Tax games in Europe

As I said a few months ago, tax evasion is the big cliff in terms of the future of the EU project. It was thus fascinating to see the tax evasion games played out at the latest ‘summit’ In Brussels yesterday.

To understand what really goes on at these summits, imagine yourself to be the PM of a small country that makes a lot of money by the tax avoidance activities of big companies operating in much bigger countries. You could be the PM of Ireland, Austria, Switerland, Luxemburg, London, Monaco, or even the Netherlands. Depending on which small country you are, the particular way you make money from tax evasion differs. The Dutch for instance make money by allowing ‘post-office’ firms which essentially make it particularly easy for foreign firms (Italian, Spanish, and Greek in particular) to be ‘international’ and to nominally park all the activities in the Netherlands that are taxed lower there (profits). London makes money by intermediating the setting up of all those ‘head offices’ in the Virgin Islands and a hundred and one other schemes. Ireland makes money by complicated off-sets to capital taxation, which is why large US companies (Google and others) have their head offices there. Switzerland and Luxemburg make money by having rich tax evaders simply hide their money in their banks. Etc.: the particular way in which your country makes money by under-cutting the big boys depends on the small country involved.

Now, of course the big boys (US, Germany, Japan, France, Italy, the European Commission, etc.) want to tax the activities of the rich individuals and companies operating on their shores. Without that taxation their governments would collapse so they are really serious about trying to reduce the degree to which their companies and rich individuals avoid national taxation. The big boys are hampered by the fact that they do want their companies to be international and sophisticated because that is needed for them to be so successful, and so the big boys can’t really do without complicated international tax arrangements, which invariably will lead to loop-holes and fudges in definitions. One should not think of this as a once-and-for-all kind of ‘finding the solutions’ problem. Rather, it is a perennial race between closing down the loop-holes and new ones opening up. To minimize the tax evasion one needs to have fast and central tax decision making to close the new loopholes. So it was, unsurprisingly, the European Council President, Van Rompuy, who dedicated the summit to tax evasion on behest of the bigger powers.

As one of the bottom-feeders of the tax avoidance inside big countries, what do you do? Well, you lie, you stall, you create confusion, and you generally try to be as uncooperative as possible without openly picking a fight with the bigger countries. Every week you delay is worth several billions. Normally speaking, stalling works beautifully. Just 5 years ago, for instance, the G20 promised the end of banking secrecy and transparency in financial arrangements, which lead to absolutely nothing in the ensuing 5 years as discussions in ‘working parties’ came to nothing. So, the tactic of bending a little on the rhetoric whilst being quietly obstructionist when it really matters has worked for you in the past.

Yesterday’s summit in Brussels showed some perfect examples of just that behaviour. For one, there was the usual tradeoff between symbolism and content: the summit produced a well-meaning declaration of intent which gave the big boys everything they wanted in terms of the things their own population wanted to hear (Merkel has to fight an election soon), but no concrete agreements on anything. Indeed, all that was decided was another meeting in December at which, maybe, things are going to be decided. Maybe GST-fraud will get tackled. Maybe the EU Commission will get involved in ousting tax evasion. Maybe, maybe, maybe. In the meantime of course, whilst the politicians of the big countries can pretend to have achieved something in their own media, you just keep cashing in. If one believes the numbers championed by the EU commissioner José Manuel Barroso, then 6 months of delay is worth 75 billion more tax evaded dollars. Not bad for an afternoon’s obfuscation, Ka-ching!

Moreover of course, the small countries all pointed to how much they wanted to cooperate if only there was agreement with everyone else on all the loopholes they benefit from. The favoured trick is to promise cooperation if people who are not in the room can be made to cooperate. Luxemburg thus said it will only cooperate if Switzerland  cooperated, whilst Switzerland only wants to cooperate after Austria and all the others in the EU already cooperate (and have thus fallen away as competitors for the ‘tax haven’ position!).

So Switzerland agreed to nothing (because it wasn’t there), Ireland and the other small ones pushed for ‘agreements’ by the G20 or, better still, all the countries in the whole world, knowing full well that is not going to happen anytime soon. Indeed, Ireland’s defence against the accusation that it is being used as a tax loophole country is that its legislation (and hence its loopholes) have not changed for a long time! The Netherlands kept quiet, but silently happy that the issue of post-box companies wasn’t even conspicuously raised.

Yet, the key thing a student of politics should pick up about yesterday’s meeting was the duplicity of the UK prime-minister David Cameron. Somewhat cleverly, he is protecting the tax haven that is the city of London by seemingly being a stalwart advocate of clamping down on the kind of tax evasion you see elsewhere. A bit like a pirate of the Caribbean railing against piracy elsewhere, meanwhile giving up small stuff to protect the big stuff.

