04 Dec GUE/NGL comments on TAX3 Draft Report
The TAX3 draft report prepared by the EPP and S&D co-rapporteurs was discussed among MEPs last Tuesday 27 November in the European Parliament. GUE/NGL’s shadow rapporteur in the TAX3 Special Committee, Miguel Urban Crespo (Podemos) was quite critical about it (watch his intervention here).
Given that the draft report has been prepared by EPP and SD, there is a risk that these two groups close themselves in their joint position inhibiting any dialogue with the rest of the Parliament, as they already have a majority to get the report be adopted as it is today.
Underneath some general preliminary comments on the report as well as a first assessment on some of the TAX3 draft report’s sections. Not all sections have been specifically addressed, as on some of them GUE/NGL would have no comments, would approve on their content, or would have to further analyse.
GUE/NGL General comments on TAX3 Draft Report
The draft report is nicely organised, covering most of the possible topics. However, the organization also hides bigger problems. For example, the inclusion of the scandals involving Danske Bank, ING and ABLV in the “Anti-Money laundering” section, hides the fact that there are structural problems in the banking sector that go beyond money laundering, such as tax evasion, tax avoidance, and the contribution to systemic problems via trading of shares that never existed as has been noted by the last leak “cum-fake”, after cum-ex.
The PANA committee produced a set of recommendations that were approved by the plenary, in the same way as previous TAX2 and TAXE committees, and therefore those should be the starting points. However, the report seems to move backwards from such already agreed positions.
The draft report has no fundamental criticism, and no mention to the fact that there is a need for some capital controls, as has been the EP’s recent position in the Interim report on the Multiannual Financial Framework 2021-2027:
48. Urges a genuine fight against tax evasion and avoidance, with the introduction of dissuasive sanctions, for offshore territories and for the enablers or promoters of such activities, particularly and as a first step those operating on the European mainland; believes that Member States should cooperate by establishing a coordinated system for monitoring capital movements in order to fight tax evasion, tax avoidance and money laundering;
49. Is of the opinion that effective measures against corruption and tax evasion by multinationals and the wealthiest individuals would make it possible to return to the Member States’ budgets an amount estimated by the Commission at one trillion euros per year, and that in this field there has been a serious lack of action by the European Union;
A first analysis on some of the TAX3 draft report’s sections:
General introduction setting the scene
This section notes and highlights the role of the Commission putting forward 22 legislative proposals. It also highlights the role of the Parliament in its contributions. However, the Commission’s proposals have so far managed to always leave sufficient gateways opened for the status quo not to change. No structural changes have so far taken place.
Regarding the role of the European Parliament, even when all past TAX and PANA committees have managed to make valuable contributions to the legislative discussions, they have not gone in-depth enough to reveal anything new that had not already been said by the media or by the civil society.
1.2 Quantitative assessment
There is no mentioned at all to the information that will be able to be obtained from the implementation of BEPS Action 13 on Country-by-Country Report. Jurisdictions have agreed to put in place Action 13 Report with respect to fiscal periods commencing from 1 January 2016. Even when this information is not necessarily public today, it is available for tax administrations and it is a reliable source of information that should be used to produce data.
1.3 Tax fraud, tax evasion and aggressive tax planning (ATP)
The European Commission and now the Parliament is deeply committed to using “aggressive tax planning” instead of “tax avoidance”. In this way, they present the problem as a non-problem, which can even be seen positively.
Also, once again tax avoidance is described as within the limits of the law but against its spirit, when the “legality” is not really tested until a court of law decides upon it. In addition, for a court of law to decide, it is sometimes so difficult in cases of for example, transfer pricing, that they would rather say it is legal instead of engaging in an impossible discussion in the current context where the law is guided by the arm’s length principle.
When describing what is ATP, the text does not make any mention of arbitration between different legislations, and between different financial tools, something that is now in the spotlight with the dividend arbitrage revealed by the cum-ex scandal.
Banks, tax and legal advisors engaging in tax avoidance, tax evasion, tax fraud and money laundering, are once again referred to as “intermediaries” when they are in fact enablers and promoters and the Irish legislation, among others, says so.
