Last updated on October 9, 2021Reading Time: 4 minutes
“European Flags in Brussels.” – Photo by: Eliara Santos – All Rights Reserved ©
Lately, while organising some files on my computer I have found some documents I used as sources to write the graduation papers of my bachelor degree in Economics. These documents are studies, articles, monographs and excerpts of books from different authors but all of them have in common one thing, the subject: tax avoidance (also known as tax planning) and tax evasion. My job was to read them, analyse and write a thesis about how the phenomena of the tax avoidance and evasion by multinational groups not based in the European Union affect the economy of the European Economic Area (EEA). A fascinating, yet challenging topic for which I fell in love with and that took me to an interesting conclusion I wish to depict in this article. Of course, it is important to note before hand that this article, because of its informative scope, is not intended to be as much as exhaustive on the representation and description of the matter presented as an academic study would be.
For those of you who do not know exactly how things work in the EEA, I will make a short introduction to explain the structure of the EU and how it works so it will be easier to comprehend a bit better the overall topic. The European Union is a Free Trade Area and a Customs Union where national borders were abolished to facilitate the circulation of goods, services and people within the common market. This common market has a unitary customs policy that regulates the commercial relationships between countries of the European Union and third-part countries (i.e. the USA, UK, Japan, etc.) in order to promote a more homogeneous treatment of both the internal and external commercial relationships.
The EU organisational and functional framework was sanctioned by the Treaty of Rome of 1957. Such principles and freedoms. that are said to be the core of the EU, are: the Principles of Non-Restriction and Non-Discrimination, and the famous EU four freedoms: Freedom of capital movement, Freedom of goods and services movement, Freedom of people movement and Freedom of establishment. While the four freedoms are quite self-explanatory, the principles of non-restriction and non-discrimination need some clarifying on their function, since they are used to prohibit any kind of discrimination either regarding people (sex, gender, nationality, etc) as well as services, capital and goods (countries cannot take measures to restrict the movement of people, goods or capital within the EU).
After this brief description of the EU, its principles and freedoms there is only one more thing to be discussed: the reason the EU was created. The Article 130a from the Treaty of Rome states that (from a socio-economic point of view): “In order to promote its overall harmonious development, the Community shall develop and pursue its actions leading to the strengthening of its economic and social cohesion. In particular, the Community shall aim at reducing disparities between the levels of development of the various regions and the backwardness of the least-favoured regions, including rural areas.” From this article, a sense of unity and equality that such measures should aim for can be denoted. Having understood the principles and freedoms of the EU, its functional framework and the reason why it was created, the new step is to consider the problem of the tax evasion and tax avoidance, first on a broader view, since it is a world wide problem and finally on a narrowed way, localising the problem and its effects in the European Economic Area.
The effects of the tax avoidance and tax evasion affects the whole global economy, because when multinationals evade or avoid paying (all or part of) the due taxes on a determined country or economic area it damages not only the economy at a local level (where it is located) as well as an international level. This can be adequately illustrated in cases where tax evasion occurs, because the profit obtained at a certain location is transferred to other location (usually through an offshore country) depriving the region where the profit was made of a fair compensation and bringing the profit elsewhere. Consequently, injecting money and pushing the economy of an area in detriment of the economy of another area.
Regarding the consequences of the tax avoidance and tax evasion phenomena within the European Union, the disparities originated in the local economies are very detrimental for the market economy as a whole, not only on an economic level, creating great gaps among the economies within the EU, moreover creating a disproportional inequality on a social level, which goes totally against what was established by the article 130a from the Treaty fo Rome. Therefore, it is important and urgent that the European Union take the necessary measures to solve the issues that have been for long in the EU commission’s agenda without being properly addressed.
If a similar scenario is harmful for the EEA economy why nothing has been effectively done to address the problem then? The answer to this question could depend partially on the fact that it is well-known that the European Commission cannot legislate on direct taxation matters (the famous sovereignty controversy) and because of that it is constrained to convince and push (and wait) Member States to make agreements among themselves seeking a harmonisation of the tax policies through the coordination of all Member States taxation policies. However, because national interests are always being put before anything else when it comes to the approval of tax harmonisation/coordination measures by the European Commission, the whole legislative process seems to have been for long on a vicious circle that has taken no one, nowhere. Furthermore, these so called national interests have yet to be proven of being essential for the survival of some countries’ economies. Are these Member States really fearing their economy to fail or more worried to be losing their own status on the EU economy when making concessions to help other countries to close the socio-economic gap among themselves?
At this point, a couple of spontaneous questions certainly cross the minds of those, who like me, are enlightened/interested on EU economic and social affairs: Is the EU still a union of countries with the same interests? Do they all aim what article 130a decrees? It is not possible at the moment to arrive to any plausible answer for such questions, unfortunately. What can be evinced, instead, from the behaviour of certain Member States is that the notion of ethics is conceived quite differently from country to country, and this can be observed by the constant avoidance and subtraction of some countries from doing the right (and ethical) thing for a “Greater Good”, which would benefit not only the countries whose economies were left behind, but the whole economy of the European Economic Area, bringing socio-economic welfare and development to all the Eu area, in addition to accomplish the objective targeted on the Treaty of Rome and its subsequent reviews in later years.