Tax havens and the role of multinationals running care services

Guest blog: an opportunity to Fight Tax Havens in the EU

By Johannes Kananen, Thomas Wallgren, Matti Ylönen, and Matti Kohonen

The EU’s new Directive on public procurement (2014/24/EU) is currently being implemented in many countries, and the fate of one small article in the directive may dictate the opportunities public authorities have to include tax and transparency-related criteria in the procurement tenders, for years to come.

The new Directive requires member states to regulate the public procurement of care services in accordance with the directive. The EU has expressed concerns about care services becoming dominated by multinational, tax-evading corporations.

The Directive offers at least two ways to ensure small enterprises can compete for contracts on more equal terms.

First, public authorities may split large bids into small parts, making them more attractive for smaller organisations.

Second, Article 77 of the Directive allows authorities to reserve rights to participate in public procurement in the area of care services to organisations that reinvest profits in the development of the organisation in question. In other words, multinational companies owned by capital investment firms could be excluded from the public procurement process.

The operation of multinational corporations in the area of care services is problematic for a number of reasons. Not only do these corporations escape corporate taxes by using tax havens: they also escape employer social security contributions by encouraging their employees to become “entrepreneurs” and thus gain tax benefits through their own holding companies.

In addition, it is difficult to maintain trust in the ethics of care offered by multinational corporations. In situations where shareholders’ interests clash with patients’ interests, companies owned by capital investment firms are likely to prioritise those of the former group. In Sweden, a scandal broke a few years ago when a multinational care provider sought to increase efficiency by weighing the diapers of elderly people in care homes.

As part of a European-wide effort to maintain high quality care services, and in order to ensure a sufficient tax base for public policy, all EU member state governments should incorporate Article 77 of the new Directive on Public Procurement into their national law.

This article does not bind authorities to exclude multinational companies from procurement processes, but empowers them to do so. Governments should also facilitate the spread of mechanisms increasing transparency, such as the fair tax pledge and the fair tax mark.

The issue at hand may seem technical, but ultimately it will greatly influence the quality of public services for vulnerable groups, such as the elderly, children in care homes and people with special needs.

All possible advocacy work regarding this would be much welcome. In this case the most pressing need is to influence national implementation of the EU directive. We believe that in most member states  national implementation legislation will not yet have been put in place.  So — while it is important and excellent to raise the issue in national and local media — the most urgent need may be to lobby national governments and parliaments. Useful lobbying practices might include petitions signed by national NGOs and experts; public vigils and rallies; and invitation of key politicians to public debates and events.

Advocating Article 77 at the national level could also be framed as developing existing practices of negative and positive screening of eligible bids. For instance, in the UK authorities may already exclude companies convicted of tax fraud and favour social enterprises that promote social values.

The implementation of the EU directive on public procurement could also be connected to the debates around Luxleaks as a potential solution to the problems raised.

Procurement activities currently comprise some 15-20% of GDP in EU member states on average, so there is a genuine need to connect the regulation of procurement activities with tax justice.

Just last month, the EU’s TAXE committee rejected a proposal to ask the EC to take into account tax justice issues during its next amendment round of the public procurement directive. While this amendment round will not happen anytime soon, this also underlines the need to discuss this further.

Johannes Kananen, University of Helsinki, Finland
[email protected]

Thomas Wallgren, Chair, Fair Tax Finland
[email protected]

Matti Ylönen, University of Helsinki, Finland

Matti Kohonen, in personal capacity