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Over the last few years there has been increasing concern at the international level about tax malpractices. Uncovered cases of tax evasion and tax avoidance have gained extensive press coverage, and the tax affairs of well-known multinational corporations and wealthy individuals have been widely debated, as shown again recently by the HSBC scandal.
This has occurred during a period of severe economic crisis in which governments are struggling to put public budgets back on a sustainable track, not only through difficult spending cuts, but also by increasing tax revenues.
In this context, governments have increasingly asked citizens to make additional efforts to contribute to fiscal consolidation, while at the same time these citizens can see that some economic actors are able to play with the rules so as to avoid paying their fair share of taxes.
At the very root of the problem is the fact that the rules of the international tax system - developed in the 1920s to avoid double and multiple taxation - have not kept pace with changes in the economic environment.
Factors of production – capital and labour - are more mobile due to technological change and the opening of borders. The emergence of the digital economy is one of most important developments of the last two decades. Intangible assets have become a key value driver for corporations. All these changes have improved the allocation of resources across the Union. However, the rules on taxation have not seen the same degree of unification and integration.
The international tax system has become increasingly complex and opaque. Non-taxation has increasingly replaced double-taxation. Tax evasion and tax avoidance opportunities have spread and taxation has become a tool for corporations to test the boundaries of the rules and to exploit differences in definitions.
Another major problem with the current structure of the international tax system is that it, implicitly, provides incentives to countries to compete with one another to secure their own bases, making the system even more complex. The resulting patchwork of national measures hinders the consistency of the European tax system, and increases compliance and administrative costs for businesses.
The corporate debt bias is an important feature of traditional corporate tax systems. It stems from the distinction between debt and equity embedded in tax law. This feature may generate large costs in terms of economic volatility and financial stability. In addition, it has also facilitated tax planning by multinationals which are able to exploit differences between tax rates and between definitions of debt and equity across countries.
At the European level, the increasing complexity and opaqueness of the tax environment for businesses, as well as the harmful tax practices followed by some countries acting in their own interest in order to attract investments and profits, hamper the Internal Market and reduce the attractiveness of Europe in the global arena.
The policy response
The public outrage following media coverage of multinationals’ tax affairs - coupled with more stringent fiscal consolidation efforts after the financial crisis - led politicians in many countries to step up the fight against tax evasion and tax avoidance practices which threatened their national tax bases.
At the international level, several initiatives have been launched to increase the transparency of the global tax system and to make it more robust to tax evasion and tax avoidance. An example of this is the initiatives for the automatic exchange of information.
In 2013, mandated by the G20, the OECD launched an ambitious action plan to combat base erosion and profit shifting. Since then, a considerable amount of work has been carried out.
The European Commission fully embraces the initiatives at the OECD/G20 level. However, the work of the Commission goes beyond these efforts.
First of all, we need to deliver on Member States' expectations.
In this respect, in recent years the Commission has actively supported Member States in their efforts to secure their domestic tax bases against aggressive tax planning and tax evasion, by framing a coordinated approach.
Several initiatives have been launched and important results have already been achieved.
On the legislative level, I would like to mention the important achievements on bank secrecy - with the revision of the Administrative Cooperation Directive - and the strengthening of the Parent-Subsidiary Directive, thanks to the inclusion of anti-abuse measures. New initiatives are already in the pipeline. The inclusion of anti-abuse measures has been proposed for the Interest and Royalty Directive. Moreover, the European Commission will propose legislative changes to the automatic exchange of information on tax rulings that will increase the transparency of the European tax system.
Among the initiatives to improve coordination at the EU level in the field of taxation, I would like to mention the creation of the Platform for Tax Good Governance and the launch of the VAT Forum to enhance business-to-tax authority dialogue.
This is about how the European Commission is helping Member States in their efforts to maintain their tax bases, while at same time ensuring a coordinated approach.
This is the short-term answer.
However, we also need a long term vision. We need to work together as a Union to deepen further the Internal Market. Much work still needs to be done.
Looking ahead, coordination in corporate taxation needs to be stepped up: we need a more common approach in corporate taxation.