‘Cum-Ex’ scandal addressed by GUE/NGL MEPs in Strasbourg Plenary

The latest and potentially biggest tax evasion scandal to engulf the EU to date has been debated by MEPs in Strasbourg yesterday afternoon, with Left MEPs demanding urgent concrete action to stop this and other fraudulent practices inside the EU once and for all.

This issue has already made headlines in Germany and Denmark where huge amounts of public funding have been lost due to tax fraud. However, previous scandals are being put in a broader context by the “The #CumExFiles“, a joint investigation by 19 European media from twelve countries, coordinated by the German non-profit newsroom CORRECTIV.

The new scandal highlights that bankers have acted as promoters of an international tax fraud to help their clients get a refund for a tax they never paid involving an important number of EU countries and amounting to an estimate of €55 billion.

The “Cum Ex” and “Cum Cum” German Scandals and the Danish case

According to Eurodad’s publication “Tax Games: the race to the bottom“,

German media had already revealed that the German tax authorities had allegedly lost billions of Euros due to bankers and brokers’ manipulations of tax payments and refunds. The case was referred to as the ‘cum ex’ and ‘cum cum’ trading scandal. Over 100 German and foreign financial institutions, including several large well-known commercial banks, were under suspicion for exploiting a legal loophole that allowed shareholders to claim double ownership of the same shares. Double ownership allowed multiple shareholders to claim tax rebates from the German government, and although the loopholes were closed in 2012 and 2016, it was estimated that the illicit tax refunds may have cost the state up to €31.8 billion.

A final report by an inquiry committee established by the Bundestag concluded that the tax tricks were illegal, but the parties represented in the committee disagreed on who was to blame for the fact that these illegalities had been allowed to occur in the first place. The scandal incited not just debates on the state of tax justice in Germany, but also on the influence of the business lobby in helping to draft national legislation.

In the Danish case, in 2016, it was revealed that the Danish tax authority had failed to act on numerous warnings that foreign companies were abusing Danish tax rules and forging documents in order to fraudulently apply for dividend tax refunds. The abuse was estimated to have cost the Danish tax authority over €1.5 billion.

How the European Commission is not solving the problem!

The fact that foreign investors are entitled to reclaim the refund of withholding taxes on dividends plays a central part in the scandal.

However, at the risk of generalising what is today a tax and financial fraud of impressive magnitudes, the European Commission has put forward new guidelines on withholding taxes in December 2017 to simplify procedures for cross-border investors in the EU, encouraging Member States to adopt systems of relief-at-source from withholding taxes. This new Code of Conduct on Withholding Tax – which only contains very limited mention of the risk of fraud – suggests this could be solved with IT systems or relief at source, thus speeding up national processes for approval of reclaims of withholding taxes.

The Commission highlights that this would also avoid eliminating the risk of fraudulent behaviour such as, double refund applications and unjustified reclaims or application for relief. However, relief at source will increase the risk of double-non-taxation or zero taxation – i.e. that foreign investors don’t pay taxes anywhere.

What is a withholding tax?

A withholding tax refers to a tax that is paid at source when income is transferred cross-border rather than being paid by the recipient of the income.

As has been very well put by Gustaf Obermaier and Lorenz Jarass – in reference to the interest and royalty Directive- the use of withholding taxes is a fundamental tool that EU countries can use to unilaterally counteract Base Erosion and Profit Shifting, in the absence of harmonization.

Yes, it is important to provide some relief to avoid double taxation (e.g. when dividends are taxed at source and at residence) but that should only be done at source upon verification that the tax has been paid at residence; or at residence after it has been proved that it was paid at source.

However, this can only be done by empowered tax administrations. And what has been seen in the last years are systematic and generalised resource and personnel reductions in EU tax administrations.

What did GUE/NGL MEPs have to say about the Cum Ex Scandals?

Last Tuesday 23 of October, the European Parliament had a plenary debate on the «CumEx Files» Scandal: financial crime and the loopholes of the current judicial framework.

GUE/NGL’s TAX3 MEPs speaking about it in the plenary were Martin Schirdewan (DIE LINKE), Miguel Urban Crespo (Podemos) and Miguel Viegas (PCP). Watch the interventions underneath:

Intervention by GUE/NGL MEP Coordinator in the TAX3 Special Committee, Martin Schirdewan (DIE LINKE):

Intervention by GUE/NGL MEP Shadow in the TAX3 Special Committee, Miguel Urban Crespo (Podemos):

Intervention by GUE/NGL MEP in the TAX3 Special Committee, Miguel Viegas (PCP):

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Read GUE/NGL’s press release here