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. Continue reading