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Markus Meinzer ■ Feedback to EU Commission’s roadmap to tackle tax fraud and evasion

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The EU Commission has called for feedback from the public on its new roadmap for tackling tax fraud evasion. Recognising that “every year in the EU, billions of euros are lost to tax evasion”, the Commission has outlined an initial action plan, presenting key initiatives to:

  • tackle tax fraud
  • make compliance easier
  • take advantage of the latest developments in technology and digitalisation

The Tax Justice Network submitted feedback which can be found here and which has been reproduced below.


Tax Justice Network feedback to EU Commission’s “Action Plan on fight against tax fraud ” initiative

With the Corona pandemic exacerbating inequalities and ushering in extreme stress on the budgets of EU member states, the Action Plan of the European Commission is planned during the most severe crisis of the European and global institutional architecture in 70 years, exposing hundreds of millions of citizens inside and outside the European Union to extreme economic vulnerability. In this context, the role of corporate tax havens and secrecy jurisdictions within and outside the EU in undermining solidarity cannot be tolerated any longer and calls for decisive action in order to safeguard the European Union’s cohesion and help preventing the further spread of populist and extremist movements.

The scope of the EU Action Plan should be broadened to include personal and corporate income tax matters, including tax avoidance in a legal grey zone. Options for an EU supported wealth tax and options for an excess profits tax on firms profiteering from Corona should urgently be explored and included in the Action Plan, jointly with reviving plans for a broad and comprehensive tax on financial transactions.

The EU would benefit from the European Commission hosting or acting as a European Tax Intelligence Centre (EUTIC), transmitting innovative data and policy analyses for improved tax compliance and fairer taxation. Among others by applying a novel geographic risk assessment tool, EUTIC would assess vulnerabilities to illicit financial flows in Europe including from tax evasion, tax fraud and tax avoidance. A more detailed proposal for scope and data implications of an EUTIC are enclosed in the draft summary recommendations of the Horizon 2020 research project “COFFERS” (Combating Fiscal Fraud and Empowering Regulators). This project has concluded end of January 2020 and offers a wide range of relevant research findings and innovative policy recommendations (full details accessible under http://coffers.eu). 

While the European Union has taken many bold legislative steps in the past years, some policy gaps remain that need addressing. In the realm of automatic information exchange of financial account information and personal income and wealth taxation, the effectiveness of the entire system is jeopardised by recalcitrant jurisdictions that refuse to engage in fully reciprocal information exchanges. To ensure a level playing field, the EU should consider implementing a withholding tax policy against non-participating banks that fail to provide financial account data on a fully reciprocal basis, using its market access as a leverage to ensure compliance.

Furthermore, the validity of passports issued under golden passport schemes by some members states should be constrained in order to prevent tax evaders and criminals to open foreign bank accounts with purchased citizenship to circumvent reporting to tax authorities at their place of primary residence. The efforts to counter tax evasion and money laundering through beneficial ownership disclosure need to be complemented by disclosure of legal ownership in all cases, by expanding the disclosure to EU real estate and the registration to freeport users, and by abolishing bearer shares or immobilising them with a government authority.

In order to rein in corporate tax havens, various conditions for participating in the Single Market should be enacted, ensuring a level playing field and robust tax revenues: group-wide public country by country reporting, full publication of unilateral cross border tax rulings including the name of the companies and minimum corporate tax rates. Other policies to consider are discussed in the current special issue of “Intertax”: Leyla Ates, Moran Harari and Markus Meinzer, ‘Positive Spillovers in International Corporate Taxation and the European Union’, Intertax, 48/4 (2020), 389–401). Full details of reform options are detailed in the 20 indicators of the Corporate Tax Haven Index.

Recommendation 1: Establish tax intelligence centres in member states and at the EU commission

The cross border integrated tax planning departments of investment banks, accounting and legal firms require a response by the state that transcends regulatory silos. A robust response that will safeguard the interests of ordinary citizens by countering the multi-billion tax avoidance and money laundering industries must include not only operational capacity to detect the latest complex cases, but equally capacity for strategic orientation. This needs to be innovative and responsive to changing dynamics. At the moment, this capacity is fragmented at the national level and absent at the EU level. As a result, there is increased risk of disconnects and time lags between policy making and regulatory implementation, with the EU public COFFERS suffering from billions in lost tax revenues and uncounted costs in terms of crime and money laundering.

An EU-level Tax Intelligence Centre (EU-TIC) would meet both of these challenges, monitoring macro-economic trends for risks of illicit financial flows and the spillover effects of domestic tax policies, and building advanced data mining and analytical capacity to support targeted tax audit and policy formulation. An EU-TIC would facilitate the prioritization of the negotiation of international agreements, shape policies and programmes for tax compliance, and support local tax administration in operational decision making (staffing, auditing). At the request of member states, the EU-TIC would provide support in policy and operational analyses, as well as tactical and strategic advice.

