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Member states should blacklist tax havens and adopt a common GAAR, says EC

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Action to step up pressure on tax havens, and the development of a common general anti-abuse rule, are among EC proposals to be presented to EU finance ministers and the European Parliament.

The EC has adopted two ‘recommendations’ to encourage member states to take ‘immediate and coordinated action on specific pressing problems’.

Tax avoidance and the UK ‘expectation gap’

Richard Murphy’s estimate of the UK tax gap is often quoted by trade unions and tax campaigners but it is disputed by HMRC. Murphy has accepted that his methodology in relation to corporate tax avoidance produces an estimate that inevitably includes an element of ‘legitimate’ tax planning.

Tax academics have noted in a recent report for the National Audit Office that in 2008 Murphy claimed, on the basis of an ‘expectation gap’, that the largest 700 companies in the UK avoid £12bn a year. In a paper on the tax gap, Professor Michael Devereux, Professor Judith Freedman and Dr John Vella said the ‘expectation’ was ‘based on a misunderstanding’.

‘The central reason is that the tax base for corporation tax differs from measures of profit in financial accounts,’ they wrote. ‘This is widely accepted: even Murphy acknowledges that “accounting profit can be the wrong basis for assessing the tax gap”, and lists a number of differences between the treatment for the two purposes. Despite this statement, he makes extravagant claims based on his methodology.’

The authors added: ‘One should not underestimate the negative consequences that misleading estimates of the tax gap may produce ... If an individual believes that others are avoiding tax then he or she is perhaps less likely to comply voluntarily themselves.’

Details are set out in a new website titled ‘Fight against tax fraud and tax evasion’, which declares that ‘up to €1 trillion per year are missing in EU countries budgets’.

As Tax Journal reported in March, that estimate was based on a study commissioned by the Progressive Alliance of Socialists and Democrats in the European Parliament, and written by Richard Murphy, director of Tax Research UK.

The EC’s web page links to that report, in which Murphy suggested that evasion costs ‘approximately €860bn a year’ and avoidance ‘might be €150bn a year’.

The EC’s first recommendation foresees ‘a strong EU stance against tax havens, going beyond the current international measures’, the EC said in a press release on 6 December: ‘Using common criteria, member states are encouraged to identify tax havens and place them on national blacklists. Specified measures to persuade these non-EU countries to apply EU governance standards are also set out.’

The second recommendation addresses ‘aggressive tax planning’ and suggests ways to address legal technicalities and loopholes which some companies exploit ‘to avoid paying their fair share’.

The EC said: ‘Member states are encouraged to reinforce their double tax conventions, to prevent them from resulting in no taxation at all. They should also adopt a common general anti-abuse rule, under which they could ignore any artificial arrangement carried out for tax avoidance purposes and tax instead on the basis of actual economic substance.’


Algirdas Semeta, EU commissioner for taxation, said: ‘Around one trillion euros is lost to tax evasion and avoidance every year in the EU. Not only is this is a scandalous loss of much-needed revenue, it is also a threat to fair taxation. While member states must toughen national measures against tax evasion, unilateral solutions alone won't work. In a single market, within a globalised economy, national mismatches and loopholes become the play-things of those that seek to escape taxation. A strong and cohesive EU stance against tax evaders, and those that facilitate them, is therefore essential.’

Oxfam and Eurodad called on member states to follow the EC’s lead and ‘agree on a common set of measures to counter harmful tax practices’.