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EU Needs To Take Serious Action Against Harmful Tax Practices, Says Parliament

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The European Parliament has called for a reformation in EU policy on harmful tax practices as a means to combat unfair rates within member states like Malta.

“The EU needs to review and step up its game in the fight against tax practices that deprive member states of substantial revenue, lead to unfair competition and undermine citizens’ trust,” said a press release following a parliamentary debate earlier this week.

Tax evasion, optimisation and avoidance have been long-standing issues within the EU and its member states with the most recent scandal being the Pandora papers which has only reinforced the need for urgent action.

However, let’s first understand what these harmful practices really are.

Tax Evasion

Tax evasion is when an entity uses illegal means to hide its tax liability. Meaning that the taxpayer would pay less tax than they are supposed to pay according to the law by hiding income or information from the tax authorities.

Tax Fraud

Tax fraud refers to a deliberate form of tax evasion which is generally punishable under criminal law. This would normally occur in situations in which deliberately false statements are submitted or fake documents are produced.

Tax Avoidance

Tax avoidance is defined as acting within the law, sometimes edging the limits, to minimise or eliminate tax that would otherwise be legally owed. It entails exploiting the strict letter of law, loopholes and mismatches to obtain a tax advantage that was not originally intended by the legislation.

Tax Optimisation

Tax optimisation is the process of reducing or eliminating your tax liability through tax-efficient choices. Financial planners engage in tax optimization for their clients in many ways.

Shell Corporations

A shell corporation is a company without active business operations. Such corporations are not necessarily illegal but they are often used illegitimately to disguise business ownership from law enforcement or the public.

A legitimate reason for a shell corporation would include a startup using the business entity as a vehicle to raise funds.

Tax Havens

A tax haven is a country that offers foreign businesses and individuals minimal or no tax liability for their bank deposits in a politically and economically stable environment.

Companies and wealthy individuals may use tax havens legally as a means of stashing money earned abroad while avoiding higher taxes from their home countries. It thus creates a potential for misuse in illegal tax avoidance schemes.

Tax havens can also be used to illegally hide money from tax authorities at home.

Malta has regularly faced claims in the EU that it is a tax haven, along with Luxembourg and Ireland.

Lax tax rules can allow large multinationals to benefit from lower taxes on declared profits – lining the pockets of shareholders with money that would otherwise contribute to the country’s taxes and economy.

And for these reasons, the European Union want to restrict the rich from essentially being able to screw the system.

MEPs are requesting a definition of a “minimum level of economic substance” – which is a threshold of economic activity within a country. If a company were to not reach the standards it cannot be considered to be genuinely established there.

They’re also calling for the Commission to issue guidelines on how to design fair and transparent tax incentives.

Most importantly, however, MEPs are demanding a complete reformation of the Code of Conduct on Business Taxation which supposedly tackles harmful tax competition.

This has now become as harmful as it is outdated, the resolution says.

 

This article is part of a content series called Ewropej. This is a multi-newsroom initiative part-funded by the European Parliament to bring the work of the EP closer to the citizens of Malta and keep them informed about matters that affect their daily lives. This article reflects only the author’s view. The European Parliament is not responsible for any use that may be made of the information it contains.

Do you think that EU tax policies need to be reformed?

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Ana’s a university student who loves a heated debate, she’s very passionate about humanitarian issues and justice. In her free time you’ll probably catch her binge watching way too many TV shows or thinking about her next meal.

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