Political Discord Europe's Struggle to Curb Tax Evasion

The European Commission wants to prevent companies from avoiding taxes but is divided over how best to do so. Some want to force companies to publish special tax deals, while others say this violates privacy rules.
Jean-Claude Juncker and Jonathan Hill don't agree on the best way to fight tax evasion.

In recent months, the European Union has repeatedly promised a fairer tax system for Europe.

“We will also step up our efforts against tax avoidance and aggressive tax planning,” E.U. heads of government stated at a summit last December, when they agreed on the bloc’s agenda for 2015. “The European Commission will do more against tax evasion and tax fraud.”

However, the commission, the European Union’s executive body, hasn’t found it easy to create fairness when it comes to tax policy. Although Commission President Jean-Claude Juncker and his 27 commissioners agree on this in principle, they are divided over how best to achieve it.

That is particularly true when it comes to forcing major companies to publish any special so-called “tax rulings” they have secured.

Tax rulings are agreements between a company and a country's tax authorities on how exactly the company is going to be taxed.

In March, the European Commission will submit its first “action plan” against tax evasion.

Although tax rulings are legal, they cannot be used to provide “state aid” by giving certain companies competitive advantages.

Mr. Juncker is in favor of getting companies to provide full transparency, according to E.U. sources. The former Luxembourg prime minister is under severe pressure over the preferential tax treatment of companies in the grand duchy and therefore has to be seen to make a stand against tax evasion.

Pierre Moscovici, the commissioner for economic and financial affairs, who is also responsible for taxation policy, wants companies to make their tax rulings public as well, according to E.U. sources.

Yet Mr. Juncker and Mr. Moscovici face internal opposition.

The commissioner responsible for regulating the financial markets, Jonathan Hill of Great Britain, wants to prevent any requirement to publish tax rulings. He argues the European Union would violate data protection by demanding the publication of tax rulings, forcing companies to divulge trade secrets, which is precisely what the special arrangements with tax authorities are all about.

Vera Jourova, the Czech justice commissioner, has also raised objections.

A publication in the annual report would be in violation of data protection rules and will accomplish nothing, according to industry insiders.

Countries that traditionally have lured companies with special tax privileges are likely to raise objections to the automatic exchange of information.

Mr. Moscovici is taking the data protection legality argument seriously. He doesn’t plan to make the contents of the tax rulings public. Instead, companies would be required to provide the bare essentials in their business reports, such as the number of tax rulings per E.U. member state.

Whether that will happen remains to be seen. In March, the European Commission will submit its first “action plan” against tax evasion. The plan will include a draft directive stipulating that in the future, tax authorities in the 28 member states automatically disclose what special arrangements they have made with what companies.

The problem is that all tax laws in the European Union must be decided unanimously.

Experience has shown that this can take years. One government or another can always be counted on to introduce a veto against the new tax directive. Countries that traditionally have lured companies with special tax privileges are likely to raise objections to the automatic exchange of information. These include the Netherlands, Belgium, Luxembourg, Ireland, Cyprus and Malta.

The E.U. competition commissioner, Margrethe Vestager, is investigating four of these countries, on suspicion of distorting competition by offering tax breaks to large corporations such as Apple, Amazon and Starbucks.

Thus, the automatic exchange of information through tax rulings could be a long time in coming. It could be much quicker for the commission to push through a disclosure requirement for companies, since approval by only a two-thirds majority of states is required.

That, too, isn't certain, given rising opposition in Germany. Many German firms request so-called preliminary tax liability estimates from the German tax office. As a rule, that doesn’t allow for any tax reduction, just legal certainty.

In the European Union, however, such preliminary information is considered to be tax rulings.

 

Ruth Berschens is Handelsblatt's bureau chief in Brussels, leading coverage of European policy. To contact the author: [email protected]