The EU Parliament blasts the Council about the tax dealings of the wealthy

European Parliament. Joint meeting of the Committee on Economic and Monetary Affairs (ECON) and the Special Committee on Tax Rulings and Other Measures Similar in Nature or Effect (TAXE). Exchange of views between the TAXE Committee President Alain Lamassoure (on the left) with Commission President Jean- Claude Juncker and Commissioner for Economic and Financial Affairs, Taxation and Customs Pierre Moscovici (on the right). (European Parliament Audiovisual Services. Event Date: 17/09/2015. Copyright: © European Union 2015).

The European Parliament once more honored its role as the authentic exponent of the will of the European citizens. Last Tuesday it dismissed as a “missed opportunity” the EU Council’s decision to water down the mandatory exchange of the ‘tax rulings’ between member states. A ‘tax ruling’ is a special taxation arrangement accorded to a company or an individual by the tax authorities of a country. It’s accorded mainly to foreign taxpayers providing an actual tax haven bargain and an assurance about how certain aspects of taxation will be applied in each specific case.

The ‘tax rulings’ made headlines in November 2014 when the world learned that the authorities of Luxembourg had accorded special tax ‘treatment’ to hundreds of wealthy individuals and multinationals in order to park their money in the Grand Duchy. It also became known that more EU and other European countries offer similar ‘services’ facilitating wealthy individuals and companies to evade taxation.

It all started in Luxembourg

After the Luxembourg scandal broke out, Jean- Claude Juncker, the then newly elected President of the EU Commission felt obliged to do something in order to appease the anger of the public opinion. He himself must have been behind these Luxembourgish tax agreements. He had served a Prime Minister and Minister of Finance of the Grand Duchy for many years.

All that said, the Commission, under his instructions, prepared a proposal to make it mandatory for EU member states to exchange information on their tax rulings. However, this proposal was met with disappointment by the European Parliament for its ineffectiveness. Even worse, the powerful ECOFIN council, regrouping the 28 EU ministers of Finance, further watered it down obliging Markus Ferber (EPP, DE), the Parliament’s rapporteur, to voice his dismay at the “directive’s limited scope and late entry into force”. His report was approved by the Parliament’s Economic and Monetary Affairs Committee last Tuesday by 49 votes in favor, 0 against and 6 abstentions. Tax experts say that the more transparent and communicated those tax dealings are, the less will be used for tax evasion. Let’s see that in detail.

The member states are reluctant

When the draft text of the new directive on the ‘tax rulings’, as it was formulated by the 28 member states at the ECOFIN council became known, the European Sting commented that, “The EU (is about) to fight cross-border tax evasion with a toothless directive”. On 8 October the Sting’s first story concluded 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”.

What the Parliament wants

In any case, the European Parliament has proposed very concrete amendments to the text that the ECOFIN council ministers agreed. The MEPs want the following changes:

*the directive should apply to all tax rulings, not just the cross border ones “given that purely national transactions can also have cross-border effects. The Council made the directive’s scope cross-border only”.

* The Parliament insists that the European Commission should be able to use the information exchanged between member states on the tax rulings for purposes other than just overseeing that the member states conform to the directive.

* The Parliament wants the automatic exchange of information to start as soon as possible, whereas the Commission proposes that it should start on 1 January 2016 and the Council agreed on 1 January 2017.

*The Commission says that the mandatory exchange mechanism should apply to tax rulings issued in the ten years before it enters into force, whereas MEPs say it should apply to all rulings that are still valid on the day the directive enters into force. From its side, the Council insists that the directive should apply only to rulings, amendments or renewals of rulings after 31 December 2016.

* The MEPs insist that the information should be communicated “promptly after the ruling is issued” rather than “within one month following the end of the quarter during which the ruling was issued” as the Commission proposes. The Council deal says that the information should be provided “within three months following the end of the half of the calendar year during which the ruling was issued”. This means that if a ruling is issued in January, the mandatory exchange of information can take place until 30 September.

Different visions

Obviously, there are key differences in the three texts. Initially, there was the one drafted by the Commission. Then the ECOFIN council agreed upon a drastically modified one, while the Parliament wants to change them both. It goes without saying that the parliamentarians are the strictest of them all concerning the effectiveness of the directive against tax evasion. What is at stake here relates to the ability of the member states to accord special tax treatments to wealthy individuals and probably help some companies to evade taxation.

Understandably those ‘rulings’ realized in one EU member state may damage the tax collection ability also of another country. The question is why so far the 28 governments tolerated such an abominable arrangement? And the equally obvious answer is that every country wants to safeguard its right to use tax allowances in order to attract money and investments. Unfortunately, those dealings have very rarely led to investments in the real economy and the creation of jobs. In most cases they have just facilitated the ‘parking services’ for capital a country chooses to offer.

Now the Parliament and the Council have to begin consultations in order to achieve a compromise on the final text. The directive is expected to be adopted at a forthcoming Council meeting but the European Parliament has to officially give its opinion first.