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The European Parliament Condemns Tax Havens and Urges the European Union to Fight Capital Flight

10 March 2010

(by Maria Victoria Garcia Ojeda)

On February 10th, the European Parliament adopted by an overwhelming majority, (554 votes to 46, with 71 abstentions), a non-legislative resolution on promoting good governance in tax matters. This text, the so called Domenici report, represents great news for civil society organisations such as Eurodad that are advocating for strong measures to effectively tackle illicit outflows from developing countries. Many of these measures have been covered in the report:

Fighting capital flight and use of sanctions .

The Domenici report “strongly condemns the role played by tax havens, tax evasion and tax avoidance” in hampering the achievement of the Millennium Development Goals and “urges the Member States to make the fight against these activities a priority”, while advocating the imposition of a regime of incentives and sanctions against illicit capital flights. Among the sanctions, the following are considered:  a special levy on movements to or from non-cooperative jurisdictions, non-recognition within the EU of the legal status of companies set up in non-cooperative jurisdictions, and a prohibition on EU financial institutions establishing or maintaining subsidiaries and branches in non-cooperative jurisdictions.

Automatic information exchange

In order to put an end to bank secrecy, the European Parliament recommends an automatic multilateral exchange of information that should take place in all circumstances and without exemptions, “applying to all Member States and dependent territories”, as a “first step towards a global framework for automatic information exchange”.

Expanding the savings tax directive

The report calls for the amendment of the European Savings Tax Directive to end the temporary exemption that allows Austria, Belgium and Luxembourg to avoid exchanging information. It also promotes the expansion of the scope of the Directive “to cover not only individuals, but also legal entities such as private companies (especially Multinational Corporations- MNCs) and trusts, and various sources of investment income”.

The European Parliament also calls for an extension of the provisions of the Saving Tax Directive to jurisdictions harboring illicit capital flows such as Singapore, Hong Kong, Macao, Dubai, New Zealand, Ghana and certain states of the US.

OECD approach: insufficient

In addition, the report considers that the commitments made by the G20 are not enough to tackle tax evasion. Likewise, the European Parliament points out that “the OECD framework for combating tax havens is unsatisfactory” since it takes place only on request. Therefore, “it calls on the OECD for the improvement of its standards, with the aim of making the automatic, multilateral exchange of information the global standard”.

Country by country reporting

The report stresses that international accounting standards should be revised so as to establish a country by country reporting of companies’ annual accounts and “suggests an EU public register listing the names of individuals and undertakings having set up companies and accounts in tax havens, with a view to unveiling the true beneficiaries shielded by offshore companies”.

Together with the automatic exchange of information and the country by country reporting, the European Parliament also looks into enabling developing countries to raise their own domestic resources by helping them “to build sustainable and transparent tax systems”. Complementing this capacity building measure, the MEPs also propose introducing a good tax governance clause in relevant agreements to be concluded with third countries.

Tackling transfer mispricing

Considering that several MNCs practice tax evasion and transfer-pricing, the report recommends the introduction of a common corporate consolidated tax base within the EU to help to tackle double taxation and transfer price issues within consolidated groups. Moreover, it suggests shifting the scope of the transfer-pricing inspection from transaction to company level.

This resolution is good news and sends a clear and strong message that should be taken into account by policy-makers in the European Parliament, Council and Commission as well as other stakeholders working on taxation, finance and development.

As the report points out, “the European Union's credibility depends, inter alia, on its willingness to clamp down on tax havens on its own territory first as an example of good governance”.                        

Read the text adopted by the European Parliament here