The extraordinary release of the Panama Papers exposes the darker side of corporate and personal tax on a colossal scale. Anyone who has examined the twin problems of aggressive tax avoidance and evasion would no doubt have been aware that this was happening, but few would have guessed how widespread it was.
By calling them the Panama Papers we underplay the reality; this was a leak from just one firm, in one tax haven. This wasn’t an exposé of an entire country’s tax practices; it was a small leak out of a much larger world. In the same way that the Lux Leaks scandal of 2014 triggered a push to reform attitudes to tax havens, we must use the Panama Papers to drive reform.
Perhaps the most frustrating element of the Panama Papers is that all governments know about these practices. We have heard David Cameron tell us that he is championing the fight against tax evasion in the UK, while his Conservative MEPs vote down all attempts at reform on a European level. But it is only by working on a global scale that we can possibly begin to close down these abhorrent practices.
Following the Lux Leaks revelations, which revealed the existence of unfair tax practices and sweetheart deals between some EU governments and multinationals, I co-wrote a report with Czech centre-right MEP Ludek Niedermayer that considered how to tackle aggressive tax avoidance and evasion by multinational corporations. That report was approved by the European Parliament in December, giving civil servants in the European Commission a year to turn our recommendations into formal proposals for new EU laws. The Panama Papers can surely only add emphasis to why those laws must be as stringent as possible, and introduced without delay.
One of our proposals was to introduce public "country-by-country reporting" for all multinational firms. By making such firms report publicly where they make their money and where they pay their taxes, we can put pressure on them to abandon illegal or immoral tax practices, or face serious reputational damage.
The Commission is expected to announce its response to this proposal on Tuesday, April 12. While this is encouraging there are reports that suggest that it is only intending to apply the rules to companies with a turnover that exceeds €750m. This would mean that only 10-15% of the richest companies operating in Europe would be affected, which is simply not good enough.
Perhaps even more worryingly, there is talk suggesting that the proposals will only require disclosure of financial activities broken down by each EU country. Outside of the EU, companies could then lump all of their profits and taxes together into a single "Rest of World" category. This quite blatantly misses the point, as there would be no way of distinguishing between legitimate business carried out in Brazil, say, as opposed to a wholly artificial structure in Panama set up for the sole purpose of avoiding tax.
Those who are reluctant to see change will argue that it is impossible to pass such meaningful reform within the EU. Yet the Commission’s newly announced VAT Action Plan showed how the EU can both tackle massive tax fraud and pass meaningful reform to end immoral policies such as the "tampon tax".
The package proposes to reduce cross-border VAT fraud by up to 80%. That would save the treasuries of Europe as much as €40bn every year, at a time when voters are suffering from punishing austerity measures. In addition to combating fraud the EU is also willing to hand back some powers to member states on VAT, meaning national governments will be able to remove VAT on items like sanitary products and renewable energy measures.
It is examples like this that show the EU is acting in the best interests of the people of Europe. By giving back these powers, it is enabling national parliaments to reform unfair tax laws.
We have seen that Europe has both the ability and the power to enact meaningful tax reform. It is now time for the Commission and the Council to step up to the plate and push forward with the decisive action on tax evasion and aggressive tax avoidance that people in Europe and beyond desperately need.
This article was originally published on EuroInsight on 11/04/2016