The EU to fight cross-border tax evasion with a toothless directive

On Tuesday 6 October the powerful Economic and Financial Affairs Council of the European Union, the well know ECOFIN group, took a decision advertised to be monumental. For the first time ever the 28 EU countries agreed to shed some light on the ‘tax rulings’, as well as at the ‘advance pricing arrangements’. These are the two infamous concessions regularly accorded by some EU governments to multinational companies and wealthy individuals allowing them to move around income and capital and have it taxed in the jurisdiction they choose. In view of that, the ECOFIN decided this week that as from January 2017 there will be an “automatic exchange of information on cross-border tax rulings” between the EU member states. The information will be also available at a registry operated by the Commission. Special tax ‘cure’ A ‘tax ruling’ is an agreement between a company or an individual and the tax authorities of a country. It gives to taxpayers an assurance on how certain aspects of taxation will be applied in specific cases. An advance or transfer pricing arrangement, also issued by tax the authorities, is a type of a tax ruling in favor of a company, determining the method and other relevant details of pricing to be applied on transfers of goods or services between business entities of the same or collaborating groups of interest. This latest facility is used by multinationals in order to transfer their profits to and accumulate capital in the jurisdiction of their liking. It employs over, under or completely untrue pricing in the trade of goods or services between companies operating in different countries of the same business or interest groups (subsidiaries). Understandably under this ‘technique’ the transfer of profits directs incomes and profits to the jurisdiction where the multinational and the tax authorities of the country have concluded a favorable tax ruling. Noble intentions but dirty results Initially the cross-border tax rulings have been used by certain EU countries to attract investments by multinational companies. However, in many cases those investments are restricted to an accounting center without any real productive content. Some EU member states actually are happy if the multinational or the wealthy individual just park their fortune or entrust their profits and incomes within the financial system of the country. The case of the Luxembourg scandal made headlines last year. Last November the world learned that the tax authorities of the Grand Duchy of Luxembourg had concluded hundreds of ‘tax rulings’ with multinational companies and wealthy individuals thus facilitating tax evasion. In this way incomes and wealth created in another country could profit from Luxembourg’s special tax allowances. The scandal came as a blow to the then newly elected and appointed Commission President Jean-Claude Juncker. In the recent past he had served as Prime Minister or Minister of Finance of Luxembourg for more than ten years. Understandably he was the architect of the ‘special arrangements’ offered to the wealthy tax evaders. Automatic exchange of what? Mind you, the “automatic exchange of information on cross-border tax rulings” to be applied as of 1 January 2017 between member states doesn’t legally block the conclusion of similar tax rulings and transfer pricing arrangements. However, the agreement struck in the ECOFIN this week requires that “Member States automatically exchange information on their tax rulings”. Currently, the EU countries share very little information with one another about such issues. It is at the discretion of the member state to decide whether a tax ruling might be relevant to another EU country. In any case, the possibility of any EU member state to ask and get information about the tax agreement between a company or an individual with another member state may act as a deterrent for these dealings. The idea is that the shared knowledge of the conclusion of such agreements in one member state which straightforwardly leads to or facilitates tax evasion or avoidance in another EU country, may even lead to penal persecution. This is due to the great differences of the tax legislation in the 28 EU countries. There was never such a thing as a common EU tax policy. Tax evasion aided by banks Undeniably, in today’s globalised financial markets with the immense abilities of the white and grey financial systems to spin the world incomes and capital around, the ability of the tax authorities to substantiate before the courts an illegal tax practice presents insurmountable obstacles. On top of that, the text of this new EU “directive aimed at improving transparency in assurances given to companies about how their taxes are calculated” cannot cover the many possibilities the modern aggressive or active ‘tax planning’ offers. Only the American prosecutors and judges have arrived at punishing some global banks with huge fines for helping their clients to evade taxation. There are also characteristic examples of some giant American pharmaceutical firms which spend billions to purchase their EU peers just for tax purposes. By the same token, the multinationals and wealthy individuals are willing to spend a lots of money in similar schemes in as much as they can gain from tax evasion. Under this light what the ECOFIN did this week is that it created just one more opportunity for the EU governments to appear before their voters as taking ‘serious measures’ against the tax evasion of the wealthy.