‘Worldwide solution for tax evasion not yet in sight’
The Panama Papers and Paradise Papers provide evidence that companies and individuals are evading tax on a large scale. Worldwide tax agreements can put a stop to this. But for the time being a treaty that will address the problem at its root is not in sight, in the opinion of legal expert Dirk Broekhuijsen. PhD defense on 16 november.
In his PhD research Broekhuijsen examined the feasibility of a single worldwide tax treaty, in which all the world's countries would make agreements about which country may levy tax on the income of multinationals. At the present time, all tax agreements are bilateral, in other words between just two countries.
Lost tax revenues
‘It is clear from different sources, including the Panama Papers, that companies use these bilateral agreements on a large scale to avoid tax,' Broekhuijzen commented. 'By making clever use of the differences in the national tax systems and the hundreds of separate agreements between different countries, they often pay little to no tax.' The EU countries alone lose some 50 to 70 billion euros in tax revenues as a result.
This is a problem because countries depend on this revenue to pay for roads, schools and security services. Not only this, many people feel it is unfair that multinationals pay relatively little tax. Broekhuijsen: ‘Is it reasonable that a small local coffee seller pays more tax the multinational Starbucks?’
Winners and losers
A multilateral treaty - in other words, one between several countries - could probably prevent tax evasion, but Broekhuijsen believes this is easier said than done. In his literature study he looked at the legal and political consequences of such a treaty. 'If tax agreements are rewritten to combat tax evasion, there will be some clear winners and losers. Many countries will collect less tax than in the current situation. Other countries will probably collect more tax, but they will then become less attractive places for multinationals to locate their businesses. That makes it more difficult to reach a joint agreement.'
How do you tax an iPad?
A further, possibly more important problem is the allocation key. Take the sale of an iPad: the iPad was devised in the US, it is produced in China and is ultimately sold in a shop in the Netherlands. Which of these countries can tax the sales of the product? And how much tax can they levy? Broekhuijsen: ‘In bilateral treaties an open norm is used for this problem: tax is levied in the country where the work and the capital converge. This means that multinationals have some scope for having their profits taxed in countries where the tax rate is relatively low. This will encourage tax competition and tax planning. An allocation key on the basis of a formula could be a solution. However, the chance that such a rule will be part of a multilateral treaty is very small.'
No mega treaty
In the short term Broekhuijsen does not expect any international mega treaty to distribute tax revenues more fairly and to prevent tax evasion. But he does believe that the international community could make a number of process agreements. 'You can facilitate a discussion on a sustainable tax system internationally, or set long-term goals. World leaders did something comparable at the climate conference in Paris, where they agreed a maximum premissible rise in the Earth's temperature of 1.5 degrees. This led eventually to more concrete sustainability measures.'
What you need to know about tax avoidance
To maximise their profit, some companies stash their income in tax havens - often through Dutch mailbox companies. How exactly does that work? And are there other options? Tax lawyers Jan Vleggeert and Tanja Bender explain in this interview.