Companies are asked to refrain from ATP. Even when only a general statement at this point, it is setting a direction towards self-regulation.
It takes notes on the readiness by France to include the debate on minimum taxation as a priority of its G7 presidency in 2019. If anything, it should talk of minimum effective taxation and not minimum taxation. Minimum taxation could in itself be a way of contributing to tax competition by lowering all corporate and withholding taxes to the minimum.
It calls on the council to resume negotiations on the interest and royalties directive. This is good. However, it should also remind Member States that withholding taxes are allowed in the current context and that they should use them, as they have been identified by some experts as a very useful tool to tackle tax avoidance in the absence of harmonization.
2.1. BEPS Action plan and its implementation in the EU: ATAD
The OECD BEPS Action Plan, because it was an OECD Plan, did not question the source-residence problem which is at the core of tax avoidance, but also at the core of developing countries negotiations of tax rights with industrialized ones.
Due to the critics of it being a club of rich countries deciding the future of international taxation without the say of developing countries, and the push for an UN tax body which is funded and allows for equal voting rights to all members, the OECD has expanded its BEPS Action Plan into an “inclusive framework”, involving developing countries in the implementation of a set of rules they have not participated in defining. This inclusive framework now has 130 members. It is still not the UN. However, the OECD has been pushing for decades in order to move the UN out of the discussion and this is just that.
Most EU Member States have openly rejected the possibility of funding the UN tax body as has been exposed by Eurodad in 2017.
The TAX3 draft report recognizes this inclusive framework as a positive thing and only requests that it discusses source-residence taxation.
This is a dangerous approach for developing countries, as it debilitates any possibility of having a UN tax body, and the OECD is not the space where developing countries can discuss the distribution of taxing rights with the rich countries.
There is a call for a clearer definition of “permanent establishment”. However, the problem is not the “clearness”, but rather the fact that in Europe, so far it includes only establishments which have physical presence, and could include significant digital presence, but it does not include other forms of activities, which take place without any presence at all. Something, which is allowed for in the UN tax convention.
There is a reference for improving the framework for transfer pricing. However, the problem of transfer pricing is not solved by improving a framework based on the arm’s length principle that is based on the fake comparison of activities performed within an economic group with activities performed between third parties. Furthermore, the text recommends taking into account the OECD 2010 transfer pricing guidelines (which have been updated in July 2017, by the way). Again, those are based on the arm’s length principle, which after 100 years of being created, has proved not to be fit for purpose (or rather, it did prove to be very effective in legalising tax avoidance).
Solutions should move towards Unitary taxation (CCCT but on a global basis); and/ or recognition of the economic reality underlying the activities between multinational groups; and/ or use of withholding taxes; and/or renegotiation of tax treaties.
Basically this whole section is excessively enthusiastic on the capacity of the OECD recommendations/ toolkit to tackle tax evasion and tax avoidance, when the OECD is at the core of the problem, because it has been pushing for the arm’s length principle and for leaving the UN out of the scene since the 70’s at least, in co-ordination with the International Chamber of Commerce.
There is a critic (although soft) to the weakness of the EU’s Control Foreign Company (CFC) rules based on the coexistence of 2 approaches and a call for Member States to implement only the most efficient CFC rules in ATAD I. GUE/NGL supports this critic.
2.2 Strengthening EU actions to fight against corporate aggressive tax planning (ATP) and supplementing BEPS Action Plan
2.2.1 Scrutinising Member States’ tax systems and overall tax environment – ATP within the EU (European Semester)
There are welcoming remarks towards DAC6 (directive aimed at having enablers and promoters informing their cross-border aggressive tax planning schemes to the tax authorities, which should afterwards share them with other EU Member States). . In any case, the hallmark of the schemes, which are supposed to be reported, is very incomplete and insufficient; as it has been evidenced by the current cum-ex scandal (dividend arbitrage would not have fallen in the hallmarks).
There are welcoming comments towards the fact that the European Semester now includes aggressive tax planning indicators. GUE/NGL supports this too. Such indicators also connect the dots between tax avoidance, tax evasion and financial instability, so they are more than welcome!
