International Policy Digest

Business /19 Dec 2019
12.19.19

The Role of the ‘Usual Suspects’ in Blocking European Tax Reform

In the wake of the Panama Papers, the European Union (EU) proposed new reporting rules to crack down on tax avoidance and evasion. This was seen by policy analysts as a first step in the battle of regaining control of tax autonomy in the Single Market.

Since then, multinationals have been able to control legal challenges through the power of the purse by lobbying member state governments to keep in place tax loopholes and incentives for business interests.

At a meeting of EU industrial ministers in Brussels, the “usual suspects” Luxembourg, Cyprus, Ireland, and Malta blocked a draft bill that would force multinational companies to make public where they pay taxes and make profits. This meeting was seen as a chance to address political grievances from political factions in member states that are in favor of an EU progressive tax system.

The action by the “usual suspects” represents international interests in favor of maintaining the status quo of tax havens in Europe. In essence, Luxembourg, with the help of its allies, was able to oppose the bill by obtaining the qualified majority needed in EU legislative proceedings.

In accomplishing their task, the “usual suspects” managed to halt talks within the European Parliament to compromise on a new legal text. Luxembourg’s political motivation to stop the bill was seen as a distraction from ongoing global talks on digital taxation.

Without strong legal texts from the EU to combat aggressive actions from non-EU countries, non-EU governments will be able to exacerbate political division between member states.

The “usual suspects” also argued that the planning of the draft bill should not be handled by industry and employment chiefs who focus on policies of the EU internal market and industry but should be handled by finance ministers.

By keeping the discussion in the purview of finance ministers, the ability for the EU Director General (DG) of Competition to address the negative impact of multinational firms on the implementation of unfair monopolistic practices is limited.

The inability of member states to create a comprehensive bill in favor of transparent practices in the public sphere represents another example of how governments place interests of companies before those of people.

Battle for Power in controlling Tax and Accounting Practices

There is a legal grey area when it comes to controlling tax and accounting practices in the EU. To push his anti-tax agenda and assert power, Luxembourg’s Finance Minister, Pierre Gramegna, rejected the bill proposed by the EU Commission on new reporting rules on the grounds that such reform is legally related to tax and, therefore, should be handled by ministers of finance.

Critics point at Gramegna’s actions as a power grab by finance ministries to dismantle the tax system and accounting practices in favor of multinationals. This becomes evident in the response by finance ministers to draft a comprehensive bill on the grounds that a consensus on legal texts cannot be reached.

The real aim of the “usual suspects” is to limit the control of the DG of Competition to provide member states greater legal precedent in the incentivization of multinationals through non-transparency in tax and accounting practices. At the same time, this strategy defines competition not as companies’ control over the market but as the member states’ ability to self-regulate tax and accounting practices. Above and beyond, it allows finance ministers of member states to dictate legislation and legal practices in favor of companies’ political interests.

This has resulted in aggressive tax planning that is harmful for competition and benefits countries with a “race to the bottom” in tax and accounting practices. To address this problem, the European Commission has proposed a public country-by-country reporting directive (CBCR) to provide a mechanism for greater transparency to curb tax evasion and avoidance.

This directive is designed to limit the ability of multinational and lobbying interests to hide their companies’ earnings in tax loopholes and accounting practices. The CBCR has been met by opposition from the following member states: Luxembourg, Cyprus, the Czech Republic, Estonia, Hungary, Ireland, Latvia, Malta, Slovenia, and Sweden.

The resistance to provide transparency in tax and accounting practices will hinder economic growth and political equity. For EU member states to meet the demands from democracies and their constituencies, every actor in Europe must be held accountable.

The inability of member states to enact meaningful tax and accounting reform is perplexing and counterproductive. At the same time, it demonstrates the economic power of multinationals over member states’ politicians and governments.

This is a global problem that needs a global solution. The creation of defined rules for reporting of tax and accounting practices would give the EU a competitive advantage in ethical and business interests.

As of right now, it is business as usual. To address these problems, Europe needs greater economic and fiscal integration to withstand the pressure from business interests that want to dismantle the European economy.