strengthens the economic inequality that already exists in all countries.

Though tax havens may seem like a niche that is exclusively for the exuberantly wealthy, tax havens are not marginal in the context of global economics––they truly have a huge impact on financial instability and politics. We do not tie the knot between the issues of wealth gap and tax havens, it seems as though these two things come hand in hand, ushered into our lives through the miraculous phenomenon called globalisation.

We need to start looking at the problem of economic inequality connected to the system that has been producing the imbalance. So from globalisation to tax havens, and from tax havens to the endless cycle of inequality. But understanding tax havens still continues to be strenuous for the ordinary people. Perhaps the lack of knowledge of these tax havens facilitating the endeavours of the richest stops the ordinary people from unifying in efforts of making a change. Like Ronald Wright once said “socialism never took root in America because the poor see themselves not as an exploited proletariat but as temporarily embarrassed millionaires.” But what if we, the bourgeoisie, the working class, the hoi polloi (Ancient Greek: “the many”), finally start rising up against the problem of unethicality and inequality and organise resistance towards this injustice?

Photo credits:

The Shard of glass–sharp like the inequality it reflects.

The wealth of a city built in the midst of inequality.

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