The Problem of Tax Avoidance: An Examination of Germany and Switzerland

Matthias MeierThis blog post is the fourth  in a series of posts that come from students of our capitalism and democracy undergraduate course. As part of the course, students were asked to write about an issue pertaining to the political economy of distribution. The best blog posts have been selected to provide an opportunity to exceptional young scholars at UCD to contribute to the debate on the future of European and global economic governance, and to promote the insightful scholarship being undertaken at UCD to a wider public audience. 

Tackling the problem of tax avoidance has become a major issue of global politics. This does not come as a surprise, as states are losing a growing amount of money due to untaxed offshore assets. The French economist Gabriel Zucman estimates that, as much as $7.6 trillion – 8% of global personal financial wealth – are stored in tax havens (Leslie, 2014). Thomas Piketty shows in his book “Capital in the 21st Century” (2014) that the problem goes even further as tax evasion promotes a further increase of inequality in wealth.

The European Commission has lately started to investigate various tax deals between several multinational enterprises and countries in the EU. Likewise the UK Chancellor of the Exchequer George Osborne and the president of the United States of America Barack Obama both warned companies of using legal loopholes in order to avoid taxes (Drucker, 2014).

Corporate tax rates

 

 

 

 

 

 

 

 

 

 

 

First steps proceeding against tax avoidance are already being implemented: The European Commission is examining the legitimacy of treaties companies negotiated with different countries, guaranteeing them a low tax rate. Among others, deals between Apple and Ireland, Fiat Finance and Luxembourg as well as Starbucks and the Netherlands are affected (Drucker, 2014). Similarly, the American government has launched a crackdown on US corporations that pay taxes in other countries through inversion and is planning to impose new laws fixing the loopholes in fiscal policy. Furthermore, the UK is expected to take action against tax avoidance before the end of this year (Drucker, 2014).

In the past, attempts of single countries to proceed against tax havens have not proven very effective – mostly due to coordination problems among countries and individual countries’ particular interests. In order to establish a common ground, extensive negotiations are necessary. As these negotiations include economic, legal and political issues, difficulties are bound to emerge. A proposed tax deal between Germany and Switzerland provides a neat demonstration of the difficulties mentioned:

In 2011 the two governments discussed a deal to settle taxation of (future and past) capital and capital income of assets held by German taxpayers in Switzerland. After almost two years of negotiations, the deal passed the Swiss National Council and the German Cabinet, but was ultimately rejected by the German federal council (Spiegel, 2012).

The opposition (consisting of the more left-winged parties SPD, Grüne and Linke), that at the time held the majority in the council, indicated several reasons for their decision. First, the rate of taxation was deemed too low (Focus, 2012a). Already existing capital in Swiss Bank accounts would have been taxed at a rate of 21 to 41 percent, depending on the amount of stored money. This would have only included fortunes accumulated within the last ten years, everything before that would have been past the statute of limitations. Newly established assets would have been taxed at a rate of 26 percent (Deutscher Bundestag, 2012).

Advocates of the deal argued that the estimated generated revenues for the German state of about €10 billion from a one-time payment of tax arrears would be substantial and in any case better than nothing (Spiegel, 2012). On their view, Germany is losing a lot of money on every day the treaty is not effective – first, because all the assets stay untaxed until then; second, because more and more money escapes the regulation as capital accumulated more than ten years ago is excluded from the deal (Focus, 2012a). Objectors countered that these revenues are far too small, as estimations concerning the total amount of untaxed German money stored in Swiss banks range up to €250 billion (Focus, 2012b), revenues from a one-time payment of tax arrears should at least amount to about €50 billion (using a tax rate of 21%).

Second, and more importantly for the opponents of the deal, the designated execution would have entailed several blind spots. In particular, no information about tax violators would have been provided to German authorities (Focus, 2012a). As the one-time penalty payment for owners of already existing illegal bank accounts would have been carried out by the Swiss banks, the institutions could have transferred the required sums directly to the German tax authorities without releasing any other data (Deutscher Bundestag, 2012). This way Switzerland’s banking secrecy would have been maintained, guaranteeing the anonymity and therefore the impunity of tax defrauders. German tax authorities would have had no means to validate whether the reported amounts and corresponding fines are appropriate or not.

The governing parties argued that the main object should be to get as much money as possible from the stored assets and to prevent future tax avoidance, even if this implies taking some losses. The opposition on the other hand found it unjust and incompatible with national laws to tolerate illegal actions (Focus, 2012a).

