EUROPEUM Institute for European Policy

  • In recent years several leaks of information from tax heavens, some of them are called Swiss leaks, Panama papers or Paradise papers, have raised public awareness of massive tax evasion. Those documents shocked the entire world by how many people, including public officials, were involved.
  • From then on, the endeavour to prevent these tax avoidances and evasions began and the EU is one of the most active.

In the light of scandals with Panama papers and Paradise papers, the EU has decided to take steps to eliminate tax fraud and tax avoidance. However, since the first is officially illegal but the latter is not, the case of tax avoidance is not punishable by law – for the time being.

The European Parliament, in reaction to revelations in both Panama papers and Paradise papers, established inquiry committees, which eventually led to the creation of so-called blacklist of economies considered tax heavens. This blacklist should have been a kind of warning for states who are not meeting EU standards as well as international transparency demands, as it should point out to international community that these states are not playing fair. Another several dozens of countries were listed as “grey” economies who meet some of the standards but should be observed. We can see a paradox situation, because no EU member states were listed even though some of them do not meet pre-set criteria. Later on, the European Commission outlined a list of possible sanctions for non-cooperative jurisdictions. Moreover, there exists already approved Anti-Tax Avoidance Directive (as a part of Anti-Tax Avoidance Package) which should come into use in 2019 for EU member countries.

This process of making aggressive tax avoidance practically illegal is supported mainly by arguments of how much money could have been used on improving welfare in each and every member state.

It might be justified opinion; with each new leak of information from tax havens, it becomes apparent that national treasuries are deprived of significant amounts of money each year. However, if you take the same problem from the point of view of blacklisted countries, it is very advantageous for them. Rich western companies and personalities are using their taxation system, hiding immense wealth from European governments. And enormous amounts of money are flowing into blacklisted economies, making them richer because they just were able to do the easy math and make their taxation systems open to tax avoidance. This money is helping them to overcome their possible lack of income originating from their own economy.

If you consider the position of both sides you can see an obvious clash of interests. The solution depends only on the European Union and its determination to pursue its goals though. To this day, there is only limited means to coerce the blacklisted states to cooperate. Except for shaming effect of being on that list and severe restrictions on funding from EU. Member states failed on agreeing on stricter sanctions, and there is potentially a chance that the existence of the blacklist might even promote tax heavens in the eyes of companies with understandable endeavour to minimize their tax payments.

In addition, in recent days the European Commission even diminished the number of blacklisted countries by eight (including Panama, United Arab Emirates and South Korea), without receiving any apparent proof or indicators of these countries changing their taxation system towards meeting international standards. This step has drawn even bigger disagreement into solution talks, which were already partitioned by view on sanctions which were not levied. If we add also the obvious use of double standards by EU towards its members and other countries which can be considered tax havens, we cannot be surprised by reluctance to adjust the tax systems of those who are blacklisted. We can just hope that the Anti-Tax Avoidance Directive will ensure meeting the EU’s demands at least from member states. As there are no means to force tax heaven states to reform, there emerges a battle of “wills”.

On one side there is pressure of the EU as a whole and other states who are losing their money and on the other side there are joint forces of wealthy companies using the possibility to minimize the amount of payed taxes and tax heaven states who are all profiting.

Analysing the structure of both black and grey lists, you can see that there are not just poor and developing countries included, but also a few developed and rich ones, some of whom are important partners of the EU (such as Switzerland, Turkey etc.). It means that the introduction of sanctions will be even more complicated and might have influence on mutual relations, international trade and industry. The aforementioned power of countries who were re-classified from black to grey list is readily apparent, and it is uncertain whether the EU members will ever be able to agree on stricter sanction plans as each of them has own interests.

To give the EU some credit, it is winning the moral side of the conflict. If even some developed countries use low taxation to attract foreign companies to pay taxes to them, not to their home states, they have to be sure that the amount of collected money will be so high that it will outweigh every possible negative consequence that might occur from the side of international community.

By fighting the tax evasion and tax avoidance, EU shows its high moral credit. Unfortunately, for the time being, it seems that it is fighting practically barehanded except for stepping up the pressure on CSR and leading several investigations of TNC for illegal tax evasion.

So, will the tax heaven states conform to EU demands? Not until the European Union stops using double standards and defines its real steps toward elimination of aggressive tax avoidance and tax evasion. This must include agreements on sanctions for non-cooperative states; otherwise, there is little hope for change. Provided the companies using tax avoidance will not be struck by a sudden hitherto unprecedented proclivity towards honesty and altruism, tax heaven countries will continue to profit.

Michaela Matějková


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