illegal tax evasion vs legal tax avoidance

tax evasion

How should the EU deal with financial havens, offshore accounts and tax avoidance regulations in Member States and EaP countries.   

The issue of managing tax evasion on an EU level is a problematic one. Tax policy has traditionally remained within the national sphere of policy making. However, as the Panama Papers and LuxLeaks have proven, tax evasion takes place in countries and across different countries. There has been increased amount of arguments about approaching tax evasion on a supranational level. Mainly due to the international nature of tax evasion and fraud as we know it today. The EU has a growing role in providing a framework for combating tax evasion and tax fraud effectively on a cross-border basis, since a national policy cannot succeed alone.

Tax evasion is highly detrimental to the successful functioning of a state. It hinders a state’s capacity to raise money and implement social and economic policies. It can be seen as the cause for cuts in public services.  Furthermore, tax evasion is inherently unfair. There is long-lasting general agreement that tax evasion and fraud need to in some way or another, be combated on a European level. The Panama Papers will in no way be the last of such leaks. That is why the tools are needed for reacting to these cases. In this paper, the focus will remain on certain aspects that need to be strengthened, for the EU to successfully manage tax evasion – on a corporate and individual basis.  

Overview of current situation

Due to the national nature of tax policies both corporations and individuals have been able to avoid paying tax. For a long time multinational corporations have been able to make use of the mismatch of different countries tax systems. The losses for which are significant. The Special Committee on Tax Rulings of the European Parliament states that approximately a third of all corporate investments are placed into offshore financial structures. Meanwhile, according the Commission, the EU is losing €1 trillion yearly from tax evasion.

Two big leaks recently have made an imprint on how tax evasion and tax fraud are discussed and dealt with. The LuxLeaks uncovered that multinational corporations where paying a fraction of the corporate tax thee should be paying. Secondly the Panama Papers revealed that a variety of individuals had been using shell companies in Panama. Hiding their incomes from national tax authorities.

The role of public opinion has been influential in bringing tax evasion into the public sphere. There are a massive public outrage. With the LuxLeaks and the Panama Papers leak, it was impossible for the leaders in Europe to no react. The European Union had been working against tax evasion before these two scandals. However these two leaks have brought the EU’s fight against tax evasion under public scrutiny.

The following sections will present areas that the EU is focusing on, or strengthen in their fight against tax corruption.

Information exchange and transparency

Tax evasion is made possible not only by the mismatch of national systems. The mismatch of secrecy laws related to banks in different countries play a role. One way to approach tax evasion is an increase in transparency. Seeing as secrecy is one of the strongest enablers of tax fraud and corruption. The value of transparency cannot in any case be undermined. It facilitates financial transparency but it also tackles the illegal financing of terrorist groups.

The European Parliament only this month voted for a fairer and cleaner corporate taxation. The benefit of transparency has also been valued here as the committee called for a public register of beneficial owners of companies, a tax havens blacklist and sanctions against non-cooperative tax jurisdictions. Furthermore the MEPs have called for the register to go global, and list assets held by individuals, companies and entities (such as trusts) that would be accessible to all tax authorities. Additionally the committee calls on further protection of whistle-blowers. The person who leaked the Panama Papers remains unknown which only goes to prove the need for further whistle-blower protection. The report will be voted on the by the Parliament in the July plenary session in Strasbourg.

The law firms and other bodies that work in intermediary roles should also be regulated and made more transparent through legislation. They should be able to spot the dodgy ones, but law firms, which husband offshore accounts tend to turn a blind eye to what kind of background their clients come from. This also brings light to the fact that are multiple guilty organs in the process of tax evasion. When it comes to individual client, many of them tend to be in high positions, often political. To increase transparency would immediately bring about an increase in accountability.

Sanctions

The committee goes further than the Commission’s proposal of creating a blacklist, to agreeing on a sanctions against non-cooperative jurisdictions (i.e. countries), as well as companies, banks, and even individual tax advisors who have been proved to have been engaged in illegal actions within those jurisdictions. To really address the individuals, MEPs have even gone as far as suggesting financial liability for those tax advisors engaged in illegal tax activities. The report, voted on in July’s plenary session, calls for a possibility to review and even temporarily put an end to free trade agreements, as well as blocking access to EU funds for the non-cooperative jurisdictions on the list.

This is essential in tackling tax evasion, as it must be understood, by the public as well as by officials, politicians and others that tax evasions do not go unpunished. This also applies to Eastern Partnership countries.

Efficient national tax filing systems

Many people that avoids tax have never used an offshore account. This is because many national systems are full of loopholes and the average tax payer can easily engage in tax avoidance. Another aspect that might encourage a decrease in tax evasion is an efficient tax filing system, such as the one in Estonia. An Estonian can file their tax in the space of five minutes online. In 2014, 95% of all tax declarations were made online.

This is an aspect that other European countries could benchmark. Many European countries are still riddled by outdated tax systems which require an extensive filing system. Systems which are time consuming and for the average national of a country, often confusing. Estonia’s use of digital tools for the functioning of society can only be admired, and the EU has acknowledged it, giving the Estonian commissioner, Andrus Ansip, the Digital Single Market portfolio and Estonian MEPs have a strong influence on the Digital Single Market in the European Parliament.

Challenges for fighting tax avoidance in Eastern Partnership Countries  

The challenge for managing tax evasion in the Eastern Partnership countries is even more daunting than the European Union. Seeing as their concerns are not voiced in the EU legislative process. This means that institutions such as the EU must actively advocate transparency and lead by example. Eastern Partnership countries tend to value very highly good relations with the EU. Without abusing this, the EU, should set standards at which it agrees to maintain relations with certain countries and remain consistent to these standards.

Conclusions and some criticism

The review of the EU stance on tax policy is generally being welcomed. However there has been words of criticism. In particular from business associations that the change will be a further detriment to an already weak European economy. Since the start of the commission’s new term in 2014, words such as competitiveness, growth and investment have been heard in nearly every corridor in Brussels. Yet, there has been criticism that the EU might go too far in the fight against tax fraud and evasion. This essentially means playing with fire in regard to the EU’s global competitiveness.Only if the finance ministers decide to go beyond standards agreed on a global level.

Corruption in entering the public narrative, with multiple leaks in the past couple of years, causing widespread outrage. This outrage amongst the public is what will truly change legislation. As understanding of the inequality increases it will put pressure on the decision-makers.

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