Hearing on cooperation in tax matters with European jurisdictions

Title photo © John6536

The European Parliament’s Inquiry Committee into Money Laundering, Tax Avoidance and Tax Evasion (PANA) invited representatives of the Channel Islands, Gibraltar and Madeira to a hearing on 9 May in Brussels for a discussion of their respective tax regimes.

The hearing was chaired by Dr. Werner Langen with the purpose of getting a better understanding of the tax regimes in the respective jurisdictions and especially their relationships and cooperation with the EU in this matter. It was divided into two panels, with the first session concerning Madeira, an autonomous region of Portugal. Rui Gonçalves, the Regional Secretary for Finance of Madeira was invited to discuss his governments’ role in fighting money laundering, tax avoidance and tax evasion. The second panel focused on the tax regimes of the jurisdictions of Gibraltar and the Channel Islands Guernsey and Jersey.

As a small but important side note, it should be said that the panel on Madeira  started with the impediment that the answers to the written questions, which have been sent previously to the government of Madeira, arrived only fifteen minutes prior to the start of the panel. An example of practices that are readily used to hinder an effective inquiry by the committee.

In order to understand the special tax arrangements prevalent in Madeira it is helpful to place it in the context of the general development of a policy approach of economic cohesion by the EU. Under article 174§ the EU aims at reducing the disparity between the levels of development of all regions and the backwardness of  less favorable regions. In its position as a outermost region, Madeira benefits from such a privileged treatment, which reveals itself in the institutionalization of a special economic zone (SEZ) and the formal approval of a 5% tax regime by the European Commission to operate assuredly until at least 2027.

As the comprehensive work by German broadcaster Bayrischer Rundfunk reveals (and as we have written about here), Madeiras privileged tax system was approved by the European Commission in 1987 for the mentioned reasons and resembles that of other offshore havens, previously in the public spotlight, in critical characteristics. For many years the corporate tax rate was held at 0%, hundreds of firms are registered at the same address without any visible physical presence and most of these letterbox companies are run by the same directors.

Despite this delicate situation Rui Goncalves entered the stage as a representative and proponent of the current system in highlighting Madeiras compliance with international and EU standards in fighting money laundering, tax avoidance and tax evasion. He eagerly emphasized the modifications and improvements that came with changes in EU law concerning tax fraud matters in 2011 and Madeira´s compliance with them.

Among others the changes of 2011 resulted in the premise for companies to create and maintain a certain number of new jobs, depending on their profits in order to continue to benefit from the preferential tax rate on Madeira. It is exactly on this sensitive issue that GUE/NGL MEP Fabio De Masi pressured Mr Goncalves to clarify his assertions. De Masi pointed out that according to the latest numbers (from 2014) the 1868 companies based in Madeira provided a total of 2721 workplaces – that’s less than 1.5 per company. And as a person can be employed by multiple companies at the same time, and each employment counts as an extra workplace, the number of people actually employed by these companies is even lower .

GUE/NGL MEP Fabio De Masi questioning Regional Secretary of Finance of Madeira

Rui Goncalves repeatedly hedged any direct answer on the real contribution of Madeira´s privileged tax regime to regional, structural development benefiting the local population and instead eluded that after modifying the legislation in 2011 companies increasingly left Madeira and moved to other EU jurisdictions like Luxembourg, Austria and the Netherlands.

Besides the necessity of a comprehensive evaluation of the real extend of creation of jobs after the implementation of the tax preferential regime, the question of De Masi concerning the plans of Madeira´s government to approach the structural and local development problems of the island in the period after 2027 remained unanswered.