Analytics, EU – Baltic States, Modern EU, Taxation

International Internet Magazine. Baltic States news & analytics Sunday, 22.09.2019, 03:11

Combating tax evasion: urgent task for EU governments

Eugene Eteris, BC International Editor, Copenhagen, 10.09.2019.Print version
Since 2013, the OECD and G-20 countries are working together on implementing 15-poins Action Plan on BEPS (base erosion & profit shifting). Already over 130 countries are collaborating to put an end to tax avoidance strategies that exploit gaps and mismatches in tax rules to drastically reducing tax payments.

Addressing base erosion and profit shifting (beps) is becoming a key priority of governments around the world. In 2013, the OECD and G-20 countries adopted a 15-point Action Plan to address BEPS. Beyond securing revenues by realigning taxation with economic activities and value creation, the BEPS project aims to create a single set of consensus-based international tax rules to address profit shifting and, finally, to protect tax bases while offering increased certainty and predictability to taxpayers.


In 2016, the OECD and G20 established an Inclusive Framework on BEPS to allow interested countries and jurisdictions to cooperate with OECD and G-20 member states in developing some BEPS standards and monitoring its implementation; over 100 countries and jurisdictions have joined the “inclusive framework”.


More in: https://www.oecd-ilibrary.org/taxation/oecd-g20-base-erosion-and-profit-shifting-project_23132612


On OECD’s Action plan on BEPS from 2013 in: https://read.oecd-ilibrary.org/taxation/action-plan-on-base-erosion-and-profit-shifting_9789264202719-en#page40 


BEPS as a national strategy to combat tax havens

Main feature behind the BEP is tackle the corporate executes’ intention to address “tax inversion” into a tax haven by “managing” the profit shifting (or earnings strip); it is the latter that is actually represent the untaxed profits moved to the tax haven.

 

The BEPS’ techniques have been used extensively by the US companies during 2004-17, mainly MNCs, to create enormous untaxed offshore cash reserves in size of $1-2 trillion in numerous tax havens (there are about 40 presently around the world, including some in Europe).

 

The OECD estimated in 2017, that BEPS technique (despite the OECD’s project during 2012-16) helped “shielding” about $100-200 bn in annual corporate profits from tax (some say that the figures are closer to S $250 bn per annum. Apple executed in 2015 the largest recorded BEPS transaction in history when it moved $300 bn of its profits to Ireland; at that time it was called a hybrid-tax inversion.

 

Due to multinational enterprises exploiting gaps and mismatches between different countries' tax systems, a proper domestic/national tax base erosion and profit shifting laws and regulations can affects all other countries.

MNCs and big corporations operating internationally, must act together with the national governments to tackle BEPS and restore trust in domestic and international tax systems.

 

It has been estimated by OECD that BEPS practices cost countries about $100-240 bn in lost revenue annually, which is the equivalent to 4-10% of the global corporate income tax revenue.

 

Working together the OECD member states (of which the Baltic States are members) have to implement BEPS Inclusive Framework and 15 Actions to tackle tax avoidance, improve the coherence of international tax rules and ensure more transparent tax systems.


Table I: Key figures

- Over 130 countries around the world agreed to cooperate on the BEPS’ package implementation;

- More that $240 bn are lost annually due to tax avoidance by multinational companies, and = More than 85 countries and jurisdictions have signed the Multilateral Instrument on BEPS.

 

Three Baltic states (Estonia, Latvia and Lithuania) have several “cooperation lines” with OECD’s Beps: on exchange of information on request (EOIR), on automatic exchange of information (AEOI), as well as reporting on existing harmful tax practices (Action 5), exchange of information on tax rulings and preventing treaty abuse, etc.

Source: https://www.oecd.org/tax/beps/  

 

However, the biggest offshore jurisdictions for the EU states are, actually within the European shores: five main EU offshore states attract annually over € 3 bn, the money which could be otherwise used for increased social-economic growth in the EU member states.    

 

Table II: Largest tax “evaders” 




The first recognized European tax haven hub was the Zurich-Zug-Liechtenstein triangle created in the mid-1920s; later joined by Luxembourg in 1929. Privacy and secrecy were established as an important aspect of European tax havens.


Modern European tax havens also include corporate-focused tax havens, which maintain higher levels of OECD transparency, such as the Netherlands and Ireland. European tax havens act as an important part of the global flows to tax havens, with three of the five major global OFCs being European (e.g. the Netherlands, Switzerland, and Ireland). Four European-related tax havens appear in the various notable “top 10 tax havens” lists, e.g. the Netherlands, Ireland, Switzerland and Luxembourg.

