Tax avoidance inching up EU agenda as trillion euro may be slipping though net

When European finance ministers gather this week in Brussels, discussion won’t purely focus on Europe’s response to the latest phase of the financial crisis. Tax is expected to dominate tomorrow’s meeting of finance ministers.

The tax arrangements of companies and individuals has crept on to the European political agenda in recent months, amid growing public concern about tax avoidance.

While the practice has been going on for years, the issue emerged into the public domain in earnest last year, when the tax practices of some of the world's best-known corporate brands, including Starbucks, Google and Amazon, were exposed. The revelation that Starbucks had paid £8.6 million in UK tax on revenues of more than £3 billion shocked consumers.

'Immoral' operations
A House of Commons committee accused companies such as Starbucks, Google and Amazon of "immoral" use of secretive jurisdictions, royalty arrangements and complex company structures to avoid paying tax in Britain.

The issue was given renewed urgency with the publication of a major study by the International Consortium of Investigative Journalists of offshore tax havens in April.

The biggest-ever investigation of its kind, the cross-border project probed about 120,000 offshore companies and trusts, as well as a similar number of individuals across the world, revealing a complex global maze of personal and corporate tax planning and avoidance.

Luxembourg’s announcement last month that it is to relax its bank secrecy laws brought the issue of personal tax arrangements into the spotlight, heightening the pressure on Austria to follow suit.

The move followed the revelation that French budget minister Jerome Cahuzac had lied about an offshore Swiss bank account. Allegations of tax evasion against Uli Hoeness, president of Bayern Munich football club, also intensified pressure on EU ministers to examine the issue.

As a result, Brussels has been on a major policy drive, with EU tax commissioner Algirdis Šemeta calling for “ambitious action” on tax evasion and avoidance.

European Council president Herman Van Rompuy announced last month that the issue will lead the agenda at next week's summit of EU leaders in Brussels, while finance ministers will discuss the issue this week.

This also has implications for the Irish presidency of the council. Tax has moved centre stage in terms of the presidency’s agenda, with Irish officials tasked with advancing EU policy on tax evasion and fraud.

Ireland exposed
The new-found prominence of tax havens and corporate tax evasion on the EU agenda is perhaps not an ideal turn of events for the Irish presidency. Ireland's status as one of the world's largest hedge fund domiciles, as well as its low corporate tax rate, is contentious.

Irish officials insist Ireland is fully transparent regarding tax policy, while the issue of national corporate rates is a separate issue that falls under the realm of national law.

Nonetheless, the prospect of Ireland's Minister for Finance chairing an EU meeting on tax evasion may be seen at best as ironic, at worst as hypocritical by many in Europe.

A letter sent by the Irish presidency to finance ministers ahead of this week’s meeting stresses the need for a “joint commitment” in combating tax fraud and evasion.

The letter, signed by Michael Noonan and Mr Šemeta, outlines seven key areas for discussion including: the revised savings tax directive proposal, a key piece of EU legislation which sets out rules on the sharing of information on interest gained on savings between member states; and agreement on the new VAT anti-fraud package, which has been a key focus for Irish officials.

The letter’s suggestion that the automatic exchange of information between countries could also be extended to a broader range of income and capital payments, could prove particularly significant.

Any decision to extend the current disclosure system to other income such as capital gains or dividends, for example, could have implications for Ireland’s funds industry.

Strength of ambition
Despite the strong rhetoric about tackling tax evasion, the significance will lie in the ambition or otherwise of the proposals, though the recent decision by the UK, France, Germany, Italy and Spain to start sharing information is indicative of the political will behind the issue.

With Luxembourg changing its stance, pressure will be on Austria to relax its bank secrecy laws. While Austrian finance minister Maria Fekter has up to now been staunchly against a move, vowing to defend what is seen as a closely guarded right, there were indications from Vienna this week that the stance may be softening. While European citizens are bearing the brunt of significant budgetary cuts, the fact wealthy corporations and individuals are avoiding tax payments throughout the European Union is a serious political issue.

Escaping funds
Mr Van Rompuy said last month that about one trillion euro is lost in EU member states because of tax evasion and tax avoidance each year. While pledging to fight the problem of tax evasion may seem like an easy way for politicians to score points with the public, turning the spotlight on individual states' tax regimes may open up uncomfortable moral questions for countries, including Ireland.

It also skirts dangerously close to the issue of corporate tax rates, something that has successfully stayed off the political agenda over the past year.

As Ireland prepares to exit the bailout, it will be hoping that any difficult questions about the country’s status as a financial services centre and location for inward investment will remain off the agenda, as it makes the return to private market funding next year.