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8 • Fifty Shades of Tax Dodging Global overview When used to their fullest potential and combined with good public expenditure, taxes can build health systems that save lives, fund our children’s education and help to create more stable, equal, democratic and prosperous societies. Taxes can also – when they are regressive and punitive – exacerbate poverty and inequality. 1 What is needed then are tax systems that are just and fair. In developing countries, where inequality is high, poverty is widespread and there is an acute lack of basic social services, effective and just tax systems are even more essential. Tax also has an international dimension, given that harmful tax policies in one country can undermine tax collection in other countries. 2 This report looks at the international aspect of taxation by focusing on how Europe can support and protect tax collection in developing countries by adopting fair and responsible tax policies at home. By doing so Europe will not only help to unlock development for some of the poorest regions in the world, it will also help to address the injustices of tax dodging in Europe. In short, this report is about our shared need for tax justice. The last few years have brought the tax debate to the boiling point in Europe. A number of scandalous revelations about the lack of tax payments by multinational companies and the role that a number of European countries have played in this made sure that tax dodging stayed in the public limelight throughout the year. While some of the scandals concern tax evasion – which is a type of tax dodging that entails illegal activities – a number of the revelations concern tax avoidance. This is a term used to describe tax dodging that doesn’t entail a deliberate violation of tax laws, but rather acting against the spirit of the law through aggressive tax planning, which is in most cases fully legal. 3 Despite being legal, the tax avoidance of multinational corporations often occurs at such a large scale that it is considered by many people to be highly immoral and undesirable. 4 With the public attention came a political promise to tackle the scandals: G20 declarations, 5 Organisation for Economic Co-operation and Development (OECD) projects, 6 EU action plans 7 and government announcements all promised to wage war against the great tax dodging problem that could no longer be ignored. This report analyses whether the promised action was ever delivered, and whether those changes that have been delivered will actually solve the problems. 50.4 per cent of the population in nine EU Member States surveyed consider taxing the rich and subsidising the poor to be an essential characteristic of democracy. 8 87.4 per cent of the population in eight EU Member States surveyed agree that cheating on taxes is never justifiable. 9 Box 1 Corporate casualties: How tax dodging hurts European businesses Since multinational companies have access to cross-border tax planning they can lower their tax rates in ways that is not possible for domestic companies. Because of this, domestic companies are often at a competitive disadvantage compared with multinational companies. This is the message from an eye-opening research report published by the European Commission in 2015. 10 The report looked at 20 EU Member States and found that, in all of them, large domestic companies face a higher corporate tax rate than multinational companies that make use of tax planning techniques. On average, the multinationals can get away with a tax rate that is 3.5 percentage points lower than for similar domestic companies. 11 The study also found that in three out of four of the 20 EU Member States, small- and medium-sized enterprises (SMEs) faced a higher tax rate than multinational companies, despite the fact that almost all Member States give sizeable tax subsidies to SMEs to increase their competitiveness. 12 It seems tackling tax dodging is not just good for justice; it’s good for European business.
Fifty Shades of Tax Dodging • 9 Photo: Uffe Karlsson 1. Global developments 2015: A year of scandals and promises Box 3 On 4 November 2014 all seemed well with the EU. A new European Commission had been appointed four days before and the new Commission President Jean-Claude Juncker was off to a good start. However, the political honeymoon was about to be seriously interrupted. On the morning of 5 November, the International Consortium of Investigative Journalists (ICIJ) released a treasure trove of tax secrets from Luxembourg that revealed the evidence of that country’s massive undermining effect on the tax base of other countries. 13 As former Minister of Finance and Prime Minister of Luxembourg, Jean-Claude Juncker was in the eye of the political storm that followed. Box 2 Under the spotlight: MNCs’ tax payments 89 per cent: Share of CEO’s of large company concerned about the media’s coverage of company tax payment in 2014. This was up from 60 per cent in 2011. 56 per cent: Share of European businesses surveyed that experienced an increase in discussion and scrutiny of corporate tax strategies in 2014. The survey notes large differences across Europe, with more than 80 per cent of businesses in the UK, Luxembourg and France reporting increased scrutiny in the last year, while a comparable increase was not reported by most businesses in Central and Eastern Europe. For example, in the Czech Republic 75 per cent of businesses did not see any change in public scrutiny compared to the previous year. 14 Whistleblowers: Tax justice heroes Behind the renewed interest and outrage over the tax dodging scandals lie stories of personal sacrifice. Whistleblowers have brought some of the most shocking details of harmful tax practices to the wider public. But the price they are paying for acting in the public’s interest is grave. Antoine Deltour – the LuxLeaks whistleblower – faces prosecutions in Luxembourg, with the possibility of five years in prison. 15 And he is not alone. Two other sources in the LuxLeaks exposure also face prosecution, as does the SwissLeaks source in Switzerland. 16 In many ways, the revelations – quickly dubbed ‘LuxLeaks’ – were telling of the year that was to come. It has been a year dominated by tax dodging scandals, many of which have had their epicentre in Europe. It has been a year where the scale of tax dodging has been exposed and where politicians were forced to answer a public cry for action. 133 out of 488 protests (27%) in the world between 2006 and 2013 linked to ‘Economic Justice and Austerity’, had ‘Tax Justice’ as one of their main motivations. 17
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