Policy recommendations

10-11-2010 EP recognises tax evasion as threat to development

On behalf of the Development Committee, MEP Eva Joly (Greens/EFA) wrote an own-initiative draft report on Tax and Development Cooperation with Developing Countries on Promoting Good Governance in Tax Matters. Fair Politics is pleased to see this report, since we are planning to launch our own policy case study on Fair Taxes soon.

This draft report is a reaction to the two Communications from the European Commission on this topic. MEP Joly mentions fairly that the Commission has made positive remarks on the topic, but more could be done. First of all, tax havens should be combated. They undermine the institutions and political systems in developing countries. Tax havens also promote economic crime and rent-seeking behaviour. Secondly, one of the most important problems is transfer mispricing, which means that companies misprice (this could be either higher or lower, depending on the transfer) their products while selling them to another branch of the same company, in order to lower taxes. This practice is illegal and countries are missing out on tremendous amounts of tax income. Thirdly, the current international architecture is too weak to combat tax havens. There are several organisations working on the harmful effects of tax havens, but none of them are targeting them directly. Fourthly, resource-rich countries are gathering enough tax revenue from the raw materials. They do not have to tax their citizens, and therefore the people cannot hold their government accountable. For this reason there should be more attention for good governance. Fifth and last, globalisation has caused fiscal problems, because capital has become more mobile and therefore more difficult to tax (most of the capital will be transferred to tax havens). At the same time developing countries were forced to give up their trade taxes in order to open up their markets and are now missing out on large tax revenues.

There are two committees in the Parliament which wrote opinions on this topic. On behalf of the International Trade Committee, MEP Marielle De Sarnez (ALDE) mentions that trade liberalisation should lead to sustainable development, and therefore the dismantling of trade taxes should be carefully done. Also there is need for coherence between the EUs development and trade policies. The Economic Partnership Agreements (EPAs) should be the framework from which this topic should be dealt with.

The second opinion was written by MEP Sirpa Pietikäinen (EPP) on behalf of the Economic and Monetary Affairs Committee. MEP Pietikäinen points out that a good taxation system is crucial for development. Therefore the Commission must work on creating an automatic exchange of information system against the harmful effects of tax havens. Also good governance provisions should be included in the Contonou agreement. Last this committee calls for the introduction of country-by-country reporting for all countries that fall under the Transparency Directive.

As mentioned, Fair Politics is working on a own case study, so we welcome the political attention for problems related to tax and development. The amount of money disappearing illegally from developing countries is estimated to be ten times the amount of all combined overseas aid. This means these countries are losing more money than they gain in terms of aid, which is a large threat to development. Despite the political attention, there is no European policy acting against tax evasion. Moreover, most of the existing tax havens are EU Member States or part of their territories, according to the Tax Justice Network. Fair Politics encourages the European policy-makers to introduce measures like the country-by-country reporting. This would be beneficial for both EU Member States and developing countries, since tax evasion from all countries would become traceable.

For their concerns expressed on tax and development MEPs Eva Joly (Green/EFA), Marielle De Sarnez (ALDE), and Sirpa Pietikäinen (EPP) are recognised as Fair Politicians. For writing the draft report and opinions, all three MEPs earn two points in our monitoring system.