Tax havens cost the European Community EUR 170 billion a year

EU Member States lose EUR 170 billion a year due to tax avoidance practices exercised by the wealthiest citizens and multinational corporations operating in the EU.

During the 50th Global Economic Forum in Davos, findings of a report on EU tax havens, drawn up jointly by the Polish Economic Institute (PIE) and Bank Gospodarstwa Krajowego (BGK), provided grounds for a discussion at the Polish House.

The discussion was attended by Polish Prime Minister Mateusz Morawiecki, French Minister of Finance Bruno Le Maire, and OECD Secretary-General Jose Angel Gurria, with Piotr Arak, Director of the Polish Economic Institute, acting as the moderator. The countries worst-hit by tax avoidance include Germany (losing 29% of its potential tax revenue, corresponding to EUR 18 billion) and France (24%, i.e. EUR 11 billion).

The losses arising from cross-border tax avoidance within the last seven years clearly reflect the scale of EU tax havens. Their aggregated sum exceed by one-fourth the entire EU budget for 2014-2020 set at EUR 960 billion.

According to Le Maire, whether this problem is solved once and for all depends not only on measures taken by individual EU Member States but also on their concerted effort. The French Government has struck a preliminary deal with the USA regarding a digital tax impacting, inter alia, the US leading tech companies (Google, Amazon, Facebook, Apple). France has made a concession to avoid the outbreak of tariff war, postponing the tax payment from April to December 2020.

EU companies transfer their profits from the countries of their operations to other EU Member States due to less stringent tax systems. As revealed by the PIE and BGK report, the countries which benefit most from this artificial profit shifting process and are regarded by the European Commission as EU tax havens, include Belgium, Cyprus, the Netherlands, Ireland, Luxembourg and Malta. In 2016, the Polish State Treasury lost 11% of the total CIT revenue (corresponding to approx. PLN 3-4 billion) due to profit transfers abroad.

Legal regulations which are less stringent encourage artificial profit shifting. In addition, such countries act as intermediaries in the process of transferring funds further to traditional tax havens such as the Cayman Islands.

To effectively bring to justice the wealthiest citizens evading taxes, OECD is applying the system of automatic exchange of information for tax purposes covering a hundred countries. This facilitated the processing of reports on 50 million bank accounts where a total of EUR 5 trillion was deposited (which is roughly a third of the value of American economy). This way EUR 102 billion due tax has been recovered. By the end of 2020, OECD is planning to announce its recommendations for modifying international tax law.

Only in the EU, the aforementioned EUR 170 billion of loss per year includes EUR 60 billion on account of profits shifted to tax havens by corporations, EUR 46 billion on account of assets shifted abroad by wealthy citizens, and EUR 64 billion loss on frauds and other unlawful activities related to VAT payments in intra-EU transactions.

The Polish Prime Minister also stressed that the declared VAT gap value in all Member States (EUR 150 billion), or loss on tax evasion by corporation or wealthy citizens (EUR 160 billion), has been nearly equal to the annual EU budget.

The report by PIE and BGK lists suggestions for solving the tax evasion issue. A ‘blacklist’ of Member States considered to be internal tax havens and a system of sanctions imposed by the European Commission are only a few of the ideas. Setting a minimum CIT rate for the entire EU might also help.