Tax evasion is not a new problem. In fact, according to David Burg’s “A World History of Tax Rebellions,” various degrees of tax resistance have existed ever since rulers began imposing taxes on their citizens. It has even been suggested that the fall of some of the major empires over the course of history has been caused by tax-related uprisings.
But has the time come to end this practice?
According to a new Eurobarometer survey of the European Parliament, 75% of EU citizens surveyed would like the EU to intervene more in the fight against tax fraud.
Can tax evasion be stopped?
The European Commission differentiates three major avenues available to tax evaders:
- Tax fraud and evasion, such as not reporting certain income, particularly cash, which illegally deprives public budgets of money.
- Tax havens, which facilitate tax evaders and avoiders by storing money offshore, where it is unreported and untaxed.
- Tax dodging, often by aggressive tax planning by big businesses or individuals, which exploits the limits of the law with the aim of minimizing taxes paid.
The European Parliamentary Research Service has concluded that tax evasion costs the EU anywhere from $55 to $75 billion dollars per year. According to the report, the bulk of the tax evasion is made up of large multinational companies like McDonalds, Google and Apple, who are able to dodge taxes throughout Europe by funneling their profits to countries that offer low-tax brackets, such as Ireland and Luxembourg. The European Commission’s tax department is currently investigating these companies along with other mega-corporations, such as Starbuck’s, Ikea, Amazon and Microsoft, to the tune of billions of dollars in owed taxes. These investigations will take time, as attempting to cajole some of the world’s most powerful and influential corporations to part with billions of dollars is no small feat.
According to major international non-governmental aid organization Oxfam’s EU policy advisor on inequality and taxation, corporate tax dodging costs poor countries more than $100 billion every year, enough money to fund the education of 124 million children who are not in school, as well as subsidize healthcare for at least six million children every year.
EU taking steps in the right direction
As part of the Commission’s investigation, efforts have begun to implement measures that will stop criminal tax fraud from taking place across the EU. A current proposal recommends an increased level of cooperation between EU member states, especially in the area of information exchange. For example, a 2016 agreement with Andorra will improve tax compliance by requiring EU member states and Andorra to exchange information automatically, providing tax administrations improved cross-border access to financial information.
In addition, the EU Commission is in the initial phases of creating the first common EU list of non-cooperative tax jurisdictions. A pre-assessment scoreboard of countries has been determined by key indicators, and these countries will be subject to further screening in order to pinpoint those countries that refuse to comply with international tax governance standards. This list is also aimed at preventing aggressive tax planners from abusing discrepancies between the different national systems.
The Commission has also published a report recommending ways for Member States to collaborate towards better direct tax and VAT collection. The report’s results indicate that implementation of digital and IT systems, as well as investment in human resources, are required for EU countries to improve their national budgets. Member States must deploy more resources to improve tax collection – a benefit that can increase national budgets by €150 billion a year in VAT alone.
Additional recommendations include:
- Guidelines to better define transfer pricing
- Better protection for whistle-blowers
- An EU-wide withholding tax to ensure that profits made in the EU are taxed at least once
- A code of conduct for banks, tax advisors, law and accounting firms
- Full access to a global register of all assets held by individuals, companies and entities
The impetus for change
The seemingly rapid movement of the EU to effect change within their systems may have been spurred by the scandalous revelation of the Paradise Papers in November. These documents include nearly seven million loan agreements, emails, financial statements, deeds and other paperwork over the course of 50 years from an offshore law firm with offices in Bermuda and other locations. Among the names listed in these documents are some of the most well known and respected people in the world, including Queen Elizabeth II, Prince Charles, President of Colombia Juan Manuel Santos, and U.S. Secretary of Commerce Wilbur Ross, as well as major corporations like Facebook, Twitter, Disney, Uber, Nike, Walmart, and Yahoo.
Putting an end to corporate tax fraud and the ability of private individuals to evade tax payments with off-shore havens is a work in progress and an ongoing investigative game of “cat- and-mouse.” It occurs domestically and cross-country, both within the EU and internationally. While the EU should be lauded for taking steps to combat this widespread problem, it is unlikely that they will succeed in a vacuum. While moving in the right direction, ultimately it will require comprehensive, worldwide cooperation to put an end to this timeless problem.
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