EU leaders let tax-evaders untouched

European Council – Meeting, 15/03/2013. From left to right: Angela Merkel, German Federal Chancellor, Elio Di Rupo, Belgian Prime Minister, Francois Hollande , President of France. (European Council, photographic library).

In tomorrows’ European Summit the 27 leaders of the European Union will have as main item in their agenda the fight against tax evasion and fraud. Reportedly without concrete results. According to the President of the Council, Herman Van Rompuy, this affair costs to member state budgets around €1 trillion every year. If only a part of that kind of money was collected by the relevant tax authorities, the entire scenery of misery and crisis in the Union could drastically change.

This extra government income could pay not only for the huge load of Eurozone’s sovereign debts, but it could also finance all the badly needed growth policies, from research and development to employment boosting mega-infrastructure projects. The issue is so crucial that in reality tax evasion and fraud threaten nothing less than the European Project itself. The European Sting has devoted recently a very enlightening article on that, unfortunately predicting very poor results.

Who avoids taxation?

Arresting tax evasion and punishing fraud is not a matter of a well-designed bureaucratic and police exercises. It demands foremost a wholehearted and uncompromised political will. And seemingly such a thing is in very short offer. The arguments in support of a mild approach to this issue are many. Most important of them is the theory that says that the black economy would probably melt down completely if brought to full fiscal light. For example in most EU countries the black economy is estimated at 10% to 25% of the GDP. A large part of that would collapse, if compelled to pay full taxes and social contributions. Many people wouldn’t like that, particularly now in the middle of a recession. Many jobs are at stake there.

This part of the story however refers to the small and very small enterprises and probably more so to professionals in the services sector, the agricultural production and construction. Probably though the largest part of tax evasion and fraud doesn’t pertain to this part of the economy. This brings us to multinationals and the wealthy individuals who invariably hide incomes from financial investments, real estate and other activities. Almost all the major banking firms offer ‘tax management’ services through their subsidiaries in well-known tax havens within and without the European Union. For example the City in London offers such services in connection with many far away or nearer tax-haven islands.

Or take the example of New York’s overgrown financial centre. During the past few years the American authorities did a very good job chasing some major banking firms, which were offering tax ‘advices’ and ‘services’. Interestingly enough though it happened and all the major banks which were chased and heavily fined for this reason in the US, were mainly foreign. No major American bank was caught to offer tax evasion services. Coincidence? Who can believe it? This is an indication of how governments view the fight against tax evasion and fraud.
European complacency

Returning to this side of North Atlantic our leaders, who are to meet tomorrow in Brussels, will discuss mainly the big kind of tax evasion. The one connected to legal loopholes and the use of foreign or home tax havens, that is practices followed by multinationals and wealthy individuals. The other kind, the ‘peoples’ tax evasion, is more or less already adequately confronted on national level in these times of fiscal deficits. It is very characteristic that Greece and Italy, two countries where tax evasion is widespread, are taking effective measures to collect more taxes from the very small businesses, the professional services, the construction and the agricultural sectors.

Against this background the European Commission on 6 December 2012 adopted an Action Plan to strengthen the fight against tax fraud and tax evasion, covering both direct taxation and VAT. It sets out concrete steps to enhance administrative cooperation and it will support the development of the existing good governance policy, the wider issues of tackling aggressive tax planning especially protecting Member State tax revenues against the challenges of aggressive tax jurisdictions and unfair competition. Unfortunately those Commission initiatives didn’t find the needed backing from the council of ministers, which is the key decision-making EU body.

The ministers looked the other way

Last week the powerful Ecofin Council, which regroups the 27 EU ministers of Finance, was supposed to prepare the preliminary texts and action for the 27 leaders to decide upon this week, over the needed measures to be taken on these crucial matters of tax evasion and fraud. However, it seems that the Commission proposal was not to the liking of many Finance ministers and was blocked at that level. The European Sting devoted a large article on that, offering a detailed account of what happened. Suzan A. Kane wrote on 15 May, “It is a disgrace for the European Union’s political elite to consciously block the internal exchange of information between the member states authorities and banks on matters related to tax evasion and fraud. This is exactly what the 27 EU minister of Finance did yesterday in the Ecofin Council in Brussels”.

It was really a revelation for the competent Commissioner Algirdas Šemeta, to watch the ministers blocking the measures needed to curb tax evasion and fraud. Kane wrote: {The good Commissioner speaking later on in a Press conference about the work of the council of Finance ministers blew up like that: “Switzerland has been saying for years that it is ready to talk openly and constructively on a new accord. So I am delighted that we will now be able to do so. Nonetheless, we cannot – we must not – make our progress within the EU dependent on our progress with third countries. So it was with great disappointment that I watched agreement on the revised EU Savings Directive being blocked on this basis today}.

Šemeta is hereby accusing the minister on two accounts. First because ‘for years’ they refused to take the Swiss offer to discuss a new accord on the key issue of tax cooperation in relation to bank deposits. It goes without saying that the Swiss were offering much more than the 27 EU ministers could take. The truth is that over the past years the inflow of foreign money into Switzerland has become a burden rather than a help. This incoming money has pushed the value of the local Swiss franc to the sky, thus undermining the country’s exports. Conveniently the Swiss decided that they didn’t like any more their country to be seen as a tax haven. Still the European ministers refused their offer all those years.

The second Šemeta’s accusation against the ministers is that now, having finally accepted the Swiss proposal to start negotiating a new agreement on tax cooperation, the Ecofin used this development as a pretext to delay the intra-EU anti-tax evasion cooperation. The Commissioner was proposing close cooperation between the 27 tax administrations and at the same time obliging the EU banks to supply automatically the needed information. No, the ministers couldn’t take all those medicines at a time.

Probably they are personally involved in fraudulent tax cases themselves and they want time to fix their own affairs. As it happened with the previous French minister for the State Budget who forgot to include in his tax return some million euros he had in a Swiss bank account. Actually he had just started a campaign against tax evasion, when his own fraudulent behaviour was publicized.

After all that, nobody expects that the 27 leaders will take tomorrow any serious measure to effectively fight tax evasion. They will discuss the issue and there will be an announcement full of promises, sure of that, but no real measures.