EU: Auditors admonish ‘loopholes’ in EU’s €100bn corporate tax avoidance fight

Brussels recently scored a win when judges ruled Apple should reimburse €13bn in underpaid taxes – but a high-profile tax havens blacklist is undermined by weak sanctions, and warnings of cross-border schemes often go unheeded, auditors said.

The EU’s fight against €100 billion in corporate tax avoidance is plagued by poor enforcement and weak sanctions, a report by the European Court of Auditors has said.

Brussels scored a recent victory in its fight against tax-dodging when judges ruled Apple had to repay €13bn in back taxes, after the European Commission argued the deal the big tech firm had cut with Ireland constituted an unlawful subsidy.

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But some of its other weapons against aggressive tax planning are stymied by a system where much decision-making and enforcement lie in the hands of its 27 member states, the watchdog found.

“Harmful tax regimes and corporate tax avoidance pose major challenges to ensuring that taxes are paid where profits are made,” Ildikó Gáll-Pelcz, the Court member in charge of the report, said in a statement.

“The European Commission needs to plug loopholes in the EU tax toolbox,” she added.

Gáll-Pelcz called for a “united front against harmful tax practices” through plugging gaps and issuing guidance – after the Commission estimated that corporate profit-shifting jeopardises one fifth of corporation tax revenues, or around €100 bn.

An EU administrative cooperation law requires tax advisors, as of 2020, to disclose details of avoidance schemes they market, which are then shared among national tax authorities.

While that directive has certainly generated plenty of paperwork – and protests from tax professionals – it isn’t being followed up, auditors said; they found just 16% of the reports generated by the law were used by tax administrations for further proceedings.

An EU tax blacklist of harmful foreign tax jurisdictions, though it generates headlines, doesn’t have proper teeth, the report found.

Countries on the list – there are currently 11, including Russia, Panama and the US Virgin Islands – don’t face a consistent sanction by EU members, auditors found.

“The high level of flexibility of this approach may limit the deterrent effect of the defensive measures and engenders the risk that companies will set up their businesses in member states that apply fewer legislative measures,” the report said, with the likes of Luxembourg, Ireland and Malta deemed particularly lax.

The Commission largely accepted auditors’ findings – but noted that its proposals to extend tax monitoring to personal taxes had been rejected by member states, each of whom has a veto over EU tax plans.

“Tackling tax avoidance and ensuring fair tax competition continues to be a key EU priority,” the Commission said, adding that its own survey painted a rosier picture about the use of EU tax planning reports.

Under the next mandate for the EU executive, due to start on Sunday, tax issues will be dealt with by the Netherlands’ Wopke Hoekstra – who, as some MEPs have noted, has been caught up in a tax-planning scandal of his own.

During a confirmation hearing, Hoekstra told lawmakers that an investment of around €30,000 he’d made in an African ecotourism project via the British Virgin Islands, revealed by the Pandora Papers leak, was a standard technique also used by the World Bank.

“That was done for safety and security reasons,” he told MEPs, adding that the issue had been scrutinised before he became finance minister in 2017, and that he’d given profits to charity.