Dedicated tasks of the EU-TIC would include the identification of abusive tax avoidance structures in EU financial systems and the internal market, and the design of suitable responses. The identification of structures would rely inter alia on the new directives on mandatory reporting of aggressive tax planning schemes (Council Directive 2018/822/EU) and on the protection of whistleblowers (Council Directive 2019/1937/EU). Furthermore, the role of the EU-TIC would encompass the identification of tax evasion and money laundering risks across the entire EU, and individual EU member states, by providing data-driven country profiles of vulnerability and exposure to illicit financial flows. This would rely in part on bilateral financial secrecy index analyses. The EU-TIC would also provide and review tax gap estimates.

The EU-TIC would set an example in transparency, by publishing periodic reviews, documenting in detail its activities and impact.

Recommendation 2: Addressing data gaps

Without reliable data, tax evasion and avoidance and money laundering cannot be countered successfully and sustainably. Public data for researchers and the wider public and the integrity of confidential administrative data require improvement. This will foster trust in institutions, contribute to a level playing field and fortify the rule of law.

Interoperability of available registry data is a pressing concern that requires a response both within, and beyond the European Union. With some economic groups in the financial sector controlling up to 25,000 separate entities, a need for the unambiguous identification of ownership structures is evident. The potential of the Legal Entity Identifier to allow interconnectivity, or even to replace EU-wide separate numbering systems of domestic legal entities, should be explored. Incentives to keep the data valid and updated have to be implemented consistently. Measures to ensure integrity and timely information include ensuring public access to financial statements, ownership data, and statistics on regulatory and enforcement actions taken by the registries in cases of non-compliance.

The current lack of data on country by country information should be remedied to construct a level playing field between SMEs and large multinationals. SMEs often operate in one country and are unable to shield relevant accounting data from public scrutiny. Large multinational companies do so by consolidating accounts and structuring corporate networks strategically.

To ensure the continued success of the automatic exchange of tax information on financial accounts, commitment by participating jurisdictions and data quality should be monitored. Comprehensive statistics on the data exchanged by country of account holder, controlling person and bank location should be published. Public statistics on golden visas and similar programmes should be made mandatory to protect against the undermining of the effectiveness of automatic information exchange of financial account information.

Standard statutory tax rate datasets should be complemented with measures of the lowest available corporate income tax rates (LACIT) legally available in jurisdictions, to improve the validity of academic research and policy analyses. Such data on LACIT is provided by COFFERS’ in the Corporate Tax Haven Index.

Recommendation 3: Addressing policy gaps and loopholes

While the European Union has taken many bold legislative steps in the past years, policy gaps remain that urgently need addressing. In the realm of automatic information exchange of financial account information, the effectiveness of the entire system is jeopardised by recalcitrant jurisdictions and banks that refuse to engage in fully reciprocal information exchanges. To ensure a level playing field, the EU should consider implementing a withholding tax policy against non-participating banks that fail to provide full financial account data on a reciprocal basis, using market access as leverage to ensure compliance.

Furthermore, the validity of passports issued under golden passport schemes by some members states should be constrained, at a minimum by requiring this status to be declared on the passports and through information exchange protocols. Without this measure, tax evaders and criminals are able to open foreign bank accounts with purchased citizenship to circumvent reporting to tax authorities in their place of primary residence. In order to improve pan-European cooperation in prosecuting cross border tax evasion and money laundering, legislative efforts should be directed towards creating harmonised and clear definitions of both crimes. A pan-European prosecutorial agency for these matters should be instituted. Efforts to counter money laundering through beneficial ownership disclosure need to be complemented by disclosure of legal ownership in all cases. Disclosure requirements should be expanded to incorporate EU real estate and freeport users. Bearer shares should be abolished or immobilised with government authority.

A return to a truly progressive tax system can help prevent the further spread of populist and extremist movements. Effective cooperation on business taxation supports this. To date no breakthrough in the area of business taxation comparable to automatic information exchange has been achieved. A first step t is the speedy enactment of public country by country reporting rules for large corporate groups. This is as is proposed in a directive under negotiation amending Directive 2013/34/EU in regard to the disclosure of income tax information by certain undertakings and branches. Minimum taxes should complement the adoption of the Common Consolidated Corporate Tax Base (CCCTB).

Fundamental corporate tax reforms (towards unitary taxation/CCCTB) will take some time. They should be complemented by intermediate policy steps that can be implemented unilaterally and immediately. Examples of such intermediate steps include the abolition of patent boxes and notional interest deductions, the inclusion of capital gains in the corporate income tax base, constraining loss utilization over time, and the introduction of robust deduction limitations on intra-group royalty and service payments.

These new EU policy-making efforts should be implemented in a way that contributes to stronger democracy in the EU. This can be achieved by establishing channels for the greater participation of independent academics and civil society organisations in the reform process. Reform should no longer be dominated by private interests and a closed and technocratic network.

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