Getting the EU response to the tax dodging scandal right

Added 27 Mar 2015
A little over a week ago, the European Commission presented its “Tax Transparency Package”. Looking ahead, much still needs to be done to address Europe’s role in supporting an unjust global tax system. This blog looks at some of the lessons of the past and recommendations for the EU in the year ahead in terms of achieving tax justice.

For many, the secret world of tax rulings for transnational corporations only became obvious in November 2014, when the International Consortium of Investigative Journalists (ICIJ) leaked more than 500 rulings from Luxembourg. The rulings showed that multinational companies – many of them household brand names – had received extremely favourable tax deals that had reduced their tax rates to next to nothing. 

A law professor described these tax rulings in the following way: “It’s like taking your tax plan to the government and getting it blessed ahead of time”. And blessed these companies were. With tax rates in some cases lower than 1%, transnational companies flocked to Luxembourg’s tax department to get a ruling.

What the LuxLeaks and many other scandals shows is an international tax system in complete disarray. The revelations also illustrated another point: that Europe plays a key role in upholding an unjust global tax system

EU’s response
Since assuming office, the new Commission has been assuring European citizens that they are doing their utmost to tackle tax dodging in the EU. There have been a number of much-welcomed Commission investigations against Member States for supposed breaches of EU state aid rules through the use of tax rulings, inherited from the previous Commission. And about a week ago, the Commission launched a so-called “Tax Transparency Package” as a direct response to the Luxembourg leaks, with a proposal for the exchange of basic information on tax rulings between Member States’ tax authorities. The Commission has stressed that the tax transparency package is only a first step in its agenda against tax dodging in 2015. The key moment to watch will be June 2015 when the Commission will unveil a package on corporate taxation.

While the Tax Transparency Package was a welcome first baby step in the right direction, it hardly has anything to do with transparency as no new tax information will be made available for the public as a result of the package. However, in a much-appreciated clarification in the factsheet that accompanied the release of the package, the Commission indicated they “will look further into the question of whether tax rulings information should be subject to wider publication”. Also of interest, the Transparency Package included a commitment to conducting an impact assessment of making country by country reporting public for all economic sectors. As public transparency is a first vital step towards fixing the tax system and building public trust, it would be a scandal if the Commission did not end up taking action to make both tax rulings and country by country reporting public.

The Commission’s guidelines for tax rulings
While we debate how to respond to the many tax dodging scandals, it is also important to ask how they were allowed to happen in the first place. This will be a part of the work of the European Parliament’s newly established Special Committee on Tax Rulings. The Committee will look into certain Member States’ tax practices but would also be well advised to look into the role of the guidance on transfer pricing, which was provided by the Commission, and with the assistance of the members of the last Joint Transfer Pricing Forum – a forum whose membership is now being revised.

In 2002, the Commission set up this expert group on transfer pricing. The phenomenon of transfer pricing is basically about how transnational companies price the trade that goes on between subsidiaries of the same company but between countries. The group was asked to “assist and advise the Commission in finding practical solutions in order to achieve a more uniform application of transfer pricing rules with the European Union”

In 2007, the group took it upon itself to produce guidelines for Member States on the type of tax rulings that would later be made infamous by LuxLeaks. These guidelines could have laid strict conditions for tax rulings and could have stressed the need for upholding EU state aid rules. Unfortunately they did neither. 

Instead the guidelines talked about the dangers of transnational corporations being “double taxed” because they operate in more than one country. They talked about the need to make it easier for companies to get rulings, and how companies could use rulings to create a “less confrontational atmosphere” with tax administrations. While the term “dispute avoidance” appears 21 times in the guidelines (e.g. the need to avoid tax administrations to challenge transnational companies’ tax payments), the term “tax avoidance” does not appear once. The report did not discuss any of the problems that LuxLeaks exposed. 