Source: https://en.wikipedia.org/wiki/Tax_haven

 



Global and European

Traditional tax havens function by about zero rates of taxation through limited bilateral tax treaties. However, present base erosion and profit shifting (beps) enable MNCs to achieve "effective" tax rates closer to zero, not just in the haven but in all countries with which the haven has tax treaties; putting them on tax haven lists. According to modern studies, top 10 tax havens include corporate-focused havens like the Netherlands, Singapore, Ireland, the U.K., Luxembourg, Hong Kong, the Caribbean (the Caymans, Bermuda, and the British Virgin Islands) and Switzerland; the latter four jurisdictions are regarded as both major traditional tax havens and major corporate tax havens. Corporate tax havens often serve as channels to traditional tax havens.


The first recognized European tax haven hub was the Zurich-Zug-Liechtenstein triangle created in the mid-1920s; later joined by Luxembourg in 1929. Privacy and secrecy were established as an important aspect of European tax havens.


Modern European tax havens also include corporate-focused tax havens, which maintain higher levels of OECD transparency, such as the Netherlands and Ireland. European tax havens act as an important part of the global flows to tax havens, with three of the five major global OFCs being European (e.g. the Netherlands, Switzerland, and Ireland). Four European-related tax havens appear in the various notable “top 10 tax havens” lists, e.g. the Netherlands, Ireland, Switzerland and Luxembourg.


Source: https://en.wikipedia.org/wiki/Tax_haven


Table III: EU’s offshore tax jurisdictions as recipients (one year -2016, in Euros)

 

Ireland – over a bn (!);

The Netherlands – 800 million;

Luxembourg – 700 million;

Malta – 400 million,

Belgium – 300 million;

Switzerland – about 300 million.

All other jurisdictions (including, Bermuda, Caribbean Islands, Singapore, BVIs, etc.)

–       about 2,5 bn totally.

 

Note: a trillion is a thousand bn, and a bn is a thousand million; this makes one trillion as one million million. That is almost an inconceivable number to imagine.

More in: http://datagenetics.com/blog/april12019/index.html

 

Data from 2016 showed, for example, that multinational companies (MNCs) have “moved” about € 4,5 bn only from Denmark; if corporate taxes were paid in Denmark, the national budget would have acquired additionally about bn euros (i.e. loss of tax revenues). 

Tax havens managed to make great holes in national budgets: Germany is losing yearly about 29% of GDP, France – 24%, the UK -21% and Denmark -12%; to compare, China is losing only 4%(due to strict transparency rules!).    


Reference:  https://read.oecd-ilibrary.org/taxation/oecd-transfer-pricing-guidelines-for-multinational-enterprises-and-tax-administrations-2017_tpg-2017-en#page36



Lux-leaks: just one example

In November 2014, the International Consortium of Investigative Journalists (ICIJ) released 28,000 documents (about 4.4 gigabytes of confidential information) about Luxembourg's confidential private tax rulings which gave PricewaterhouseCoopers’ clients during 2002-10 enormous tax benefits in Luxembourg. This ICIJ investigation disclosed 548 tax rulings for over 340 multinational companies based in Luxembourg. The LuxLeaks' disclosures attracted international attention about corporate tax avoidance schemes in Luxembourg; the scandal contributed to the implementation of measures aiming at reducing tax dumping and regulating tax avoidance schemes beneficial to multinational companies.

 

In March 2019, the European Parliament voted by 505 in favour to 63 against of accepting a new report that likened Luxembourg, Malta, Ireland, the Netherlands and Cyprus to "tax havens facilitating aggressive tax planning". However, despite this vote, the EU Commission did not make proper steps to include these EU jurisdictions on the blacklist.

 

Conclusion. In my view, tax havens as parasitic to national jurisdictions with normal tax regimes and could dramatically damage their economies. In addition, IMF research in 2018 have shown that much of the foreign direct investments, FDIs have been coming from tax havens, i.e. resources being stolen from the national budgets. Widely contested modern economic theories do not see the damaging effects of corporate taxation (generally and in MNCs) on economic growth. Looking at contemporary global tax havens’ system, one can’t get rid of the impression of a highly injustice system covered by legal means with lack of moral corporate responsibility. 






Search site