Fixing Financial Plumbing: Tax, Leaks and Base Erosion and Profit Shifting in Europe

Abstract

Aggressive tax planning by multinational enterprises (MNEs) costs EU member states between €50-70 billion and €150-190 billion per annum through base erosion and profit shifting (BEPS). This tax gap has been blamed on ‘unethical’ companies acting legally, but inappropriately. Action to curtail this behaviour has been made possible by the confluence of two powerful movements: a popular articulation of tax morality as it relates to MNEs and the high issue salience reached as a consequence of the financial crisis and austerity in Europe, an emerging discourse around tax morality, and the efforts of prominent whistleblowers. As a result, domestic governments have removed their ‘soft’ veto and facilitated supranational bodies in innovating on corporate taxation, helping to rebalance the technical and structural superiority of MNEs in the international tax system.

Keywords:

• Tax
• business
• ethics
• BEPS
• EU
• whistleblowers

Notes

¹ The discrepancy between where businesses invest and where their activities are based, and where they report profits for the purposes of taxation is known as base erosion and profit shifting. The erosion element is the deliberate minimisation of a business’ tax base, whilst the shifting of profit is one of the ways that businesses achieve this minimisation. Dover et al., Bringing Transparency, Coordination and Convergence, 1.

² For a lengthy discussion, see Prebble and Prebble, “The Morality of Tax Evasion”.

³ PriceWaterhouseCoopers, “Local Revenues, Global Profits”; Van Brederode, “A Normative Evaluation”; Christians, “Taxpayer Morality”.

⁴ Alm and Torgler, “Do Ethics Matter?”.

⁵ Torgler, “Tax Morale and Tax Compliance”, 663.

⁶ Wiebe, Putting Tax Transparency.

⁷ Christians, “Taxpayer Morality”.

⁸ Alm, Sanchez and De Juan, “Economic and Noneconomic Factors”.

⁹ Jones et al. , “The Destruction of Issue Monopolies”.

¹⁰ Culpepper, Quiet Politics and Business Power; Newman, “Transnational Capture or Transnational Pluralism?”; Moravcsik, “Reassessing Legitimacy”.

¹¹ Newman, Ibid.

¹² OECD, Harmful Tax Competition.

¹³ Ring, “What’s at Stake in the Sovereignty Debate?”

¹⁴ This is also to protect the commercial confidentiality of businesses.

¹⁵ Ahmed et al., “Facebook Faces Profits Hit”.

¹⁶ Aldrich, “Regulation by Revelation?”.

¹⁷ Aries and Panichi, “ LuxLeaks Whistleblower”; Tax Justice Network, “The #LuxLeaks Whistleblowers Verdict”.

¹⁸ Doe, “Panama Papers Source”.

¹⁹ The European Parliament is currently seeking to address this via legislation.

²⁰ The Economist, “Über-warehouses for the Ultra-rich”, 23 November 2015.

²¹ OECD, Action Plan on BEPS, 10.

²² OECD, Tax Morale, 50.

²³ European Commission, CCCTB.

²⁴ Alm, McClelland, Schulze, “Why do People Pay Taxes?”.

²⁵ Zhu, “G20 Institutional Transition”; Newman, “Transnational Capture or Transnational Pluralism?”.

²⁶ European Commission, Questions and Answers on the CCCTB.

²⁷ European Parliament, Tough Debate with Multinational Companies.