Curbing Tax Avoidance, Tax Evasion And Tax Havens

Paul Sweeney

The aggressive tax avoidance by multinational corporations (MNCs) where they are now paying virtually no tax was highlighted recently by the takeover of “Irish” company Allergan by Pfizer in a blatant tax-avoidance move. Such tax avoidance by these companies is facilitated by sovereign nations in their “tax wars” between each other, vying for foreign investment. They are ceding billions in taxes to multinational corporations while beggaring their own exchequers.

Governments have woken up to these tax losses; progress is being made, but much more needs to be done.

Figures released from the OECD confirm that corporate tax revenues have been falling across OECD countries.

Corporate incomes and gains fell from 3.6% to 2.8% of gross domestic product (GDP) over the 2007-14 period. Forced to make up the difference, revenues from individuals’ income tax grew from 8.8% to 8.9% and VAT revenues grew from 6.5% to 6.8% over the same period

the OECD said.

It argues that this trend “underlines the urgency of efforts to ensure that corporations pay their fair share.”

OECD’s anti-avoidance BEPS programme has achieved more in a few years than many would have expected. Global tax reform is complex especially with so many countries involved and with the growth of the digital economy.

Tax evasion is the non-payment or underpayment of tax. It is illegal. The level of tax evasion globally is huge, based mainly around criminal activities, but includes sums not paid by firms of all sizes and by individuals. Tax evasion in Europe is estimated to be almost 20 percent of GDP. But it ranges from as high as 32.3 percent in Bulgaria, down to single digits in other states. Progress is being made on curbing evasion. Governments must now work together effectively and particularly seek to eviscerate the activities of tax havens and their banks.

Tax avoidance is growing. It is the legal minimisation of tax liability by companies or individuals. With globalisation and aggressive tax planning by the Big Four accounting firms and other major tax planners, tax avoidance is now big business. Some governments may be encouraging tax avoidance in order to win mobile foreign investment, with the only long-term winners being multinational corporations (MNCs).

Tax havens are jurisdictions which allow money to be stored in great secrecy, protecting depositors and firms from the prying eyes of the law. These tax havens are built on banking the illegally-gained money of criminals and rich tax evaders and corporate tax avoiders. Recent moves to force tax havens like Switzerland, Monaco and others to disclose information on European and US citizens is welcome.

In a globalised and digitised world, tax evasion, avoidance and tax havens pose challenges for governments. The EU is acting on these issues. Being the world’s biggest economic bloc, it could do more, act faster and it could be more effective in curbing tax evaders and avoiders. Popular anger at blatant tax cheating is motivating political action.

Figures from DG Taxation show that nominal rates of corporation tax have fallen in the EU 27 from 35 percent in 1995 down to just 23 percent in 2014. The effective “cash tax payment” can be as low as zero and is too often around 2 or 3 percent of total profits, thanks to transfer mispricing by MNCs.

While Ireland, Holland and Luxembourg are “tax avoidance hubs” within the EU (Switzerland is another one on the outside) many other EU member states also “compete” with specialist offerings for MNCs tax avoiders.

The power of organisations like the big accounting and legal firms in influencing taxation policy is undermining faith in the democratic system. Taxation is complex and the policy debate is now deeply influenced by these experts who are coincidently paid by MNCs and rich people. NGOs, citizens and indeed politicians are not as well informed and are hopelessly funded compared to these interests. The tax “professionals” even have staff embedded within government tax departments, influencing policy. They also fund “research” on taxation in universities, with some academics also influencing tax policy.

Tax “competition” (tax wars) does not work in an economic and social union. The race towards the bottom has already reduced nominal and effective corporate tax rates substantially.

The Solutions To Global Tax Avoidance And Evasion

A number of steps should be taken by the European Commission to curb tax avoidance, tax evasion and tax havens as suggested in an ETUI paper by the author.

• EuroTax should be established as an international European-wide tax investigation centre, well funded, with wide powers of investigation into tax evasion and avoidance by wealthy individuals, companies and criminals.

• The European Commission should immediately establish a widely representative once-off Commission on European Taxation of “wise persons” to chart the evolution of taxation for the Union, based on broad principles of taxation.

• The tax system in Member States should be simplified by abolishing many exemptions and allowances.

• The moves to deal with tax avoidance by MNCs through BEPS, profit shifting to tax havens and base erosion are welcome but we need: public disclosure of country by country company accounts; shadow banking and private pools of capital must be dealt with effectively; to facilitate greater participation of developing countries in EU tax reform; a public register of the beneficial owners of companies and trusts in Europe in one digital location.
• Tax Competition / Tax Wars between Member States to win FDI is ultimately self-defeating, as nominal and effective tax rates plummet. Taxation must be coordinated effectively within the Union to end the current race towards the bottom.

• There should be a mandatory Common Consolidated Corporate Tax Base in the EU with coordination of rates within a range of say 15 to 35 percent for EU states.

• The Big Four accounting firms should be broken up and steps taken to separate responsibility for functions such as auditing, taxation and consulting to avoid conflicts of interest and governments should cease embedding their staff in economic and tax departments.

• MNCs should be required to publish full accounts in each country in which they operate including information on the relative and absolute amounts of economic activity in each country (e.g., sales, employment, investment).

• All major companies should be required to publish the annual “cash tax payment” made by the company in the economy. In short, the actual tax payment for each year and not some provision or other evasive figure be published.

• The moves to force tax havens such as Switzerland, Monaco etc. to disclose information on European citizens is welcome but the European Commission should move hard against all tax havens within its geographical area to eliminate any loss of tax revenue from all 28 states in every way possible.

In conclusion, tax evasion and avoidance have contributed to rising inequality and to the decline in labour’s share of national income in most countries. The ETUC has adopted most of these recommendations and it is essential that the European Commission and European Parliament follow. Reverse takeovers and blatant tax avoidance by MNCs is undermining democracy. By moving effectively to reduce tax cheating better public services can be funded, economies can become more efficient and fairer.

Paul Sweeney

Paul Sweeney was chief economist with the Irish Congress of Trade Unions for a decade.