By Vasiliki Koukoulioti, Ph.D. researcher at Queen Mary University of London
On 7 October, the European Parliament adopted by a very large majority (506 votes in favour, 81 against and 99 abstentions) the draft resolution submitted by the Committee on Economic and Monetary Affairs calling for an in-depth reform of European policy to combat harmful tax practices.
In this non-binding plenary resolution, prepared by Aurore Lalucq (S&D, FR), the Parliament outlined its priorities for reforming EU policy for the purpose of intensifying its fight against abuse of the tax system by toughening the tools it uses to combat damaging tax practices.
Proposals to fix the EU policy on harmful tax practices
In the resolution, members of the European Parliament (MEPs) made several proposals to quickly improve policy on harmful tax practices.
One proposal was to introduce a definition of a “minimum level of economic substance”. This would establish a threshold of economic activity within a country below which a company cannot be considered to be genuinely established there.
Another proposal was to ask the European Commission to issue guidelines on how to design fair and transparent tax incentives with fewer risks of distorting the EU’s Single Market. A related proposal would demand that the Commission assesses the effectiveness of patent boxes and other intellectual property (IP) regimes.
MEPs also proposed using the country-specific recommendations issued each year as part of the European Semester to tackle aggressive tax planning.
Reform and replacement of the EU’s key tool to fight harmful tax practices
Most importantly, MEPs called for a reform of the Code of Conduct on Business Taxation.
The 1997 Code of Conduct is the EU’s main tool to combat harmful tax practices and has become seriously outdated in the context of growing digitisation and globalisation. In addition, the EU’s code of conduct group on business taxation, a forum within which EU countries monitor one another’s tax rules, and which also lays the groundwork for the EU tax haven blacklist, uses outdated criteria to classify a tax practice as harmful.
Especially, the focus of the reform should be on the criteria, governance and scope of the Code of Conduct. The currently narrow focus of the Code of Conduct on preferential tax regimes disregards other systems that present new challenges. Hence, the resolution suggests the introduction of broader criteria and scope, including an effective tax rate criterion in line with the internationally agreed minimum effective tax rate, as well as clear economic substance requirements. In addition, governance reforms should go towards the direction of a more transparent and efficient decision-making system, where the Code’s recommendations are legally binding.
Lastly, the MEPs proposed that the current Code of Conduct should be eventually replaced by FATAL (the Framework on Aggressive Tax Arrangements and Low-Rates), which would include a number of effective weapons to fight tax crimes. Such an approach might involve sharper criteria for defining what constitutes a tax haven, such as a minimum effective tax rate and a minimum level of economic substance, as well as preferential personal income tax regimes designed to attract highly mobile wealthy individuals under the scope of the instrument.
Tax competition and tax scandals
The resolution does not consider tax competition in itself problematic, but it acknowledges that it has evolved in novel ways over the last 20 years, while the EU mechanisms have not kept up with more innovative tax schemes. As a result, member states are deprived of precious tax revenues, unfair tax competition practices proliferate, and citizens’ trust is undermined.
A European Parliament press office statement noted that “conservative estimates” by the OECD indicated that base erosion and profit shifting (BEPS) practices currently cost governments an amount equal to around 4% to 10% of global corporate income tax revenues, or EUR 84 billion to 202 billion (USD 97 billion to 234 billion) annually.
The timing of the resolution could not have been more topical, following the release of the Pandora Papers earlier this month. These revelations are the latest in a series of tax scandals, including Lux Leaks, Panama Papers, and Paradise Papers, involving multinational corporations and net worth individuals. The Parliament’s resolution provides a concrete answer to the urgency of “implementing common European rules to end tax dumping between member states, while fighting tax havens elsewhere”, as Lalucq said.
In a related development, a few days before the adoption of the resolution the Council of the EU updated the EU list of non-cooperative jurisdictions for tax purposes, removing Anguilla, Dominica, and Seychelles. This decision has been condemned by MEPs and Oxfam who described the move as wrong and “grotesque” after the Pandora Papers revelations.
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