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October 16, 2013
October 16, 2013

Fraud and fiscal evasion: the billions that plague Europe

Source:  Category: On the crisis
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Fraud and fiscal evasion: the billions that plague Europe

Fraud and tax evasion amounts to € 2 trillion in Europe

Τhe European Commission is referring to it as “a huge problem”. €2 trillion are missing each year from state budgets, according to the latest estimates, due to tax evasion by the wealthy. These amounts are enough to make the sacrifices made in the name of austerity look ridiculous. They are also enough to encourage states to engage in war –media or legal– against tax evasion. How is France and its neighbours fighting against this scourge? Are the strategies in use up to the challenge? Let’s do a little trip around Europe..

“A script full of endless flashbacks”: if tax fraud were the central theme of a bad TV series, this would be the critique of the Europeans after watching the last episode.

The complaint of tax offenses is not a recent phenomenon. Already in 2006 the European Commission expressed its regret for the extent of tax evasion in Europe, which was estimated between 2% and 2.5% of EU GDP, or between €200 and €250 billion. Greatly underestimated.

Since then, the revelation of ICIJ (International Research Consortium of Journalists) about offshore companies, the Cahuzac case in France, the Uli Hoeness case in Germany, the conviction of the fashion designers Dolce & Gabbana in Italy, and the low taxes paid by multinational companies such as Apple and Google. In May 2013, the Commission revises its assessment: the evasion reaches €1 trillion…: This is an enormous amount of money, which seems even more shocking in view of the austerity policies implemented in the continent.

In September r this figure climbs up to €2 trillion; not very far from the
estimates of the International NGO “Tax Justice Network”.

Summits and statements of good intentions are accompanying such evaluations. But not only: the development of systems for combating tax evasion is tedious, but effective and is bringing results in Europe:

“The reform of the VAT system, the EU actions to combat tax fraud (…) are in the right direction. We know the problem, we have identified the solutions and it is time for Member States to act”

Algirdas Šemeta, European Commissioner on tax matters, urged recently. “The culture of tax is the culture of democracy. It reflects the will of people to contribute to public life”, notes Daniel Lebègue, president of the French section of “Transparency International”, in the columns of Le Monde.

Succeeding what exactly? In Germany, France, Italy and England, the fight against tax evasion prevails in national debates.

In France, the “accelerator Cahuzac”

In France the “Cahuzac case” favoured the inclusion of the fight against tax evasion in the political and legislative agenda. It primarily concerned the main political and administrative leaders of the country. In the wake of the media storm that aimed at the former Finance Minister, Francois Hollande announced on April 3rd, 2013 the draft legislation concerning transparency in public life.

After intense debate the bills were finally adopted in a compromised form on the 17th of September. A half-victory.

At the same time on November the 5th, a law against tax evasion and heavy financial crime was voted. It establishes the offense of “very serious tax evasion”, in the case that the crime has been committed by an organised gang or by keeping accounts in foreign banks.

It is this law that was partially censored on December 4 by the French Constitutional Court, particularly the Rule that allowed detention for 96 hours for the crime of “very serious tax evasion”.

The Constitutional Court held that the custody for 96 hours, which enabled a 48-hour postponement of the lawyer’s intervention, constituted an “unreasonable” blow to individual freedom and the right of defense.

Under the leadership of Jean-Louis Debré, the sages rejected the possibility of a fine proportional to the turnover of companies that had evaded taxes.

They also canceled the section, that added to the list of tax havens all countries with which France has not signed a bilateral agreement for mutual exchange of financial information. The Council felt that this article was premature as these bilateral agreements were not to be applied 2016.

Aside from public life, further progress has been made recently: the law of the 26th of July 2013 concerning the separation and regulation of banking activities (under which banks are required to publish information about their activities in tax havens) the signing of the OECD convention against tax havens (which was just signed by Switzerland as well) or even strengthening the jurisdiction of the National Brigade of Prosecution of Tax Delinquency (BNRDF).

“The time of impunity is over. Lack of transparency is not tolerated”

warned the President of the Republic last May. But for the time being evasion continues to be present: the recent report of the parliamentary committee, which was written by MPs Alain Bocquet and Nicolas Dupont-Aignan, estimates that the annual deficit linked to tax evasion is between €60 and €80 billion; not far from reaching the fiscal deficit, which in 2012 amounted to about €98 billion… This very critical document was followed by n announcement by the Court of Auditors, which finds important –but insufficient– changes and makes recommendations.

The same conclusion is reached by the National Solidarity trade union in Public Finance, without resulting in positive assessment. Despite all the good intentions in legal terms, the union regrets to reduce manpower (human resources) and material resources (especially in terms of digitisation of information) available in the fight against tax evasion.

Germany in crusade

  • Evasion: between €150 billion (according to the SPD, the Social Democratic Party) and €165 billion per year (Tax Justice Network)
  • Non-payment of VAT: about €27 billion per year or 1% of GDP (Eurostat, 2011)

In recent years, Berlin has launched a real crusade against tax evasion, making an agreement with Switzerland in 2011. The CDU (Christian Democratic Union) was shaken earlier this year by a scandal involving the president of Bayern Munich Football Club, staunch supporter of the political party of Angela Merkel, who admitted not having paid taxes on interest income from assets in Switzerland.

The fight against tax evasion thereafter became one of the main issues of the electoral campaign. It was pushed forward by the CDU, which supported the need for more control, both at European and international level, but was also the strong card of the SPD, whose program on the subject was presented by the candidate for the presidency of Hesse, Thorsten Schäfer-Gumbel. His assessment is that only for Hesse, the deficit amounted to €800 million annually.

At the federal level, according to SPD, tax evasion is estimated at over €150 billion annually or 16% of the total tax revenue. The party calls for zero tolerance in this area and supports the idea of ​​tax control at the federal level.

The issue is central in the ongoing negotiations between SPD and CDU to form a government. The Social Democrats regard the fight against tax evasion as a way to finance large infrastructure projects without raising the tax rates. Some experts estimate that €50 billion could be recovered annually.

UK, the financial hub in search of dignity

Tax evasion is being discussed widely in the United Kingdom, the hub of the European financial system, which is also considered a hub of fraud in the continent. After complaints from Austria according to which the Channel Islands, the Cayman Islands and the Virgin Islands are a centre of money laundering, the British government began negotiations with Jersey and Guernesey. The objective: the signing of an agreement for the automatic exchange of information as in December with the Isle of Man. Being British territories, these two islands are not included neither in the UK nor in the European Union, which gives them a legal manoeuvring margin.

Meanwhile, the Director of Finance George Osborne claims that

“over a hundred people who seem to have benefited from these sinful structures have already been identified”

Investigations against over two hundred accountants, lawyers and other advisers are being conducted. “The message is simple”, assured the Minister of Finance:

“If you are a fraudster we will chase you”

Chasing bad debtors in Italy

  • Evasion: between €180 billion (according to the Ministry of Finance) and €184 billion annually (Tax Justice Network)
  • Non-payment of VAT: more than €36 billion per year or 2.3% of GDP (Eurostat, 2011)

At the same time that Berlusconi, who was convicted of tax evasion, is preparing to serve a sentence of ½ year of social work to avoid home detention, the Ministry of Finance publishes the latest information on tax evasion. Last year, the state lost €180 billion because of tax acrobatics by the experts.

Tax officials organise occasional random checks in tourist areas, bars and restaurants in the cities of the peninsula.

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