Efforts to attack multinationals’ tax avoidance at EU level fall foul of national beneficiaries. Time to try naming and shaming instead.
The Netherlands’ insistence that everyone ‘go Dutch’ on mushrooming coronavirus deficits in the European Union has (given its complicity) revived the debate on tax havens within the EU. In an ideal world, action on joint debt issuance should go hand in hand with tax harmonisation and brakes on fiscal dumping.
But, given the current standstill in Europe, it is more likely that national solutions to avoid tax-base erosion will be sought, at least in the near future. Enforcing transparency and leveraging on company reputations could be enacted more effectively than the bans and regulations currently considered.
Profit-shifting
New data published by the Berkeley economist Gabriel Zucman remind us once again who wins and who loses in the tax-competition game. In 2017, the United Kingdom, Germany, France and Italy lost revenues of $18 billion, $20 billion, $13 billion and $6 billion respectively from tax avoidance by multinational enterprises (MNEs), through profit-shifting to tax havens.
While tax havens conjure up an image of palm trees and white-sand beaches, the data show a much more prosaic lack of neighbourly love. Belgium, Ireland, Luxembourg, Malta and the Netherlands are responsible for the vast majority (between 80 and 90 per cent) of tax avoidance in the EU. This is facilitated by international tax rules and the lack of unitary taxation.
In 2018 the European Commission and Parliament approved a plan for a Common Consolidated Corporate Tax Base (CCCTB). Under this, profits of MNEs would be allocated among member states on the basis of objective metrics such as turnover and number of employees. But the proposal is stuck in limbo in the European Council, where tax matters are decided by unanimity and reforms are blocked by those countries which benefit most from the status quo.
While it is reassuring that the commission president, Ursula von der Leyen, has included CCCTB on the ‘to do’ list of the commissioner for the economy, Paolo Gentiloni, the political will needs to come from the large European countries—all losers from tax competition—to put full tax harmonisation centre stage. This at a time when discussion around the Recovery Fund also requires a marked leap forward in co-operation and co-ordination.
Unilateral measures
While waiting for the European Godot, the fight against tax avoidance continues via unilateral measures, such as the recent French and UK digital-sales taxes. Poland, Denmark, France and Italy have recently announced the intention to refuse, within their Covid-19 emergency plans, the bailing out of companies registered or with subsidiaries in tax havens.
While simple in theory, in practice this strategy runs into problems, as there is no common agreed definition of tax havens. Although the Tax Justice Network’s Financial Secrecy Index includes 133 jurisdictions, the EU’s own ‘non-compliance jurisdictions’ amount to only 12: American Samoa, the Cayman Islands, Fiji, Guam, Oman, Palau, Panama, Samoa, Trinidad and Tobago, the US Virgin Islands, Vanuatu and the Seychelles.
Notably absent—reflecting political compromise—are the EU’s own tax havens. If the planned measures by France, Italy, Denmark and Poland are based on the EU list, then the chances are that these measures will be merely symbolic. On the other hand, if the exclusions were to include corporations based in EU tax havens, they would most likely be considered by the commission an infringement of free capital circulation.
Conditionality principle
There is a way around these difficulties. The solution would be to avoid exclusions and to embrace the principle of conditionality. All MNEs should be allowed to apply for member-state support, thus making the issue of accurate listing of tax havens irrelevant. But they would be required to publish a report detailing data on turnover, profits before tax and taxes paid in each of the countries in which they operated.
This would not be a new requirement: since 2013, within the Basel III framework, the EU requires similar reporting from financial institutions operating within its borders. This has reduced tax avoidance.
The transparency conditionality would force MNEs to internalise part of the social cost of shifting profits to tax havens, forcing them to account for something more precious than turnover—reputation. The public outcry against child labour which has damaged global brands such as Nike, ultimately forcing them to change business practices, shows that conditionality based on transparency can be easier to implement and more effective than bans and regulations.
Tommaso Faccio is head of the secretariat of the Independent Commission for the Reform of International Corporate Taxation (ICRICT), a lecturer in accounting at Nottingham University Business School and a senior adviser to the Tax Justice Network. Francesco Saraceno is deputy department director at OFCE, the Research Centre in Economics at Sciences-Po in Paris, where he teaches European economics. He also teaches at LUISS Guido Carli in Rome.