Tax Games: the Race to the Bottom

Europe’s role in supporting an unjust global tax system. 

The race to the bottom

The world’s governments have committed to ambitious Sustainable Development Goals and a new global climate agreement, but the funding necessary to reach these goals is lacking. This gap is felt most strongly in developing countries, where funding sources are in short supply and the development challenges are most severe. In this context, corporate tax income is an absolutely indispensable source of government revenue.

Despite the promises to make multinational corporations pay their fair share of tax, the world’s governments have become locked in a very costly and destructive ‘race to the bottom’ on corporate taxation. One government’s decision to cut taxes for corporations leads others to follow suit, and if the current trend continues, the global average corporate tax rate will hit zero per cent in 2052. This projection is based on the development between 1980 – when the average corporate tax rate was above 40 per cent – and 2015 – where it has dropped to less than 25 per cent.

Europe is playing a leading role in this race, and currently seems to be accelerating the pace. An analysis of developments in the EU and Norway shows that 12 governments have either just carried out a new cut in the corporate tax rate, or are planning to do so over the next few years. One extreme example is Hungary, which slashed its corporate tax rate in half within a few months, and overtook Bulgaria as the EU country with the lowest corporate tax rate. Meanwhile, only two governments – Greece and Slovenia – have decided to increase their rates.

While corporations are being asked to pay less, consumers around the world are being asked to pay more, reflecting the fact that someone has to fill the gap from the missing corporate tax income. Since consumer taxes impact disproportionally hard on the poorest, this trend has the concerning consequence that tax systems are becoming more regressive, and risk exacerbating inequality rather than reducing it.

Corporate Tax Avoidance

Some governments justify corporate tax cuts with a theory that the income lost will be regained as a result of increased efforts to combat tax avoidance. However, as highlighted in this report, the political process to stop corporate tax avoidance resulted – at best – in half-hearted solutions, and new loopholes are being introduced to replace old ones. Attempts to simplify the global tax system resulted in the opposite, and the OECD’s base erosion and profit shifting (BEPS) agreement has taken the complexity of the international tax system to new levels.

Meanwhile, corporations continue to dodge taxes. A constant stream of corporate tax scandals serves as a reminder that corporate tax avoidance is still widespread, and the best estimates say it is costing societies around US$500 billion in lost revenue every year. One key reason why this problem has been allowed to continue, is the fact that governments offer secrecy, tax incentives and loopholes that make it possible. 

Europe plays a central role in this problem.

Scientific research has identified the countries that play the most central roles as ‘sinks’ – where corporations can keep their profits without incurring much tax – and ‘conduits’, which are countries that help channel corporate profits out of the countries where the multinational corporation is doing business, and into the sinks. The researchers found that the world’s largest sink and conduit countries are both EU member states, namely Luxembourg and the Netherlands respectively, while several other European countries such as the UK and Ireland also feature high on the list.


Secrecy and exclusion

Developing countries are particularly vulnerable to corporate tax avoidance, as corporate taxation is central to their revenue. Despite this, they are still not able to participate on a truly equal footing in the decision-making on international tax standards. The OECD – also known as the rich countries’ club – continues to occupy the role as global decision maker, often in tandem with the G20. And while more than 100 developing countries were excluded when the most recent standards were negotiated, OECD countries are now keen to ensure that developing countries join the implementation.

Meanwhile, a large group of developing countries keep calling for a UN negotiation to solve the problems in the global tax system, in a setting where all countries participate as equals. However, the analysis carried out in this report shows that a large block of EU countries still insist on keeping the global decision making at the OECD.

Information is still hard to get for citizens who want to know what multinational corporations pay in taxes, and hence tax scandals still serve as a key source of information. Whistleblowers who expose corporate tax avoidance risk prosecution, as exemplified by the ongoing LuxLeaks trial in Luxembourg.

As a result of the mounting political pressure, the EU is now discussing whether to allow citizens to see where multinational corporations do business, and how much they pay in taxes in each country where they operate. However, this report has mapped the positions of 18 European countries, as well as the European Parliament and Commission, and found that a majority are still against introducing full public country by country reporting.

On a more positive note, substantial progress is being made with regards to ending anonymous shell-companies, which can be used to hide money and evade taxation. The EU has now committed to introducing public company registers showing the real – beneficial – owners in all countries across the union.

Key findings

Our report analysed 18 European countries and found that:

  • Harmful tax practices are popular in several European countries, and problematic practices such as patent boxes and secret advance tax rulings have been increasing in numbers over the last years. Out of the 18 countries analysed, five received a ‘green light’ on harmful tax practices, while nine countries received a ‘red light’.
  • European tax treaties with developing countries remain a key issue of concern. Out of the 18 countries analysed, 12 countries have tax treaty networks that are highly problematic.
  • Six countries have pushed ahead in the fight against secret shell companies by introducing public company registers showing the real – beneficial – owners. Meanwhile, secret company ownership is still possible in 12 of the analysed countries, and the UK still offers opportunities for setting up anonymous trusts.
  • The majority – ten of the analysed countries – seem reluctant or outright against the idea of introducing full public country by country reporting, which would allow citizens to see where multinational corporations do business, and how much they pay in taxes.
  • 13 out of 18 countries are openly against the proposal of establishing an intergovernmental UN tax body to address the problems in the global tax system, while ensuring that developing countries participate on a truly equal footing.
  • While the vast majority of the governments studied now provide financial support to promoting domestic resource mobilisation in developing countries, few have analysed how their own tax systems and policies can either promote or undermine tax collection in developing countries.