Time for Europe to take tax justice seriously

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John Christensen, the director of the Tax Justice Network, has a piece with the above title in the latest edition of New Europe, just published. It’s worth reproducing in full:

European governments and citizens should be doubly alarmed by last week's Bloomberg news story that Google Inc. has been paying tax at a rate of just 2.4%. Not only do taxpayers in Europe and elsewhere face higher tax bills or poorer public services because Google won't pay its taxes, but also the tax structures Google has used to cut its tax bill, from the so-called "Double Irish" to the "Dutch Sandwich", are being facilitated by European tax havens.  Google's game is called Transfer Pricing. By artificially adjusting the prices that its subsidiaries sell to each other, it can shift its costs into 'onshore' high-tax countries and its profits into tax havens, where it can run almost employee-free offices and pay next to no tax. This cuts tax revenues in the United States and in the European and other countries where Google does its real business.

Despite the efforts of deficit-plagued governments to tackle such abuses, multinationals are winning these battles. In 2000, Microsoft booked less than 20% of its profits outside the United States; that figure is now 60%, though Microsoft's share of real sales and employment only grew from 30% to 40% during that time. Microsoft has cut its tax rate sharply as a result.

All this distorts markets and is anti-competitive. It favours large multinationals over their smaller national competitors and boosts the strength of those like Google or Microsoft with already elevated market power.  It helps banks grow too big to fail. It does nothing to improve these corporations? real productivity.

The Tax Justice Network (TJN), a global civil society coalition, seeks to tackle abuses like this, to expose the systemic faultlines in the international financial architecture, and to propose policy answers. Tax havens (or secrecy jurisdictions as they are often known) are central to TJN’s concerns.

Europe can lead

National tax authorities, rooted in their home jurisdictions, cannot properly assess the devious tax strategies of global multinationals, legal and illegal. International co-operation must be part of the answer. So a co-operative Europe is naturally a potential world leader.

Europe already leads in some areas. Its Savings Tax Directive (STD), under which member states automatically share tax-related information, is an excellent idea which should be expanded far beyond Europe's borders. Europe's own tax havens, notably (but not only) Luxembourg and the United  Kingdom, have lobbied hard behind the scenes to insert loopholes into the current STD, and it is fairly ineffective. Work is being done to tighten it, and Europe needs political courage to confront the vested interests.

Europe could also lead on curbing transfer pricing abuse. Current international tax rules treat multinationals as if they were a collection of unrelated entities, with each part taxed by the jurisdiction where it is resident. This OECD-led system makes no sense, because multinationals are integrated global operations.

A better alternative, Unitary Taxation, would involve taxing multinationals based on what they do in the real world, rather than on the artificial offshore constructions its tax advisers can cook up. Under unitary taxation a multinational is considered as a whole, and its profits are allocated to different jurisdictions under a formula based on wages, turnover or capital value in each place. Jurisdictions can set whatever tax rate they want, but if a company runs a one-person booking office out of Bermuda, say, then only a tiny portion of its profits will be allocated there and subjected to its zero-tax rate. Some U.S. states already operate this system successfully; a European project called the Common Consolidated Corporate Tax Base (CCCTB) currently being considered would be a step towards this system. It must be driven forward in the face of howls of protests from tax havens, multinational corporations and the powerful accountancy and law firms that support them.

Europe should also lead on rules for corporate reporting. Multinationals are currently not required to break down their profits and other important data by country, but can instead report them by region or even for the world as a whole. Neither the citizens of the countries where they operate, nor their tax authorities, can unpick this published data to find out what these corporations are really doing on their territories.  A new proposal for so-called Country by Country reporting, under which results would be broken down for each jurisdiction, is starting to get a worldwide civil society coalition behind it. Europe can lead the world in pushing this forwards.

Europe is a tax haven victim and a perpetrator, but with political courage, it can fight the vested interests on behalf of all Europe's citizens. TJN also wants Europe to lead a global struggle against the abuses, to benefit the citizens of the poorest countries. Given that up to a trillion dollars in illicit financial flows are estimated to leak out of developing countries each year, this could be far more effective than foreign aid.