GUE/NGL’s analysis of the result of the TAX3 Committee vote

The vote of the TAX3 Committee draft report took place yesterday morning.

Thanks to the negotiations by its shadow rapporteur, Miguel Urbán  Crespo (Podemos, Spain), GUE/NGL got 114 of the 167 amendments it had originally presented into the  text and/or amendments voted in Committee.

For an analysis of the original draft report, click  here.

A positive outcome of the negotiations on the TAX3 report is that the text now puts aggressive tax planning and tax avoidance on par;  and intermediaries are identified as ‘enablers and promoters’-even when only in footnotes-.

Another positive outcome was the recommendation over the use of withholding taxes for transactions outside the EU – although there is no mention of those within the EU – and the need to conduct spill over analysis on EU’s tax treaties.

The negotiations also resulted in a compromise on the social dimension of taxation which not only considers the detrimental effects of tax evasion, tax avoidance and money laundering in the society and on women’s rights, but it also addresses the shift of tax incidence from wealth to income, from capital income to labour income and consumption.

The final committee text also includes the point that when certain jurisdictions like Latvia tried banning shell companies, from the UK, the Netherlands or Malta, they can’t due to the restrictions imposed by the EU treaties.

The risk of cross-border tax conversions (i.e., the transfer of headquarters to tax havens) is also addressed by the final committee text.

The fact that tax amnesties “…have the effect to encourage residents to evade taxes and wait for the next amnesty, without being subject to dissuasive sanctions or penalties…”, is addressed by the text, and a specific request has been included “to ensure that relevant data related to the beneficiaries of previous and future tax amnesties is duly shared with the judiciary, law enforcement, and tax authorities, to ensure compliance with anti-money laundering rules and possible prosecution for other financial crimes.”

Another noteworthy point in the final text  was on Switzerland’s non-compliance with FATF anti-money laundering recommendations numbers 9 and 40, as was indicated by Andreas Frank in one of TAX3’s hearings.  Sanctions are recommended both for the institutions and for managers working for them in money laundering cases.

The text of the report incorporates a concern on the EU member states identified for their promotion of tax evasion (The Netherlands, Ireland, Malta, Cyprus, Belgium, Luxembourg and Hungary) in the European Semester, and a request for tax indicators to be used periodically in the European Semester.

There is also a very modest criticism of the EU list of non-cooperative jurisdictions for tax purposes, and a call on “the European Commission and the Council to work on an ambitious and objective methodology, which does not rely on commitments but rather on an assessment of the effects of effectively implemented legislation in those countries”.

Negotiations succeeded in incorporating a text addressing the conflict of interest of tax and legal advisors and tax auditors advising both the public and the private sectors, and on revolving doors as well.

There is a reference to the fact that whistleblowers in the financial sector seem to be completely unprotected, and that Switzerland is pursuing libel cases against journalists and whistleblowers – although there was no agreement to include the UK as well – a country which has been noted in several PANA and TAX3 Missions for that use.  A number of amendments were passed in the committee vote that specifically addressed the financial hardship endured by whistleblowers, and the problems they encounter when attempting to guard their anonymity.

The text questions the role of the Council in stopping any further changes and their lack of transparency, although this was much more critical in the Panama Paper recommendations. Italso calls for a permanent subcommittee to be created in the Parliament to deal with tax evasion, tax avoidance and money laundering.

The report also urges for a clearer definition of “permanent establishment”. However, the problem is not the clarity; rather, it is the fact that in Europe,  it only includes establishments which have a physical presence, and may soon be encompassing those with significant digital presence yet, it doesn’t  include other forms of activities which take place without any presence at all (the UN Model Tax Convention does address economic activities taking place without physical presence, but EU Member States have always prefered using the OECD Model Tax Convention, which restricts the definition of permanent establishment to physical presence).

What does remain in the text is the need to protect the commercial interests of multinational companies in relation to public country by country reporting. The protection of commercially sensitive information is a problem, as it guarantees that there will be lots of gaps and loopholes in the reporting by multinational companies. Paragraph 40 of PANA Recommendations (from December 2017) had moved further ahead from the Parliament’s position on the CBCR proposal (from July 2017) requesting an ambitious public CBCR.

Moreover, the text is not that critical towards the European Commission, nor the OECD – even praising them both for the work they have done on taxation. The final report also mentioned the need to create an intergovernmental tax body on international taxation in the UN and yet, it also praises the work of the OECD’s BEPS Inclusive Framework and suggests other intergovernmental frameworks in which the UN, the OECD, the IMF and the World Bank participate. The latter is already in place – it is called the Platform for Collaboration on Tax, and in the absence of a political will at the  UN, it has been governed by OECD technocrats . The legitimisation of these frameworks thus undermines the fight for a UN intergovernmental tax body.

More damningly, both the draft text and the Committee text resort to patronising language with developing countries and pander to the concept of capacity building with the underlying argument that industrialised countries have greater technical expertise. That is inherently untrue.

Even when the final committee report questions the legitimacy of the arm’s length principle, which in the end serves the purpose of legalising tax evasion – and this is not explicitly mentioned in the report-  somehow, the use of the OECD Transfer Pricing Guidelines is recommended. Such guidelines have made their way into legislations all over the world in a way that makes it almost impossible for tax authorities to challenge the manipulation of arguments, values and companies used by multinational companies to help reduce their tax obligations.

There is a reference for improving the framework for transfer pricing. However, the problem of transfer pricing is not solved by improving a system  based on the arm’s length principle with fake comparisons of activities performed within an economic group with those between other third parties.

For further prove of the intrinsic difficulties when relying on the arm’s length principle and the fact that there  isn’t necessarily more technical expertise in the EU than in developing countries, one only has to look at the EU’s Court ruling on Belgium’s state aid.

The text passed by the TAX3 Committee also states over and over again that everything will be solved once the CCCTB and CCTB proposals have been approved by the Council. However, this is not strictly true. Firstly, the current proposals will only be applicable to companies with revenues of over 750 million euros – a threshold and a loophole that will tempt companies into multiply themselves into smaller affiliates to get beneath the threshold and get round the “control” element in EU legislations.

Further, the text is pushing for the Council to pass these proposals with an apportionment formula that includes both tangible and intangible assets. Intangible assets are already used for tax avoidance and their valuation is never easy – let alone transparent or clear. Example of this include the value of Google’s brand name, and of its algorithm.

Lastly, another worrying inclusion is “the existence and positive results of the only transnational PPP, the Europol Financial Intelligence Public Private Partnership, which promotes strategic information sharing between banks, FIUs, law enforcement agencies (LEAs) and national regulators across Member States”. The Europol Financial Intelligence PPP is a PPP integrated by Europol, but also by Thomson Reuters and the Davos Forum (the World Economic Forum).

Ahead of the plenary vote in late March, GUE/NGL will try to negotiate further improvements to the text by including:

  • A recommendation to use withholding taxes within the EU
  • A mention to the role of financialisation on the increase in tax evasion and avoidance.
  • More criticism of the role of the Commission and to the fact that state aid cannot be the only argument used against tax avoidance as it has not proved to be effective in all cases.
  • The elimination of the concerns regarding the protection of commercial interests for public country by country reporting.
  • Criticism to self-regulation
  • The elimination of the recommendations on capacity building for developing countries
  • The elimination of the text praising a Public Private Partnership (PPP) between Europol and the World Economic Forum
  • An elimination of intangibles as part of the formula suggested for apportionment in CCTB

For a full analysis of the GUE/NGL amendments that got into the text and those key ones that did not make it, check our Analysis of the result of the TAX3 Committee.