There is a call for the Code of Conduct Group (CoCG) to report annually on the main arrangement founds in EU Member States. This is also a positive call.
2.2.2 Common consolidated corporate tax base (CCCTB)
There are welcoming remarks towards the CCCTB in the TAX3 draft report. GUE/NGL has several critics to it and to the Parliament’s opinion based on a study by Alex Cobham, Petr Janský, Chris Jones and Yama Temouri (Tax Justice Network); namely: 1) no impact assessment based on reliable data has been conducted so far, an impact assessment should be carried out with the data from the CBCR before any other move in this respect, particularly in the design of the formula; 2) transactions with companies outside the EU, are meant to be controlled based on the CFC rules, which currently allows for a weak solution, this added to the threshold (750 million Euros) means that a lot of transfer pricing will still take place; etc. etc.
2.2.3 Corporate Digital Taxation
This section is very welcoming towards the 2 proposals of the European Commission regarding corporate digital taxation. GUE/NGL’s shadow (Martin Schirdewan) will most probable support both proposals, although with some critics.
Regarding the significant digital presence file, it is more of a move into the right direction. The commission understands that this discussion is about the definition of permanent establishment. However, instead of opening the discussion to the whole permanent establishment definition, and attempt at sorting all problems with one solution (probably knowing that this attempt will never be accepted by some Member States and it would end in a difficult discussion in the Parliament itself), only introduces an addition to the current permanent establishment definition, which is meant at including the “significant digital presence”. It does not recognize that the problem is not necessarily of digital companies themselves, but of the possibility of operating in different countries without having any presence at all.
Regarding the digital service taxation, or interim solution, there is a risk that if this one passes, the rest of the package will not be implemented (tax administrations will see some extra money coming from a sector which was more difficult to tax before, and will be happy with that); the threshold is too high and the tax is too low; but also, it is a sales based tax, and that brings some distortions into taxation.
2.3. Administrative cooperation in relation to direct taxes.
GUE/NGL welcome the call on the Commission to swiftly assess the implementation of DAC4 and national tax administration’s access to Country-by Country information held by other Member States.
2.4 Transparency in relation to corporate tax
GUE/NGL welcomes the mention to the European Commission’s country-by-country proposed directive, European Parliament’s amendments and the fact that it has been sitting in the Council since last year. However, among the appraised amendments is one, which has weakened the proposal, which is the protection of commercially sensitive information.
2.6 Letterbox companies
It is positive that the draft report highlights the high level of inward and outward foreign direct investment as a percentage of GDP in seven Member States (Belgium, Cyprus, The Netherlands, Malta, Ireland, Hungary, and Luxembourg). However, instead of saying clearly that this indicator reflects the existence of tax avoidance (as the Commission did in the European Semester, although saying it was a sign of ATP), it only says that this cannot be explained by economic activity taking place in such Member States.
PANA recommendations had stronger wording against letterbox companies:
55. Calls on the Commission to present a legislative proposal to address the issue of cross-border conversions and transfers of seats and to provide clear rules on the transfer of a company’s headquarters within the EU, including rules to counteract letterbox companies;
There is no mention of the carrousel fraud, nor to the problems of the proposal on generalized reverse charge mechanism (GRCM), which is currently being discussed by the Parliament.
There are also some paragraphs that have a positive look towards VAT being paid in the country of destination. This entails several risks for VAT collection, turning it into a revenue/ sales tax.
Taxation of individuals
The section does not condemn the use of amnesties at all.
PANA recommendations had a much stronger paragraph:
59. Calls on the Member States to identify and stop all use of any form of tax amnesties that could lead to money laundering and tax evasion or that could prevent national authorities from using the data provided to pursue financial crime investigations;
Anti-Money Laundering (AML)
There is a small error in the description of the origin of money laundering. Normally it is understood that terrorist financing is a problem at the end of the chain and not at the origin of money laundering, i.e. laundered money is necessarily of illegal/ illicit origin, while terrorist financing can have a legal origin. In addition, there is no mention to a problem which affects women and girls in a 70% which is trafficking in persons, and which relates to money laundering and illicit financial flows.
