Tax Evasion Costs EU Countries Billions
Although the amount of evaded tax in the EU has fallen by 12 to 16 percent recently, it is still very high compared to other parts of the world. According to recent studies globally, EU states have lost an estimated 824 billion Euros in tax money in 2015, alone. This has definitely not ameliorated since then, to collect the concrete numbers simply takes ages.
In absolute terms, the largest share of this is evaded in in Italy, followed by Germany and France. Of course, but tax evasion is a big issue in the EU. European politicians often point the finger to other nations. Supposedly, there is no corruption within the EU, only abroad. Of course, there is a lot of corruption and cheating. The EU has its own tax havens, not only the other states.
EU Member States lose EUR 170 billion per year due to EU tax havens
Nearly EUR 960 billion – this is the size of the European Union’s current budget. The mere elimination of artificial profit shifting by multinational corporations between jurisdictions would lead to the recovery of EUR 420 billion, i.e. an amount exceeding the EU’s appropriations for cohesion policy. Germany, the United Kingdom and France suffer the highest tax revenue losses related to the functioning of tax havens.
Analyzing data on tax avoidance in Europe can lead to the sad conclusion that solidarity is only a declared rather than pursued value in the EU. Losses resulting from the use of international transactions for tax fraud and tax avoidance reduce EU Member States’ revenues by around EUR 170 billion annually. The Union should take integrated measures to seal the tax system in order to have an additional source of financing for the new budget, that is to be constructed without the United Kingdom, a major payer. And here we see some last life signs of the EU: Officers know that this is the very lifeline of the members states, and that they have to act here if they want to have their completely excessive pensions secured. Yes, they act and prosecute, but only with “easy targets”. They do not dare to get engaged in highly sophisticated tax schemes – they know that they would lose this battle, instantly.
So much has been taken by so few from so many – in the past two decades, the effective corporate income taxation in EU member states has dropped by 8 percentage points (from 24% to 16%). Multinational companies freely shift their profits from the countries of operation to lower-tax jurisdictions within the EU. According to data for 2016, the country’s worst hit by losses due to artificial profit shifting when member states like Germany (EUR 18 BN), France (EUR 11 BN) and the United Kingdom (EUR 14 BN).
The result is a terrible loss of public revenue which must be compensated by other financing sources.
Six EU member states benefit from tax competition within the EU. Referred to as internal tax havens by the European Commission, these are: Belgium, Cyprus, Ireland, Luxembourg, Malta and the Netherlands. These countries intentionally implement legal regulations conducive to artificial profit transfers. Moreover, they also tend to be used by transnational corporations as intermediaries in further transfers to traditional tax havens, such as the Cayman Islands or the British Virgin Islands. Unless the EU takes effective action to combat tax havens, the situation will undermine trust and solidarity between member states. In fact, we do hardly see any solidarity between EU members states anymore. The European Union as a whole loses EUR 170 bn annually due to cross-border tax avoidance and evasion. The sum includes EUR 60 BN and EUR 46 BN shifted by large corporations and wealthy individuals respectively. Furthermore, the situation is made worse by the enormous VAT gap in EU member states, an average of 12% of VAT revenue. A significant part of the gap results from the use of cross-border transactions by companies and criminal groups to extort VAT, which generates losses of EUR 64 BN every year.
Assets held by wealthy individuals in tax havens account for 10% of the EU’s GDP; about 75% of the wealth is not reported to the tax authorities at all. We are losing huge amounts of money, while at the same time cutting the budget for cohesion policy which facilitated the EU’s faster growth in previous decades. Can this be a coincidence?
What should the EU do to improve the situation? There are several ways of resolving the problem of tax avoidance, in theory. The solutions proposed include blacklisting the EU member states identified as tax havens and giving the European Commission the power to impose sanctions on countries classified as non-cooperative tax jurisdictions. Another remedy may be the establishment of an EU-wide minimum rate on corporate income, calculated using a tax base that disallows the deduction of payments most often utilized for tax avoidance, such as interest and royalties.
As you can see, this will never happen. The EU prefers to praise a fake criminal prosecution for tax evasion. And it goes without saying: If the law enforcement agencies can choose between EU and US corporate groups or Asian companies to be prosecuted, they will try to go after Asian or Taiwanese entities. Remember: There is “no crime” in the EU, and the USD is still our closest ally – Please let me paraphrase, the EU is completely dependent of the US, the actual government of the EU is the US, in practice.
Taxation is a (legal) prerogative of the member states, the EU having only limited competences – it is the very lifeline of every modern state. As EU tax policy is geared towards the smooth running of the single market, the harmonization of indirect taxation was addressed before direct taxation. A fight against harmful tax evasion and tax avoidance has followed. EU tax legislation must be adopted unanimously by the member states which hardly ever happens. The European Parliament has the right to be consulted on tax matters; for budgetary-related issues it is even co-legislator. Do you know who gets a post in the European Parliament: Those that have failed in national politics. Again, unfortunately, the European Parliament is an institution with hardly any real powers and is still not being taken seriously by European professionals, that are able to look behind the veil.
And this is an important takeaway for Asian companies in the EU: if there should be any problems at all, it will be related to indirect taxes, that is VAT. For instance, we always advice our Taiwanese clients active in the EU to focus on flawless VAT compliance. This is the spot European law enforcement usually attack, if at all. Corruption within corporate group – you certainly know the US legislation “USFCPA” or the “UK Bribery Act 2010” – is not really important for European law enforcement in practice, for instance. It is much more im important in the US and UK. Within the EU, it is VAT authorities fully focus on.
Legal basis of the fight against tax evasion in the EU
The tax provisions chapter (Articles 110-113) of the Treaty on the Functioning of the European Union (TFEU), which relates to the harmonization of legislation concerning turnover taxes, excise duties and other forms of indirect taxation; the chapter on the approximation of laws (Articles 114-118 TFEU), which covers taxes that have an indirect effect on the establishment of the internal market, with fiscal provisions not subject to the ordinary legislative procedure; other provisions relevant to tax policy, referring to the free movement of persons, services and capital (Articles 45-66 TFEU), the environment (Articles 191-192 TFEU) and competition (Articles 107-109 TFEU).
Basically, several laws that have no relevance in real live. It could make sense in theory, but it is not lived in reality. If you are an Asian entrepreneur, you do not need to be aware of these laws. If law enforcement tries to prosecute, they do this on the legal basis of a national state. Often, we see German law enforcement trying to prosecute – indeed, the German law enforcement maybe works best within the EU, although it is already very weak. So, if you have a structure of maybe four entities in the EU (Often: The Netherlands, Germany, Poland and Italy), do you need legal/tax protection in every state? No, it is fully sufficient if you have a law firm in one member state. Often, international corporate groups choose German law firms in Europe, because here, you probably have the best cost-benefit ration. For instance, in Poland, legal fees are not as high in Germany, but many people would say that Polish law firms lack quality. In the Netherlands, you often have UK privately educated lawyers with high competences, but also high fees. We are often told that German public education mixed with an international relatively low fee level led to efficient results in practice.
