The Blog

Pushing Harder for Tax Justice in the EU

Tax avoidance can also be illegal. Hence you can be found guilty of tax avoidance if it is ruled that the methods you used were actually illegal, even though the intention of the tax(non)payer was not to break the law. ..

The "LuxLeaks scandal", which refers to tax dodging on a grand scale apparently facilitated by the government of Luxembourg, has forced the issue of tax justice up the European political agenda. The scale of tax avoidance and tax evasion across the European Union (EU) is quite staggering, with around one trillion euros in tax revenue dodged each year - that's €2,000 per citizen. How? By multi-national companies and rich individuals shopping around for the most favourable jurisdictions and hiding money offshore in tax havens, along with other morally questionable practices.

As a result of tax dodging, governments across Europe are being deprived of valuable tax revenue, money that could be spent on public services such as schools, hospitals and welfare.

The issue of tax dodging can seem complex. For clarity, tax evasion is where there is a deliberate intention to break the law to reduce tax liabilities, i.e. knowingly lying about your income. Such behavior is illegal / against the law (use one or the other).

To be fair, accountancy firms would not advise their clients to evade tax. However accountancy firms do advise on how to avoid tax, often selling clients what are called 'high aggressive' avoidance schemes that they themselves have invented.

As it stands tax avoidance can be legal (to a greater or lesser extent), e.g. the use of offshore accounts, or when a company registers itself outside of the territory in which it sells its products. This can be seen in the case of Amazon, whose UK operation is based in Luxembourg.

Tax avoidance can also be illegal. Hence you can be found guilty of tax avoidance if it is ruled that the methods you used were actually illegal, even though the intention of the tax(non)payer was not to break the law.

All four of the 'Big 4' accountancy firms have been successfully prosecuted by tax authorities for devising and selling dubious tax dodging schemes. One of the Big 4 recently admitted they were willing to recommend schemes to their clients that they thought only had a 25% chance of succeeding if it got to court.

Yet the Big 4 - Pricewaterhouse Coopers, Ernst and Young, KPMG and Deloitte - remain respected 'blue chip' companies, whose senior staff are recruited from Europe's best universities, whose executives grace the boards of many of our most respected companies and charities, and whose glossy corporate offices are physical representations of their valued status. Yet despite being repeatedly fined for illegal practices in many jurisdictions, often for huge sums, individuals very rarely go to prison. As such, the deterrent factor is low re: illegal or aggressive tax avoidance.

Yet the reality is that tax dodging is not a victimless crime. Wherever you see a family struggling to make ends meet, a pensioner worried over how to pay an ever-rising fuel bill, or a young person without a job,you don't need to be Sherlock Holmes to work out the link between increased tax dodging and increased poverty.

In the world's poorest countries it is estimated that governments are losing $160 billion annually as a result of tax dodging by some multinational companies: a sum of money greater than the global aid budget.

The former South African Finance Minister Trevor Manuel is on record as saying, "It is a contradiction to support increased development assistance, yet turn a blind eye to actions by multinationals and others that undermine the tax base of a developing country".

As austerity has bitten across Europe the tide of public opinion has turned against tax dodging and the companies and individuals who engage in it. As a result the political elite can no longer ignore the issue and they know they have to act.

Quite what to do is where the debate is now at. The European Commission has promised to "step up efforts to combat tax evasion and tax fraud" as part of its 2015 Work Programme. Some political groups within the European Parliament would like to see an inquiry set up and they have now reached the requisite number of signatures from MEPs to make this happen.

It would be disingenuous to rubbish the idea of an EU Parliament inquiry: it is a perfectly valid response and it may produce some interesting information. But is it the best response? We in the Socialist and Democratic Group think not. Why? Because inquiries have a reputation of being used by the political elite as a way of 'kicking a difficult issue into the long grass,' i.e. as a way of delaying and slowing down the process of reform or change.

Instead Labour MEPs have challenged the Commission to back up its promises with specific legislative proposals to fight for greater tax justice, suggesting three simple steps:

1. Country by country reporting on company profits;

2. A Europe-wide approach to tackling tax havens;

3. Boycotting of companies that engage in tax dodging and the financial advisers who help them to do it.

Those who insist on continuing to aggressively avoid their fair share of tax need to recognise that they are operating in a morally indefensible way. This was neatly captured by former British Chancellor Denis Healey, who remarked that the difference between tax avoidance and tax evasion is "but the thickness of a prison wall". Yet there is still time for the dodgers to repent, change and adopt the maxim of Oliver Wendell Holmes, a US Supreme Court Justice who noted, "Taxes are the price we pay for a civilised society".

Paul Brannen is a Labour MEP for North East England