Wealth havens - taxing for society

December 12, 2017

 American Samoa, Bahrain, Barbados, Grenada, Guam, Macau, the Marshall Islands, Mongolia, Namibia, Palau, Panama, Samoa, South Korea, St Lucia, Trinidad & Tobago, Tunisia and the UAE: after one year of tedious work, the European Council’s Code of Conduct (COC) has just released  a blacklist of seventeen non-European countries that have been refusing to cooperate with the battle against tax havens. French minister for economic affairs Bruno Le Maire declared  "We have adopted at EU level a list of states which are not doing enough to fight tax evasion" :tax evasion occurs when companies or individuals place their money in order to fructify it illegally.

 

Tax evasion is extremely costly for governments : indeed, according to Jose-Manuel Barroso, former President of the European Commission, a trillion euros of revenue are lost each year within the European Union because of tax evasion -  depriving already starved public budgets of money. It is essential that governments tackle the problem of foregone revenues: indeed, this amount of money is greater than the total health expenses in one year in Europe. Countries have been blacklisted because they do not respect the three criteria set by the European Commission in 2016, which are the respect of the automatic exchange of information (AEOI) put in place by the Organisation for Economic Co-operation and Development (OECD), the strict rules for transnational corporations concerning tax evasion and finally the restriction for countries to help offshore companies settle in their national territory. In 2015, the OECD decided to implement the BEPS programme (Base Erosion and Profit Shifting), which consists in fifteen actions that give governments domestic and international tools to tackle profit shifting so that they can make sure that taxes are levied where the production takes place. It has been a significant improvement in tackling profit shifting as not only did it make this issue known to a wider public, but it also emphasized the supervision of transnational corporations’ fiscal activities.

 

However, a recurring problem remains : these actions are not legally binding so the programmes rely entirely upon every country and firm's goodwill to co-operate. However surprising it may appear, being on the blacklist set by the European Commission is actually not a real threat for the countries: indeed, for the moment the named countries do not face any consequences at all. Regarding game theory in economics, although every country would be better off if all of them applied and respected the rules on tax evasion, this cannot be the case for the moment as they do not have to abide by the rules, giving rise to free rider behaviours. Indeed, as every country thinks about its interest first, no initiative is taken. Yet tax evasion can only be solved collectively and this is why the European Commission is urging European and non-European states to collaborate. Pierre Moscovici, the European commissioner for tax, admits that not legally-binding action is not the solution but he assures that this is only the beginning of a long fight against tax havens. Also, it might seem that some countries are missing from the blacklist: indeed, Ireland, Luxembourg, the Netherlands and Malta do not figure on the list, whereas the Paradise Papers scandal showed that they did not have fair tax rules. This is because European countries are supposed to respect European standards already put in place concerning tax evasion. In this context the European Commission has dealt with the Irish government that had made a special agreement with Apple and has just managed to ensure that Ireland will be receiving the 13 billion euros in back taxes from the company as from January 2018.

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