STOP Fifty Shades of Tax Dodging The EU’s role in supporting an unjust global tax system A report coordinated by Eurodad Acknowledgements This report was coordinated by Eurodad with contributions from civil society organisations in countries across Europe including: 11.11.11 (Belgium); Centre national de coopération au développement (CNCD-11.11.11) (Belgium); Glopolis (Czech Republic); IBIS (Denmark); Demnet (Hungary); CCFD-Terre Solidaire (France); Oxfam France (France); World Economy, Ecology & Development (WEED) (Germany); Global Policy Forum (Germany); Debt and Development Coalition Ireland (DDCI) (Ireland); Re:Common (Italy); the Centre for Research on Multinational Corporations (SOMO) (Netherlands); Instytut Globalnej Odpowiedzialnosci (Poland); InspirAction (Spain); Oxfam Intermón (Spain); Ekvilib Institute (Slovenia); Forum Syd (Sweden); Christian Aid (UK). A special acknowledgement goes to doctoral researcher Martin Hearson of the London School of Economics and Political Science (LSE) for providing data and valuable input on the sections related to tax treaties. Each chapter was written by – and is the responsibility of – the nationally-based partners in the project, and does not reflect the views of the rest of the project partners. The chapter on Luxembourg was written by – and is the responsibility of – Eurodad. For more information, contact Eurodad: Rue d’Edimbourg, 18 – 26 Mundo B building (3rd floor) 1050 Ixelles, Brussels, Belgium tel: +32 (0) 2 894 46 40 e-fax: +32 (0) 2 791 98 09 www.eurodad.org Design and artwork: James Adams Copy editing: Vicky Anning, Julia Ravenscroft and Zala Zbogar. The authors believe that all of the details in this report are factually accurate as of 5 October 2015. The report has been produced with the financial assistance of the European Union and Norad. The contents of this publication are the sole responsibility of Eurodad, and the authors of this report and can in no way be taken to reflect the views of the funders. Contents Glossary 4 Executive summary 6 Global overview 8 Report findings 28 Recommendations 38 European Parliament 39 European Commission 42 Belgium 46 Czech Republic 50 Denmark 53 France 57 Germany 61 Hungary 65 Ireland 70 Italy 74 Luxembourg 78 The Netherlands 82 Poland 86 Slovenia 89 Spain 92 Sweden 95 United Kingdom 98 Appendix 102 References 104 4 • Fifty Shades of Tax Dodging Glossary Advance Pricing Agreement (APA) See under Tax ruling. taxes through tax treaties, nor do they address the general division of taxing rights between nations. Anti-Money Laundering Directive (AMLD) An EU directive regulating issues related to money Harmful tax practices laundering and terrorist financing, including public access to Harmful tax practices are policies that have negative information about the beneficial owners of companies, trusts spillover effects on taxation in other countries, such as and similar legal structures. The 4th Anti-Money Laundering eroding tax bases or distorting investments. Directive (Directive 2015/849) was adopted in May 2015. Illicit financial flows Automatic Exchange of Information There are two definitions of illicit financial flows. It can refer A system whereby relevant information about the wealth to unrecorded private financial outflows involving capital that and income of a taxpayer – individual or company – is is illegally earned, transferred or used. In a broader sense, automatically passed by the country where the income is illicit financial flows can also be used to describe artificial earned to the taxpayer’s country of residence. As a result, arrangements that have been put in place with the purpose the tax authority of a tax payer’s country of residence of circumventing the law or its spirit. can check its tax records to verify that the tax-payer has LuxLeaks accurately reported their foreign source income. The LuxLeaks (or Luxembourg Leaks) scandal surfaced Base Erosion and Profit Shifting (BEPS) in November 2014 when the International Consortium This term is used to describe the shifting of taxable income of Investigative Journalists (ICIJ) exposed several out of countries where the income was earned, usually to hundred secret tax rulings from Luxembourg, which had zero – or low-tax countries, which results in ‘erosion’ of the been leaked by Antoine Deltour, a former employee of tax base of the countries affected, and therefore reduces PricewaterhouseCoopers (PwC). The LuxLeaks dossier their revenues (see also below under ‘Transfer mispricing’). documented how hundreds of multinational corporations were using the system in Luxembourg to lower their tax Beneficial ownership rates, in some cases to less than 1 per cent. A legal term used to describe anyone who has the benefit of ownership of an asset (for example, bank