What did David do? Just look at the outcomes and storylines he managed to secure! No mention in the final communiqué about Tobin taxes, which would really hurt London. No mention of a list of ‘financial piracy countries’ such as the havens that London makes money from. And a final declaration full of intentions that wouldn’t hurt London even if they happen. Just reflect on this beauty: “At the international level, the EU will play a key role in supporting and promoting the automatic exchange of information as the new international standard”. London has little to fear from exchange of information, so that one is fine. Indeed, ousting the banking secrecy of the small countries would help London, since it has no banking secrecy laws, which means that truly axing banking secrecy would take out the competitors to London! Here’s the other clincher: the summit advocates “ongoing efforts made in the G8, G20 and OECD to develop a global standard”. How nice, the G20 again, we know how useful declarations from that one will be….

What would really hurt London is fast decision making on closing down loopholes. So the real worry for London is that tax rules would be decided centrally for all EU members, which is of course what the commission wants. On that point of course, ‘sovereignty’ is the key excuse and impassable barrier.

So well done, David Cameron! London might now almost forgive you for that referendum on EU membership that would truly threaten its position. Or was that merely a higher-order ruse to be able to keep the issue of tax sovereignty off the EU agenda? That would truly be political brilliance.

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9 Responses to Tax games in Europe

  1. derrida derider says:

    It is absolutely true that negotiations over complex matters will stall endlesly if any one of the parties wants them to. And really the recalcitrant party does not have to be all that skilful to have the whole thing dissolve is such a haze that few people can actually put their finger on who caused the dissolution. Its quite easy to avoid being seen as the hold-out if that’s what you want (it never worried Maggie Thatcher, for example).

    I know – I’ve been involved in too many Commonwealth-State negotiations, occasionally as part of the recalcitrant party. I can only imagine the horror of being a Brussels bureaucrat tied up in these ones.

  2. conrad says:

    Some of the big guys could do unilateral stuff if they wanted to, as the US did to Swiss banks a while ago (e.g., http://uk.reuters.com/article/2013/05/22/swiss-tax-fines-idUKL6N0E32SV20130522). It wouldn’t surprise me if they start extending that or similar to others soon.

    • Paul frijters says:

      Absolutely. National governments will react as best they can, including changes in their tax-mix from things that can be hidden easily to those that can’t. More tax on consumption, land, property, and people, less on capital and profit.

    • Patrick says:

      Been there, done that, copied it already.

      Paul is right, and he correctly highlights some of the many reasons to suspect that Steven Bradbury has no idea what he’s talking about. The fabled ‘base erosion and profits shifting’ (which as the Australian Treasury clearly recognises (PDF) is nothing to do with tax evasion) is not going anywhere this century.

      Actual tax evasion, however, (hint: not that much of it occurs in Ireland or the Netherlands) is, I think, going to reduce significantly over the next 10 years as a result of mandatory reporting regimes such as FATCA.

  3. Bill Posters says:

    The big, big legal weapon that no-one is talking about (yet) is the derecognition of tax haven entities. When this gets on the table we’ll know that the taxing nations have run out of patience.

    • Patrick says:

      Yes, I can just see it now. France will invade Monaco and Andorra, the Germans will take Belgium and Austria, New York will invade Delaware whilst California invades Nevada…

      • Tel says:

        Like this?

        http://abcnews.go.com/International/story?id=2921407&page=1

        Actually France has historically had a number of goes at invading Switzerland and failed. Recently they successfully invaded Mali, but not because of a tax haven, mostly because they needed to go halfway round the world to find someone weak enough that the French troops didn’t surrender.

        … tax evasion is the big cliff in terms of the future of the EU project …

        Hmmm, that would make sense if the EU was about creating a supra-national government and a supra-national currency, but (presuming the advertising brochure was correct) the EU has nothing to do with those things. It is about fostering a trade union, on a voluntary basis.

        Tax is something for national governments to concern themselves with.

        • Bill Posters says:

          Nah, like a statutory presumption against legal personality for bodies incorporated in tax havens.

          It would of course be one way, so that they could be sued but could not sue.

  4. The government has taken a number of steps in order to crack down on offshore tax evasion since 2008. This has included signing a number of “tax information exchange agreements” with partner governments, such as the British Virgin Islands. The 2013 federal budget also included a new program to stop international tax evasion. Under the program, Canadians who tip off the CRA to an evader could get a financial reward. If the CRA ends up collecting more than $100,000 based on the information provided, the tipster could enjoy a cut of between 5 and 15 percent, depending on how good the information was.

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