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42 • Fifty Shades of Tax Dodging European Commission “Tolerance has reached rock-bottom for companies that avoid paying their fair share of taxes, and for the regimes that enable them to do this. We have to rebuild the link between where companies really make their profits and where they are taxed.” Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs 225 General overview Ahead of the European Parliament approving his appointment, European Commission (EC) President Jean-Claude Juncker made it clear that he considers this Commission to be the “last chance Commission”, stating that “either we succeed in bringing the European citizens closer to Europe, or we will fail.” 226 Shortly after getting the backing of MEPs, the LuxLeaks scandal broke and Juncker later had to admit that it had left him “weakened” since “LuxLeaks suggests that I took part in operations that did not follow basic ethical and moral rules.” 227 Amidst these controversies, the Commission has tried hard to demonstrate its commitment to fighting tax dodging. This has happened through two tax packages in 2015 – an emphasis on tax in the EC work programme, and by pursuing and expanding a number of high-profile state aid investigations initiated by the previous Commission into Member States and their tax deals with some of the largest multinational companies in the world. (The term ‘state aid’ is used here to describe tax deals given by a government, which confer a selective benefit to a company not available to others). However, as the content of the tax packages have become clear – and as we get further and further away from LuxLeaks – there is increasingly a sense that the tough rhetoric and new initiatives have not translated into action that is commensurate with the challenges faced, especially when it comes to presenting new legislative initiatives that would effectively tackle tax dodging. Even more worryingly, the few policy initiatives that have been presented under the new EC fail to consider the interests of developing countries. Tax policies In line with the idea of the internal market, the EC has long promoted the free flow of capital within the EU. The Parent Subsidiary Directive and Interest and Royalties Directive have been key in this regard, as they have removed the withholding tax on cross-border flows within the EU. 228 While the basic idea of the free flow of capital has not been challenged, the Commission is increasingly recognising that some multinational companies have misused these directives to avoid being taxed at all. 229 As a result, the Commission has developed an anti-abuse provision for the Parent Subsidiary Directive, which was adopted by the Council in January 2015. 230 It is currently working on a similar provision for the Interest and Royalties Directive, although it is proving difficult to get support for such a review among the Member States. 231 Such anti-abuse provisions allow Member States to deny the tax benefits under the directives to companies if their structures serve the “main purpose or one of the main purposes of obtaining a tax advantage.” 232 In June 2015, the Commission launched a package to promote fair and efficient corporate taxation within the EU. 233 The measures in the package promised to “offer a more coordinated corporate tax environment within the EU, leading to fairer taxation, more stable revenues and a better environment for businesses.” 234 However, the package was light on new legal initiatives. Perhaps the most significant measure in the package was the announcement that the CCCTB proposal 235 for a coordinated approach to corporate taxation in the EU would be revived. While the Commission only expects to put forth a fully developed proposal in 2016, 236 it has already indicated that the new proposal would allow multinational companies to move freely losses from one EU Member State to another, allowing them to lower their official profits and thereby their tax payments. At the same time, the Commission has also postponed indefinitely the deadline for when the EU will consider introducing a system that consolidates all the profits and losses that a multinational corporation has made in the different EU Member States. 237 Civil society has pointed out that these plans could open up new loopholes in the EU tax system and thereby lead to more aggressive tax planning and lower tax payments from multinational companies. 238 The Commission argues that at present it sees these changes as necessary to get support for the proposal in the Council. 239
Fifty Shades of Tax Dodging • 43 The package also announced a new list of 30 noncooperative jurisdictions, otherwise known as ‘tax havens’ or ‘secrecy jurisdictions’. 240 The Commission decided to use a relatively arbitrary criteria to compile the list, only including those jurisdictions that were blacklisted by at least ten Member States. 241 There were no sanctions announced for being on the list, with the Commission merely stating that it would be willing “to coordinate possible countermeasures,” without specifying what these measures might be. 242 Perhaps most critically, the list did not include any of the many jurisdictions in the EU that play an essential role for multinational companies’ tax planning strategies. On the other hand, the list did include developing countries such as Liberia, which only plays a marginal role in the international financial and offshore system. 243 Similarly, as The Guardian pointed out, the list “includes the tiny Polynesian island of Niue, where 1,400 people live in semi-subsistence — but does not include Luxembourg, the EU’s wealthy tax avoidance hub.” The Guardian also noted that “Jersey and Switzerland, for example, were not named.” 244 Patent boxes A study published by the Commission in November 2014 seriously questioned the effectiveness of patent boxes, noting that they are prone to aggressive tax planning and that instead of spurring innovation they “seem more likely to relocate corporate income.” 245 Reflecting these concerns, the Commission has previously sought to challenge the UK patent box, and had been leading an investigation into Member States’ use of patent boxes. However, following a deal struck between Germany and the UK on the future use of patent boxes in the EU, a Commission official in February 2015 indicated that the enquiries into patent boxes in Member States had been called off. 246 Reflecting the compromise reached between the UK and Germany, the Commission’s June corporate tax package announced that it would guide Member States to implement their patent boxes in line with the OECD’s recommendations developed under Base Erosion and Profit Shifting (BEPS). It further warned Member States that, if progress was not made within 12 months on aligning their patent boxes with these recommendations, the Commission would consider putting forward a legislative proposal to force through change. 247 While the Commission’s focus on the problems associated with patent boxes are much warranted, it is troubling that it is relying on the OECD recommendations to solve the problems, as this approach has been criticised for failing to limit the profit-shifting opportunities inherent in patent boxes. 248 Tax rulings The Commission has used the powers of its state aid investigations to challenge several Member States’ tax rulings (see more below in the section on EU solutions). In addition, it announced a legislative proposal for the automatic exchange of tax rulings in March 2015. 249 The new proposal would – if adopted – grant the Commission an oversight role on the number and type of tax rulings issued by Member States. Apart from failing to disclose any new information to the public, this proposal also fails developing countries, as only countries within the EU would receive tax rulings through exchange, despite what effects the rulings might have on the tax base of countries outside the EU. Previous EU-wide guidelines on Advance Pricing Agreements (APAs) were developed by an expert group and approved by the Commission in 2007. 250 Civil society has criticised these guidelines for failing to deal with the potential misuse of rulings for aggressive tax planning purposes. 251 It also criticised the fact that the group that had written the guidelines was dominated by multinational companies and audit firms with a history of questionable tax practices. 252 In a minor improvement, the Commission opened up for a slightly more balanced composition of the group when three civil society organisations were added as members in 2015. 253 Whether there are any plans for the group to update the Commission’s guidelines on APAs is yet unknown. An investigation in early 2015 was launched by the European Ombudsman to make Commission expert groups more balanced and transparent. This could potentially put an end to the past practices of asking companies and advisers embroiled in tax controversies for advice on tax policies. 254 Financial and corporate transparency The Commission identified the lack of transparency as one of the key drivers of aggressive tax planning in its March 2015 Tax Transparency package, stating that “lack of transparency is … an incentive for enterprises to apply aggressive tax planning.” 255 Having got the diagnosis right, it was surprising that the Commission failed to propose to make any new information public. 256
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