account, trust, Offshore jurisdictions or centres property) and yet nominally does not own the asset because Usually known as low-tax jurisdictions specialising in it is registered under another name. providing corporate and commercial services to non- resident offshore companies and individuals, and for the Common Consolidated Corporate Tax Base (CCCTB) investment of offshore funds. This is often combined with a CCCTB is a proposal that was first launched by the European certain degree of secrecy. ‘Offshore’ can be used as another Commission in 2011. It entails a common EU system word for tax havens or secrecy jurisdictions. for calculating the profits of multinational corporations operating in the EU and dividing this profit among the EU Patent box Member States based on a formula to assess the level of A ‘patent box’ or ‘innovation box’ is a special tax regime that business activity in each country. The proposal does not includes tax exemptions for activities related to research specify what tax rate the Member States should apply to and innovation. These regimes have often been labelled a the profit, but simply allocates the profit and leaves it to the type of ‘harmful tax practice’, since they have been used Member State to decide what tax to apply. by multinational corporations to avoid taxation by shifting profits out of the countries where they do business and into a Controlled Foreign Corporation (CFC) rules patent box in a foreign country, where the profits are taxed at CFC rules allow countries to limit profit shifting by very low levels or not at all. multinational corporations by requesting that the company reports on profits made in other jurisdictions where it Profit shifting See ‘Base erosion and profit shifting’. ‘controls’ another corporate structure. There are many Public country by country reporting (CBCR) different types of CFC rules with different definitions Country by country reporting would require multinational regarding which kind of jurisdictions and incomes are covered. companies to provide a breakdown of profits earned, taxes General Anti-Avoidance Rule (GAAR) owed and taxes paid, as well as an overview of their economic GAAR refers to a broad set of different types of rules aimed activity in every country where they have subsidiaries, at limiting tax avoidance by multinational corporations in including offshore jurisdictions. At a minimum, it would cases where the abuse of tax rules has been detected. include disclosure of the following information by each Whereas GAARs can in some cases be used to prevent transnational corporation in its annual financial statement: tax avoidance by allowing tax administrations to deny • A global overview of the corporation (or group): The name multinational corporations tax exemptions, they do not of each country where it operates and the names of all its address the general problem of lowering of withholding subsidiary companies trading in each country of operation. Fifty Shades of Tax Dodging • 5 • The financial performance of the group in every country or non-binging. Tax rulings cover a broad set of written where it operates, making the distinction between sales statements, many of which are uncontroversial. One type of within the group and to other companies, including profits, ruling is the so-called advance pricing agreements (APAs), sales and purchases. which are used by multinational corporations to get approval of their transfer pricing methods. Tax rulings have attracted • The number of employees in each country where the increasing amounts of attention since they have been company operates. known to be used by multinational corporations to obtain • The assets: All the property the company owns in that legal certainty for tax avoidance practices. The documents country, its value and cost to maintain. exposed in the LuxLeaks scandal were APAs. • Tax information i.e. full details of the amounts owed and Tax treaty actually paid for each specific tax. A legal agreement between jurisdictions to determine the cross-border tax regulation and means of cooperation Special purpose entity (SPE) between the two jurisdictions. Tax treaties often revolve Special purpose entities, in some countries known as special around questions about which of the jurisdictions has the purpose vehicles or special financial institutions, are legal right to tax cross-border activities and at what rate. Tax entities constructed to fulfil a narrow and specific purpose. treaties can also include provisions for the exchange of tax Special purpose entities are used to channel funds to and information between the jurisdictions but for the purpose of from third countries and are commonly established in this report, treaties that only relate to information exchange countries