Tax havens: patience is running out

The OECD has proved unable to tackle tax havens, so it is up to the European Union to do so.

Did people really hope that the club of rich countries that is the Organisation for Economic Co-operation and Development (OECD) would be able to offer the world solutions to end tax abuses by multinational corporations? Seven years after being mandated by the G20—the world’s top 20 economies—to overhaul the international tax system, the institution recently revealed a series of proposals which are as complex as they are disappointing.

At the beginning of the year, there was a semblance of optimism: for the first time, countries agreed that companies should pay taxes based on where their customers, factories and employees are located—not where they rent a mailbox in tax havens. But by the end of the negotiations, this seemed to be much ado about nothing.

That’s no surprise. The OECD had certainly sought to legitimise its claim to speak for all by creating an ‘inclusive framework’ involving developing countries. However, of the 137 nations sitting around the negotiating table, only the G7—those home to the major multinationals and their lobbying teams—had a voice. As a result, the solutions advocated by the OECD would hardly limit financial flows to tax havens and the scarce resources recovered would mainly benefit rich countries.

Services struggling

Already scandalous, this is intolerable at a time when the world is ravaged by the coronavirus epidemic. Public services everywhere are struggling to cope with the emergency, after decades of budget cuts. Yet states lose more than $427 billion every year to tax havens—as revealed in The State of Tax Justice 2020, a report just published by the Tax Justice Network, Public Services International and the Global Alliance for Tax Justice.

Estimating the loss of resources caused by corporate and individual tax abuse country by country, and the consequences for healthcare spending, this research is chilling. Globally, these diversions correspond to 9.2 per cent of health budgets, equivalent to the salaries of 34 million nurses. The impact is even more devastating in developing countries, where the shortfall represents 52.4 per cent of health spending.

The United Kingdom, for example, loses almost $40 billion annually. That’s equivalent to taking $607 from every member of the population every year. Above all, it represents 18.72 per cent of the country’s health budget, which would pay for some 840,000 nurses’ salaries.

Minimum tax

Hospitals need more resources. The education system needs more resources. Small businesses, on the verge of bankruptcy, need more resources. And someone will have to foot the bill. That’s why it’s urgent to get these funds from tax havens. And since the OECD is unable to impose reform, it is time for the European Union to move forward, including by introducing an effective minimum tax on corporate profits. 

At the Independent Commission for International Corporate Tax Reform (ICRICT)—of which I am a member, along with economists such as Joseph Stiglitz, Thomas Piketty and Gabriel Zucman—we calculate that this rate should be at least 25 per cent. Even the president-elect of the United States, Joseph Biden, is advocating a global minimum of at least 21 per cent. To defend a lower level—12.5 per cent, as some states argue—would in fact fuel the ‘race to the bottom’ in corporate taxes, causing a further fall in revenues.

Of course, there is strong opposition within the EU itself, for one simple reason: if we readily point the finger at the small islands of the Caribbean, it is to make people forget that Europe has its own tax havens. The departing UK, together with its network of Overseas Territories and Crown Dependencies—often referred to as its ‘spider’s web’—is responsible for 29 per cent of the $245 billion the world loses to corporate tax abuse every year, according to The State of Tax Justice. And we have further examples inside the EU. Every year, for example, the Netherlands steals the equivalent of $10 billion from its EU neighbours. And it is not alone: Luxembourg, Ireland, Cyprus and Malta do the same.

Formidable weapon

This group of states has been blocking reform for years, taking advantage of the unanimity required for decisions on tax issues. The president of the European Commission, Ursula von der Leyen, has however a formidable weapon with which to move forward. Article 116 of the Treaty on the Functioning of the European Union, on the equality of the rules of competition among states—violated by this fiscal dumping—would make it possible to circumvent the unanimity requirement and put an end to the plundering of fiscal resources by certain states.

Von der Leyen has the political strength to take such an initiative and should be supported by Germany, which holds the presidency of the European Council until the end of the year and is one of the countries most affected by corporate tax abuses. If time is too short, Portugal, which takes over the presidency in January, can also act.

A commission initiative would be ideal, especially as it would have a global impact, since Europe is a key market for multinationals. But if this does not eventuate, France, Germany, Spain, Italy and other countries in the region could move on together, thanks to the enhanced co-operation mechanism which can be set in train by a group of at least seven. This has enabled, for example, the creation of a European Public Prosecutor’s Office.

At a time when the second wave of the coronavirus is bringing the whole of Europe to its knees—and with the threat that ‘Brexit’ could create an even more powerful tax haven—the status quo is more unacceptable than ever.

See our series of articles on Corporate Taxation in a Globalised Era