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The taxation trap

November 8, 2014

Published in ‘New Europe’ Print and Digital Editions

Taxation trapAfter the 2008 financial crisis and the 2010 sovereign debt debacle, tax-hungry Western governments intensified their worldwide campaign to increase tax receipts. International bodies such as the Financial Action Task Force (FATF) and the Organization for Economic Cooperation and Development (OECD) were assigned the task of issuing ‘guidelines’ and ‘recommendations’ about fighting tax evasion and closing loopholes used by both individuals and multinational companies to limit their tax liability. Those guidelines and recommendations then became compulsory for the rest of the world and unilaterally enforced by OCDE members through ‘black’ and ‘grey’ lists, to which non-compliant states could be included, thus risking severe financial sanctions.

More to that, tax-friendly states, such as Ireland, were forced to revise their legislation, while others like Cyprus (nicknamed a ‘casino economy’ by the then French finance minister and current economic affairs commissioner Pierre Moscovici) were simply ‘punished’ by a refusal of international aid, and were forced to apply a haircut of their bank deposits. The United Stated enacted a foreign assets disclosure law, known under the acronym ‘FATCA’ and required all foreign banks to apply it to their American clients—in fact asking institutions established in other countries to act as agents of the US Internal Revenue Service.

Currently, two broad initiatives are underway, one called ‘automatic exchange of information’ targeting mostly individuals, and the other under the fancy name of ‘base erosion and profit shifting’ (BEPS) intended for the multinational corporations. According to OECD, the automatic exchange of information ‘involves the systematic and periodic transmission of bulk taxpayer information by the source country to the residence country concerning various categories of income’, with the explicit goal of preventing physical persons to hide income (and assets) abroad. On the other hand, the much more complicated BEPS rules will try to prevent large companies from using differences in tax legislations in order to fictitiously transfer their income and profits from the place where the income is effectively created to the various tax heavens around the globe.

However commendable these initiatives may be, they are not without serious flaws and contradictions. Just to take an example, the automatic exchange of information presupposes that all countries involved are democratic, ethical, and have high standards of processing information and protecting private data; otherwise the risks of blackmail and extortion are very high. How will this mechanism be applied in today’s troubled world, full of rogue regimes and unstable states, remains an open question.

And what about the competition among countries to attract foreign investment, through low tax rates and privileged agreements with big companies? Is it compatible with their official statements about claiming tax justice? How can a major European country have the objective of becoming the ‘prime place for international companies’ (obviously, at the expense of its neighbors), or invite expats to settle in it, and at the same time participate in the international effort to close all tax loopholes?

However, things really get bad when they become political. Take for example the current disagreements and conflicts within the European Union. When a higher than expected contribution to the EU budget was imposed on the UK, all of a sudden, a big scandal about Luxembourg’s secret agreements with hundreds of multinational companies to facilitate their tax evasion, erupted. Coincidentally, Mr. Junker, the European Commission’s President, was Luxembourg’s Prime Minister; and such agreements date back several years, when he was in office… So, let’s imagine that the next ‘scandal’ could be about the UK’s ‘benign neglect’ policy of specific tax vehicles for which it became famous among tax-minded executives and traders, such as the use of limited partnerships (LLP’s) and their role in cross-border tax ‘optimization;’ and so on.

There is no end to this game; it looks as if the current economic difficulties were transformed into a war in and through taxation, where each country is trying to undermine its neighbors’ advantages while hiding its own—a modern version of the competitive devaluations of the 30’s. Today’s governments, overwhelmed by their public finance imbalances, are caught into a gigantic taxation trap. Will all this provide a solution to our growth problem? Rather not.


From → Views & Opinions

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