In 2007, the Commission sent out a Communication to Member States recommending that they should adopt the guidelines of the expert group and stating that the new guidelines should result in “a quick and efficient resolution” of tax rulings and that, in turn, “this should encourage the use of APAs [the technical term for tax rulings] in the EU, leading to more dispute avoidance and less double taxation” (p.3-4).

Who wrote the Commission’s guidelines on tax rulings?
In exploring why the official guidelines for tax rulings were so blind to the problems that were later uncovered in LuxLeaks, it is interesting to look at the members of the expert group that wrote these guidelines. 

The chairman of the group was a lawyer working for a law firm specialising in advising transnational companies on transfer pricing. The company’s website has the following quote about the chairman from one of his corporate clients: “He can assist you with dealings with the authorities on transfer pricing, audits and pricing agreements; he’s among the best in this area." The vice-chair was a representative from Pfizer’s branch in Luxembourg. What an American medical company that has a long and checkered past record when it comes to their tax payments and use of tax havens was doing advising European governments on tax rulings seems unclear.

While the expert group also included representatives from the Member States’ tax administrations, it is noteworthy that there was not a single civil society organisation or public interest organisation present among its members.

In 2011, the expert group sent out applications for new members. Among the experts that were elected to guide the Commission was Fiat, now under investigation for misusing the tax ruling system in Luxembourg; and PwC , which brokered the contentious tax rulings that were exposed in the LuxLeaks scandal and was accused in 2014 by the UK’s Public Accounts Committee of promoting tax avoidance on an industrial scale.

Eurodad raised concerns about the unbalanced membership of the expert group back in 2011 to which an EU spokesperson responded that the Commission did not see a need to actively expand the membership beyond those that represented business engaged in transfer pricing. Luckily, the Commission seems to have changed its stance somewhat and has actively been trying to get a more balanced composition in relation to a recent call for new members for the group. Hopefully, this will be part of a broader trend. For years, civil society organisations such as Alter-EU and the Corporate Europe Observatory have been highlighting the close involvement of business in the formulation of policies that are meant to regulate these very companies. 

Looking ahead: What needs to be done?
In order to tackle the scandal of tax avoidance and evasion, civil society organisations are making the following demands:

1. The Commission needs to balance its expert groups: We hope the Commission will use the recent call for new members to join its expert group on transfer pricing to pursue a more balanced membership.
2. The role of the guidance given by the former expert group should be clarified: The European Parliament’s Special Committee can help in this regard by investigating how the guidelines on tax rulings were created and come up with recommendations on how to make expert groups more balanced and take into account the interests of the public and developing countries, not only in its composition of members but also in their mandates.
3. The Commission should ensure transparency: The Commission’s tax transparency package that included tax rulings in the (highly confidential) automatic exchange of information among tax administrations is not enough. The EU needs to consider ways to make more information available to the public, not just tax administrations. The Commission’s commitment to look into making tax rulings and country by country reporting public needs to be acted on quickly and comprehensively. The Commission’s promised impact assessment must be conducted by a politically neutral institution and must not only look at the costs of making country by country reporting public, but also the benefits for society, both in Europe and for developing countries. This should include the potential positive impacts on the tax payments of multinational companies, of creating a level playing field small and medium enterprises, the competitive advantage of having EU companies with high degrees of transparency (and thus high credibility), and of restoring trust and accountability with citizens.
4. The Commission needs to present an ambitious package to deal with tax dodging in June: The Commission has announced plans for a summer package to reform corporate taxation in the EU. This is important as the transparency measures highlighted above will not in themselves bring tax justice, but will only expose what is wrong with the system. The Commission’s June package presents a major opportunity to respond to the challenge of tax dodging. The announcement that the package might include a proposal to revive the plans for a European Common Consolidated Corporate Tax Base (CCCTB) is welcomed, but the level of ambition needs to go beyond that to address the many harmful tax structures in the EU, such as Special Purpose Vehicles, unfair tax treaties, patent boxes and many more.