There is no criticism to the problem of self-regulation.
Even when several banks are identified in this section such as Danske Bank, ING and ABLV, the role of the banks in the report is disguised as it only falls inside the AML section.
5.2. Cooperation between financial intelligence units (FIUs)
It is positive that a mention is made regarding necessary cooperation between member States’ FIUs and also outside the EU.
However, PANA recommendations were much stronger regarding FIUs which were based on EPRS study and the mapping of EU FIUs, and which referred to problems that are not at all addressed in this report. Some of which are:
104. Believes that, to be more efficient, all European FIUs should have unlimited and direct access to all information related to their functions from obliged entities and registries; FIUs should also be able to obtain such information on the basis of a request made by another Union FIU and to exchange this information with the requesting FIU;
105. Suggests to Member States that, when implementing the AMLD, they remove the requirement for FIUs to obtain clearance from a third party to share information with another FIU for intelligence purposes, in order to foster the exchange of information between FIUs; calls on the Commission to issue guidance on general provisions in the AMLD, especially on the need to ‘spontaneously and promptly’ exchange information with other FIUs;
107. Notes that the purpose limitation on the use of the information exchanged by FIUs should be reviewed and unified at EU and global level in order to allow for information to be used for tackling tax crimes and for purposes of producing evidence;
Paragraph 133 of the TAX3 draft report mentions that AMLD5 obliges Member States to ensure that the information on beneficial ownership is accessible in all cases to any member of the general public. In its revision of the directive, Parliament called for the creation of BO registers also for trusts and for full public access to such registers (companies and trusts), but in the end the public access has only been granted to company registries, and trusts registries are only accessible after proof of legitimate interest.
However, it is positive that there is a call for a more stringent and precise definition of beneficial ownership to ensure that all natural persons are identified, as it was also requested in PANA recommendations.
PANA had stronger paragraphs on sanctions than the ones that are being proposed by the TAX3 co-rapporteurs, such as:
30. Calls for sanctions also to be applied to companies, banks, accountancy and law firms, and tax advisers proven to have been involved in illegal, harmful or wrongful activities with non-cooperative jurisdictions or proven to have facilitated illegal, harmful or wrongful corporate tax arrangements involving legal vehicles in those jurisdictions;
64. … calls on the Member States and third countries to ensure that the fines and pecuniary sanctions imposed on tax evaders and intermediaries are not tax-base deductible;
76. Calls for a more effective exchange, treatment and use of information globally and urges that the provisions on common reporting standards (CRS) be implemented efficiently and consistently, moving from the name and shame policy under the peer review system to a sanctions regime…
120. Calls for more efficient, dissuasive and proportionate sanctions at both EU and Member State level against banks and intermediaries that are knowingly, wilfully and systematically involved in illegal tax or money laundering schemes; stresses that the sanctions should be targeted towards the companies themselves as well as the management-level employees and board members responsible for the schemes; stresses that substantial penalties are essential and believes that the use of a public shaming regime for confirmed cases could discourage intermediaries from circumventing their obligations and encourage compliance;
131. Calls for the stringent application of effective sanctions on banks, providing for the suspension or withdrawal of the banking licence of financial institutions that are proven to be involved in promoting or enabling money laundering, tax evasion or aggressive tax planning;
International dimension of taxation
6.1. List of tax havens
The EU list of non-cooperative jurisdictions for tax purposes should be heavily criticised, there is no criticism in the draft report.
Given that 2 out of the 3 criteria refer to the OECD, the blacklist process seems more an extortive means of getting developing countries to implement standards that they have not participated in setting; than a serious effort to tackle tax evasion and tax avoidance.
Based on these criteria, 20 jurisdictions were cleared without any public explanation. The US and Israel where among them.
The list has today 6 countries:
- American Samoa
- Trinidad and Tobago
- US Virgin Islands
Even when some of these are indeed tax havens, they are not necessarily the ones having the biggest economic impact.
A comment should be made on the fact that even when the European Commission has pointed at some Member States promoting ATP, there is no EU tax haven blacklist and this is the section to include that criticism, as it has been done in PANA as well.
