Story of change: MEPs advance tax justice

How can we tolerate that the European Union loses around € 1 trillion a year in taxes?

Why should poor countries keep losing US$950 billion in illicit financial flows a year, whilst knowing that this is seven times the annual amount they receive in aid?

When will we have the political will to stop wealthy individuals stashing between USD 21-32 trillion in tax havens- the equivalent of the US and Japanese GDP combined-?

Who will tell companies like ExxonMobil that they cannot make over €5 billion in Spain and still get a tax refund of EUR 1.5 million? Should we accept that Google only has to pay 3.2% in taxes on all the profits it made outside the USA, including the European Union?

Nowadays some multinationals and wealthy individuals manage to pay less tax than they should. Tax dodging is possible because of tax loopholes, because wealthy individuals and companies have the financial means to set up tax avoidance operations, and because tax havens exist and create harmful competition, undermining other countries’ capacity to collect taxes. Tax dodging affects us all because it undermines tax revenues which are necessary to fund public services such as health and education.

The problem is worldwide: it affects us in Europe and the average worker in a poor country. Action adopted by the EU to reduce tax dodging will have a big impact both in Europe and in developing countries because EU regulation does affect the behavior of European companies at the global level and because EU decisions can shape the global political agenda. In fact, the EU is bound by the Lisbon Treaty to tackle this problem, and to ensure that all EU policies are coherent with its development objectives, a concept known as Policy Coherence for Development.

One important piece of the puzzle of preventing tax dodging is greater transparency about who owns what and who pays taxes, how much and where. The more transparent the tax system, the more difficult it will be for those cheating to remain unpunished. A better informed public is better positioned to demand accountability and ask the government to adopt policies that address their concerns. For example, transparency would provoke people to demand answers to difficult questions such as why companies have subsidiaries in tax havens even when they do not conduct any business in them.

The European Union and especially the European Parliament is at the forefront of this battle. As explained below, the European Parliament has heard the voices of citizens from Europe and developing countries that claim for greater tax justice, and to pass legislation that will increase the transparency of many multinational companies about where they work and pay their taxes.

Nowadays, it is difficult to have a detailed picture of what multinationals do. They publish annual reports about their global performance but there is no obligation to publish information about each country where they work. For example, what and where are the companies’ subsidiaries? How many people do these subsidiaries employ? How much profit or loss do the subsidiaries make and how much tax do they pay? Do these companies pay taxes at the source, meaning the places they are based? Without this basic information available on a country-by-country basis, it is not possible to know if these companies pay their fair amount of taxes in the countries where their sources of income are, and real business is conducted. In other words, without this information you cannot know if the fact that Google only paid 3.2% taxes on its profits made outside the USA has come at the expense of tax payers in Europe or other countries.

What has the EU done about it?

The European Commission took the first step at the end of 2011 by proposing that multinational companies in the extractive and forestry sectors should publish what they pay to governments in exchange for the extraction of these natural resources. The idea was to increase multinationals’ responsibility and governments’ accountability, especially in developing countries, where natural resources represent an important source of wealth.
In 2012, the European Parliament took a much more ambitious position, eliminating unnecessary exemptions undermining the law and calling for this proposal to be extended to other sectors like banking, telecommunications and construction companies. It did not listen to the business lobbyists who maintained that increased transparency would cost so much that it would force some companies into bankruptcy, or at least make them uncompetitive against non-EU rivals.

Their argument about competitiveness was undermined by the recognition that US, Chinese or Brazilian companies would also have to comply with the law as long as they are listed in European stock exchanges. The position of the Parliament was not fully captured in the final text, because Member States wanted a less ambitious proposal and it was a matter of compromise. But the European Parliament played a key role in strengthening the original proposal and helped to start a very timely debate about the transparency of multinational companies at the European level.
The debate also helped to crystalize another even more important step forward.

In 2013, the Parliament successfully introduced strict transparency requirements for banks in a Directive on banking regulation. This means that soon, banks will have to disclose what they pay to the governments of each country where they are active. They will also have to document how many people they employ, how much profit they make, the taxes they pay and the assets they own in each country. Convinced of the importance of fighting unjust tax practices and aware of the importance of the banking sector as an agent and an enabler of tax dodging, Parliamentarians convinced Member States to support this measure, which took the financial lobby by surprise.

The results?

As of 2015, anyone will be able to find information about the taxes paid by European based or listed multinational companies in the extractive, logging and banking sectors in every country where they operate. More importantly, we will be able to look at the whole international structure of European banks. For example, we would be able to see whether a large proportion of their activities are taking place in tax havens, and ask questions about whether they are helping tax dodgers to hide their money.

The lesson?

The European Parliament can make crucial and effective decisions that will discourage tax dodging and begin to restore genuine justice to systems that have long been corrupted by the power of money. The European Institutions are often accused of being distant from us as European citizens, but this shows they care about the wellbeing of European citizens and their counterparts in developing countries. When citizens are affected, they can make decisions that matter to us and that contribute to promote equality both within Europe and across the world.
The future? Only you can tell.

European elections will be held in May and your vote will make a difference for the next five years. The risk is to have a high number of far-right or left populist and nationalist parties elected (sources mention up to 30%) which do not have social issues at the core of their agendas. This will make consensus building more difficult and hinder progress on tax justice and transparency more difficult to achieve. You have the right to decide who will represent you in Europe- who would you like it to be?