Taxing times

Written by Molly Scott Cato on 25 June 2019 in Opinion
Opinion

MEPs must continue to press national governments to take firm action on tax evasion, avoidance and financial crime, argues Molly Scott Cato.

Photo credit: European Parliament Audiovisual


We are proud that the Greens/EFA group managed to successfully push for a European Parliament subcommittee on tax during the last mandate.

Parliament has now acknowledged that there is an urgent need to strengthen the fight against financial crimes and aggressive tax planning.

In March this year, MEPs adopted - by a large majority - a report by the special TAX3 committee. This was set up following the scandals revealed by LuxLeaks and the Panama and Paradise Papers.

I was shadow rapporteur for this committee, which investigated tax fraud and tax avoidance issues; I was delighted when the report was adopted by 505 votes to 63.


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It will now be passed to the Council and the European Commission, although it should be noted that the measures are not binding on EU Member States or the EU institutions.

Recommendations include setting up new bodies at the EU and global levels to clamp down on aggressive tax planning, by agreeing and adopting a comprehensive definition of what this means.

The report also highlighted the lack of political will displayed by some Member States in tackling tax evasion and avoidance as well as financial crime.

In particular, the report identifies seven EU countries (Belgium, Cyprus, Hungary, Ireland, Luxembourg, Malta and The Netherlands) that display tax haven traits and facilitate aggressive tax planning.

From a Green perspective, there are several important aspects to this. On corporate taxation, there is an obligation on companies that create offshore structures to declare them to a tax administration; there is also a demand to pay corporate taxes in the jurisdiction where profits are actually generated.

When it comes to so-called “letterbox companies” - those that have no actual economic activity and are registered in jurisdictions where companies are not required to submit financial statements – the Parliament has agreed that Member states should be obliged to ban commercial relationships with such companies.

“Ahead of the European elections, we launched a ten-point plan and manifesto on tax justice, which will form part of our core demands for the coming European Parliament”

There is also an important digital tax package. Digitisation enables some companies to gain a lower and unfair rate of tax compared to companies with a fixed physical presence.

The EU has agreed to adopt measures that ensure profits are registered and taxed where businesses have significant interaction with end users through digital channels.

When it comes to financial crime, there has been an agreement to establish a European financial police force as well as an EU anti-money laundering surveillance body. We also welcome better protection for whistle-blowers and investigative journalists.

Then there is a proposal to phase out ‘Golden visas’ and passports. A recent Green report, “Competing for the Rich”, reveals just how critical this is.

Personal income tax is the largest source of revenue within the EU, raising 22 percent of the total, compared to seven percent from corporate income tax. However, just as with corporate tax, countries use their own tax systems to compete for the highly skilled, rich and mobile.

They do so by creating special regimes for those that decide to change their residence for tax purposes. In doing so, they are creating a destructive race to the bottom, forcing other countries to lower their tax rates to compete.

Brexit is helping fuel this race to the bottom on personal tax rates, with the report citing France as an example, where Paris is deliberately seeking to increase the city’s attractiveness of Paris as an alternative to London for bankers and financiers by removing wealth taxes.

“The tragedy for the UK is that if we leave the EU, we exit from the emerging spirit of cooperation at EU level in promoting tax transparency. Instead, we will become competitors with our European neighbours in this race to the bottom”

Meanwhile, Italy has started a scheme where UK residents make up a third of new users. Brexit has also been suggested as the reason why Cyprus has created “arguably the most beneficial scheme for the very rich and mobile with high capital incomes – with virtually no tax”.

Obviously, if the UK leaves the EU it is likely to try and make retaliatory moves to entice the wealthy to stay, or to lure them from other European countries. Just look at how the UK Conservative leadership contenders are trying to out-compete each other on reducing taxes on the wealthy.

As Greens, we would like to see measures go further: there’s a lot more to do to build a just and equal society. Ahead of the European elections, we launched a ten-point plan and manifesto on tax justice, which will form part of our core demands for the coming European Parliament.

This includes an EU-wide plan to tax the super-rich and implement an EU-wide carbon tax and levies on the aviation industry as part of prioritising the transition to a sustainable economy.

Overall the TAX3 committee report can be seen as an indication of the increasing pressure from Parliament on both the other EU institutions and on national governments to act.

The tragedy for the UK is that if we leave the EU, we exit from the emerging spirit of cooperation at EU level in promoting tax transparency.

Instead, we will become competitors with our European neighbours in this race to the bottom.

About the author

Molly Scott Cato is a vice president of Parliament’s Greens/ EFA group

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