The only positive aspect of this section is that there is a mention of the Swiss case and a request that it be listed if it does not repeal its non-compliant tax regimes by the end of 2019. However, there is no specific mention of the fact that Switzerland may be creating new loopholes when closing the current ones and that such movement should be considered as well.
6.3. Position of the EU as a global leader
It could be added that the presidencies of the G77 have been asking for a UN tax body, notably Ecuador in 2017.
6.4. Developing countries
There is a mention regarding supporting the building of tax capacities in developing countries. This is complex. Many developing countries ask for this support themselves from industrialized countries. However, in this context it ends in imposing solutions from the North to the South. It ends up in modification of legal framework in developing countries, e.g. moving it towards the arm’s length principle, which has proved to produce more damage than anything else.
However, what should be enhanced or allowed for or incentivized is more South-South cooperation without the EU in the middle of it.
There is again an appraisal of the OECD’s inclusive framework because it now has 115 countries in it. Whatever the amount of countries, it is still in the framework of a club of rich countries, the OECD. The UN has 194, and it can allow for decisions to take place in an equal footing, so there is no possible comparison between the two of them.
GUE/NGL supports the paragraph on the need to fair treatment of developing countries when negotiating tax treaties, as we have a study by Martin Hearson about it (Read it here).
6.5. EU agreements with third countries
We support that tax good governance clauses be included in all EU agreements. However, this is not enough, as there are other recommendations from an EPRS study commissioned by INTA in 2016 which should be considered as well; some which have been taken up in a GUE/NGL study by Magdalena Rua, Martin Burgos and Veronica Grondona published today; namely:
- if one of the EU’s trading partners fails to implement the international and European AML/CFT standards (e.g. EU-Andean Community FTA), then the EU should consider limiting the definition and/or scope of financial services to be liberalised where compelling reasons exist;
- the EU should strive for a greater degree of specification of the AML/CFT and tax-related requirements in its FTAs;
- ensure that all FTAs contain provisions on tax cooperation and that such provisions guarantee cooperation at the bilateral level in addition to any regional or international instruments or arrangements;
- include provisions aimed at combating the mispricing of internationally traded goods and services;
- include provisions on country-by-country reporting of corporate tax and the establishment of public registers of beneficial owners.
- insist on the establishment of well-functioning channels of information exchange between domestic Financial Intelligence Units (FIUs), tax authorities, financial supervision authorities and prosecutors;
- pursue a strategy of imposing a measure of conditionality during trade negotiations, where structural weaknesses in rule of law enforcement – mainly due to corruption, organised crime and shadow economy – undermine the EU’s trade goals and the trading partner’s legislative and administrative endeavours in combating money laundering and tax evasion;
GUE/NGL does support the spirit of paragraph 170, which says that the EU should not conclude agreements with non-cooperative tax jurisdictions (although it unfortunately refers to the shameful EU blacklist only).
6.6. Bilateral tax treaties concluded by Member States
GUE/NGL supports this section, although we would be more precise regarding the fact that, as we have seen in the study by Martin Hearson, EU Member States allow developing countries to retain only 40% of their taxing rights intact, less than the OECD countries and that agreements signed among developing countries.
6.8. Outermost regions
PANA recommendations were much more critical on outermost regions’ tax systems:
157. Calls on the relevant Member States to make use of the opportunity afforded by their direct relations with the countries concerned to take the necessary steps in order to put pressure on their overseas countries and territories (OCTs) and outermost regions that do not respect international standards pertaining to tax cooperation, transparency and anti-money laundering; takes the view that the EU transparency and due diligence requirements should be effectively enforced in these territories;
As in PANA, enablers and promoters’ responsibilities are washed down by calling them “intermediaries”.
GUE/NGL would also have other recommendations based on the study by Richard Murphy and Saila Stausholm.
9.2. Code of conduct group on business taxation (CoCG)
Considering the fact that the European Parliament’s TAX3 Special Committee has not yet received any documents from the CoCG, there should be more criticism in this section that what there is today.
GUE/NGL supports the creation of a permanent structure within the parliament such as a subcommittee to the ECON committee.