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Jakarta Post

Tax evasion in Europe'€™s governance

  • Richard Werly

    The Jakarta Post

Brussels   /   Sat, May 4, 2013   /  02:12 pm

No one could be happier these days than Algirdas Semeta. A former Lithuanian finance minister, sidelined until recently by his lack of charisma and continuous obstruction by some European governments, the EU Commissioner for Taxation is today courted by the media and in a position to plead for his longtime proposal: An automatic exchange of tax information between the EU'€™s 27 member states, which can be imposed on neighboring non-EU countries like Switzerland, Monaco or Liechtenstein. If Mr. Semeta has his way, any bank account held by an EU citizen will be, from January 2015 onwards, reported to the tax authority of its country of origin.

This tectonic shift is largely the result of pressures since 2009-2010 from the United States on financial centers and banks suspected of withholding crucial tax information about US citizens with financial
assets abroad.

The main pressure is being applied through the FATCA (Foreign Accounts Tax compliance Act) agreement that Washington intends to sign with prominent commercial and financial partners. As of April 2013, FATCA has been signed with the UK, Mexico, Denmark, Ireland and. [...] Switzerland which, after decades of maintaining banking secrecy, has finally surrendered it. Negotiations are ongoing with Singapore and Hong Kong.

In brief, the United States Treasury, by threatening to deprive uncooperative financial institutions from operating in Wall Street, aims to break into foreign vaults and extract crucial account data to identify potential American tax evaders.

In addition, Semeta'€™s breakthrough is the result of Europe'€™s economic and political convulsions. Until recently, the tiny state of Luxembourg, well-known to harbor a massive load of undeclared tax accounts from France, Germany, Belgium or and The Netherlands, was refusing to give up its banking secrecy.

But successive scandals, including the disclosure of an undeclared bank account hidden by the French [...] Treasury minister in Switzerland and in Singapore, have provoked a wave of protests.

The international disclosure of the '€œOffshore leaks'€ data gathered by the International Consortium of journalists has added to that outcry, reminding the world of the uncontrolled proliferation of companies anchored in controversial jurisdictions like the Cayman Islands or the British Virgin Islands.

In the meantime, the European debt crisis has forced governments against the wall. With public finances in disarray, rising welfare costs caused by ageing populations and exploding unemployment, European countries need money '€” and quickly.

The time for tax laxity is over. Even Germany, seen as the EU economic success story, has been waging for years a war on Switzerland and Liechtenstein, accusing its banks of hiding German taxpayer assets. German intelligence services have been involved in buying CDs and stealing data. '€œWe want OUR money back'€ is the rallying slogan heard from most European ministries of finance eager to collect more taxes, and to stop the '€œCombinaziones'€ favored by their business elite.

The problem arises when Europe'€™s campaigns against financial centers like Switzerland, Singapore and Hong Kong are seen in a wider context. The FATCA model that big European countries want to adopt to force banks to disclose their secrets cannot, for example, be disconnected from the United States laws and tax regime.

Contrary to what happens in the US, European taxes on individuals are indeed based not on nationality, but on the place of residence.

Moreover, EU countries themselves harbor different level/regime of taxation, while their borders are wide open as is their internal market. No wonder, therefore, why wealthy French citizens, heavily taxed, have taken advantage of this system for years, settling comfortably in nearby Belgium or Switzerland where they can pay less on their income, properties or financial assets. [...] European loopholes are, before all, responsible for massive tax fraud.

The second area of European denial concerns the average level of taxation in the EU, especially the tax burden inflicted on small and medium companies. In the US, taxation amounts to roughly 30 percent of GDP, while it reaches 43,2 percent in France. All European Union countries are taxing their citizens and entrepreneurs a lot more than the United States. Add to this a European welfare state in crisis, and you are landing in the heart of the EU economic taboo.

The question, therefore, is far more complex than being only a legal one. On paper, European governments are right to track fraudsters and to force them to pay their dues. But what will be the political and economic outcome of this anti-fraud tsunami, for new generations of European students who will be tomorrow'€™s entrepreneurs, inventors and risk-takers? And how can you convince international investors to come to Europe when you accuse Asian financial centers to siphon off European wealth?

In-depth studies published by the Singapore based Asia-Europe foundation (www.asef.org) show how unattractive EU'€™s image has become in booming Asia. Does Brussels wish to dig its grave deeper? When will Europeans authorities recognize that their excess of regulations, the uncontrolled spread of their public sector, and the controversial allocations of funds to inefficient administrations can be, in a time of globalization, a real deterrent for entrepreneurs?

Tax evasion has to be fought. The hardening of sanctions against financial institutions that refuse to comply with internationally agreed standards is legitimate. In today'€™s globalized financial world, where mafias can move billions of Euros with a mouse click, opacity cannot be the way to do business and stimulate international competition. Corporate giants have a special responsibility to be transparent. Wealthy citizens can accept a heavier tax burden, especially when their countries are in financial difficulty. But EU leaders, expected to meet in Brussels on May 22 to discuss taxation shall face the facts: Tax evasion is also a symptom of Europe'€™s past governance shortcomings.

The writer is a journalist with the Swiss daily Le Temps and associate fellow of the EU Centre Singapore.

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