Again and again, major European multinationals manage to take advantage of loopholes in national tax laws. They outwit the tax authorities in different EU countries by moving around their capital and profits, and not just to faraway tax havens in the Caribbean, but to nearby countries like Belgium, Ireland and the Netherlands.
Many EU governments are tired of watching this tax carousel and want to do something about it. With Europe in the grip of a recession, government debt is limiting many governments' options while aid packages for crisis-stricken countries are straining euro-zone budgets. Many European leaders now realize that EU countries will have to coordinate their tax policies more tightly if they hope to put an end to tax flight.
Nevertheless, there are strong national forces resisting change, as was evident at a meeting of EU finance ministers last time. Their goal was to adopt a guideline on the taxation of interest income, but Luxembourg and Austria refused to play along. As a result, tax flight is still possible with the help of anonymous foundations, life insurance policies and other income from capital.
The two countries did agree to EU negotiations over a tax treaty with Switzerland, San Marino, Andorra, Liechtenstein and Monaco. But they are still unwilling to give up their banking secrecy laws, and they also voted against the automatic exchange of data with other EU countries.
According to European Commission estimates, EU countries lose €1 trillion ($1.3 trillion) a year to tax evasion and avoidance.There was great outrage when Cyprus choked on its oversized banking sector, with EU leaders declaring the island's "business model" a failure. In reality, tax dumping is part of the core business of some EU countries.
Tough competition over the most favorable business tax has been raging for years. The average rate in the EU has dropped from 35.3 percent in the mid-1990s to 23.0 percent today, according to a recently released joint report by Eurostat, the European Union's statistics office, and the European Commission. Bulgaria has the most attractive business tax rate, 10 percent, while Ireland and Cyprus both have a rate of 12.5 percent. With a 15-percent business tax, Latvia and Lithuania also offer attractive investment conditions.
But official rates often say little about the true scope for tax trickery. In theory, companies pay a 35-percent tax in Malta, but a large number of discounts and rebates bring the real rate down to 5 percent.
Belgium has come up with a special instrument to attract companies. It allows countries to claim something on their tax returns that doesn't actually exist: interest on a company's equity capital.
This creates a large incentive for companies, to legally move large amounts of capital to Belgium, because declaring the capital there reduces their tax burden.an attractive place
The Netherlands is also attracting companies. The system there works like this: A company's main office establishes a Dutch offshore company. The main office then pays the Dutch company license fees, which are tax-exempt in the Netherlands. In this manner, the parent company reduces its profits in its home country and pays fewer taxes.
The Netherlands' attractions for foreign capital are reflected in the level of direct investment. In late 2012, the kingdom posted, according to Organization for Economic Cooperation and Development (OECD) figures, $3.5 trillion in foreign investments, of which only $573 billion flowed into the real economy, while the rest went to shell companies. There are an estimated 23,000 of these firms in the Netherlands.
There have been many attempts in the euro zone to structure business taxes fairly and uniformly. In 1998, the Austrian government placed the issue on the agenda of a meeting of EU finance ministers. "The differences in the tax systems of the member states are becoming increasingly important for investment decisions," an official noted at the time.
The introduction of the euro intensified this conflict. In the past, governments could improve competitiveness by devaluing their national currencies. Because this is no longer an option in the monetary union, the easiest way to improve a national economy's standing is by cutting taxes on companies.
There are different politicians in office now, but the arguments haven't changed. "There can be no lower limit or upper limit," says Luxembourg Finance Minister Luc Frieden. "Each country must decide for itself how much tax a company should pay. A certain amount of tax competition is necessary."
"I'm opposed to harmonization at a high level," says Austrian Finance Minister Maria Fekter. "I support tax competition. It's in the national interest to structure the tax system in such a way as to make a country more attractive to businesses."
And so the tax carousel keeps on turning. Even a crisis-ridden country like Portugal, which has €78 billion in bailout loans to repay, has reduced its business tax. A few weeks ago, British Chancellor of the Exchequer George Osborne announced that the country's Corporation Tax is being reduced to 20 percent, which would be the lowest rate among all G-20 countries.
The British intend to address the aggressive financial optimization of companies and the super-rich with international treaties. They have placed the issue on the agenda of the G-8 summit in mid-June, which US President Barack Obama is expected to attend.
The idea of a large-scale exchange of data is also gaining traction in the EU. Last week, 17 EU countries, announced their willingness to exchange tax-related data on private individuals and companies in the future.
There probably will be more transparency in the end, but there are no signs that aggressive tax competition among the member states will end. The draft of the conclusions for the EU summit includes the promising statement that the "Code of Conduct" task force will be asked to submit proposals. But it's been doing that for a long time -- for more than 15 years, to be precise.
By Guylain Gustave Moke
World Affairs Analyst