On the one hand, the treaty would have definitely brought advantages for Germany. Tax authorities would have gained at least €10 billion from penalty and payments of arrears. Moreover, the treaty would have provided a legal basis for the monitoring of future capital flows, limiting tax avoidance. On the other hand, Germany would have gained only a fraction of the total loss suffered from tax evasion. Furthermore, tax defrauders would have gotten off cheaply by just paying the fine without being legally prosecuted. This could have set a bad example for the rest of the population. Likewise, Germany would have had no means of control and no guarantee that there would not still be loopholes to be exploited.

The abovementioned case illustrates the difficulties of setting up treaties between just two countries and points out why such small-scale approaches cannot be the final solution to the problem of tax avoidance. In order to guarantee tax compliance, international cooperation is crucial. Piketty (2014) shows, that a shared global tax system is not necessarily needed, but at least a shared legal basis guaranteeing transparency of financial flows including as many countries as possible, is required in order to stop the further increase in inequality of wealth. Furthermore, according to him, a kind of controlling instance would need to be established.

In the past, steps in this direction have already been undertaken. The European commission passed a directive on foreign savings (EUSD) in 2003, which required member states to share information more openly (Taxation and Customs Union, 2014). But for several reasons it did not change a lot: The treaty affected only EU member states and covered only deposit accounts but not stocks. Likewise, it included exceptions for a number of countries that were allowed to withhold information, requiring other countries to produce proofs of tax fraud and to file formal requests before being granted information (Piketty, 2014: p. 522).

In 2010, the American government launched a more far-reaching law, the Foreign Account Tax Compliance Act (FATCA). To be realized in 2014 and 2015, it requires the disclosure of information about US citizens’ offshore assets. In contrast to the EUSD, FATCA includes all kinds of capital in every country (Piketty, 2014: p. 522). Even though its success remains to be seen, it has already fueled new discussions on the topic, in the European commission as well as in the OECD. What is more is that it definitely sets a sign and is likely to bring side benefits, if successful.

To tackle the issue of tax avoidance, some kind of global agreement is crucial. Recent developments show that increasingly many (influential) countries are willing to take action. Even though future developments are hard to foresee, this stirs hope for the establishment of a global cooperation.

Matthias Meier is a student at Ludwig-Maximilians Universität München, Germany, studying to become teacher in secondary school for English, Psychology and Spanish. This blog post is part of his coursework for the UCD politics module, capitalism and democracy, during his year abroad at University College Dublin in autumn 2014/spring 2015. 

Bibliography:

Deutscher Bundestag (2012) Entwurf eines Gesetzes zu dem Abkommen vom 21. September 2011 zwischen der Bundesrepublik Deutschland und der Schweizerischen Eigenossenschaft über Zusammenarbeit in den Bereichen Steuern und Finanzmarkt in der Fassung vom 5. April 2012. Berlin: Bundesanzeiger Verlagsgesellschaft mbH. Available at: http://dip21.bundestag.de/dip21/btd/17/100/1710059.pdf. [Accessed 20 October 2014].

Drucker, J. (2014) ‘Crackdown on Apple in Ireland Opens Front on Tax Avoidance War’, Bloomberg News, 30 September. Available at: http://www.bloomberg.com/news/2014-09-30/crackdown-on-apple-in-ireland-opens-front-on-tax-avoidance-war.html. [Accessed 19 October 2014].

European Union. (2014) Taxation and Customs Union. Available at: http://ec.europa.eu/taxation_customs/taxation/personal_tax/savings_tax/index_en.htm

[Accessed 19 October 2014].

Focus Online. (2012a) ‘Pro und Contra: Steuerabkommen mit der Schweiz’, Focus, 10 August. Available at: http://www.focus.de/finanzen/steuern/steuerfahndung/pro-und-contra-steuerabkommen-mit-der-schweiz-_aid_797594.html. [Accessed 19 October 2014].

Focus Online. (2012b) ‘Experten vermuten 250 Milliarden Euro deutsches Schwarzgeld in der Schweiz’, Focus, 23 September. Available at: http://www.focus.de/finanzen/steuern/experten-streiten-ueber-schwarzgeld-verstecken-deutsche-250-milliarden-euro-in-der-schweiz_aid_825137.html. [Accessed 19 October 2014].

Leslie, J. (2014) ‘The true Cost of Hidden Money’, The New York Times, 15 June. Available at: http://www.nytimes.com/2014/06/16/opinion/a-piketty-proteges-theory-on-tax-havens.html?_r=1. [Accessed 19 October 2014].

Piketty, T. (2014) Capital in the Twenty-First Century. London: Harvard University Press.

Spiegel Online. (2012) ‘Opposition Opposed: German-Swiss Tax Evasion Deal Blocked in Berlin’, Spiegel, 23 November. Available at: http://www.spiegel.de/international/europe/german-opposition-votes-against-tax-treaty-with-switzerland-a-868912.html. [Accessed 20 October 2014].

 

 

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