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The €1trillion a Year Dilemma: What Tax Fraud and Tax Evasion Really Costs the EU

06/05/2013 16:58 BST | Updated 06/07/2013 10:12 BST
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Chicago gangster Al Capone proved so notoriously difficult to prosecute for crimes such as smuggling and prostitution that the US government resorted to convicting him for tax evasion. Today, as authorities struggle to crack down on tax evaders, it might have been a very different story.

It is a problem that affects everyone. Tax fraud and tax avoidance costs the EU an estimated €1 trillion a year - €2,000 for every European. That is more than Europe spends on healthcare each year and more than four times what is spent on education.

The economic crisis has made the issue more acute. Fighting the crisis and easing austerity would be much easier if people and companies simply paid all the taxes they were due.The man in the street has also become less accepting of those who try to take advantage of loopholes as recent scandals involving comedian Jimmy Carr and Starbucks have shown.

The Channel 4 funnyman slashed his tax bill by putting his earnings into an offshore trust and then lending the money back to himself to avoid being taxed for salaries. HM Revenue and Customs is currently checking if the scheme, reportedly used by more than 1,100 wealthy Brits, is legal. Meanwhile, Starbucks used accounting sleight of hand to claim it made very little profit in the UK despite selling millions of coffees each year. The public backlash over the revelations quickly forced the company to seek an arrangement to pay more taxes.

Making use of loopholes can be perfectly legal, but that does not make it ethical. People and companies involved in tax avoidance still make use of public services and benefit from an unfair advantage over firms that pay their taxes in full.

However, any serious attempt to tackle the issue will require international cooperation to prevent those evading taxes from parking their money in another country. Britain announced last Thursday that overseas territories would share information on bank accounts, but this is only the start. Things are also moving at a European level.

In April 2012 the European Parliament adopted a resolution calling for urgent action on tax fraud and tax evasion, which led to a European Commission action plan two months later. It contains recommendations for improving collaboration between countries, closing loopholes and promoting good governance.

This month the European Parliament will take things a step further. On 22 May MEPs will vote on a report on the fight against tax fraud, tax evasion and tax havens written by Mojca Kleva Kekuš. The text outlines the EU's role in helping to stamp out tax evasion and calls for a common EU approach towards tax havens, including a European blacklist.

The ambitious goal behind these plans is to halve losses due to tax fraud and evasion by 2020. Even if this target is only partly met, it would still mean several hundred billion euros extra to spend in these crisis-ridden times.