Sven Giegold

Grade: Poor – European Member States cooperate insufficiently to collect billions in taxes

Dear friends and all those who are interested,

It is painful to watch: In times of empty coffers due to the Corona crisis, the Member States are letting billions slip through their fingers because they are not consistently cooperating on a European level in tax matters. It is still far too easy to hide income and assets from the tax authorities in Europe.

For a year now, my team and I have been digging into the successes and failures of cross-border cooperation between tax authorities in Europe. While improving European tax law is important, the enforcement of existing rules is crucial. As rapporteur for no less than three reports of the European Parliament in this subject area, I have just published my implementation report on the state of cooperation between tax authorities in Europe (“Directive on Administrative Cooperation in the Field of Taxation”). While the shadow rapporteurs are preparing their amendments, I would like to present the most important results of our investigation to you.

The European “Directive on Administrative Cooperation in the Field of Taxation” (DAC) has been in place since 2011 and has laid the foundation for Member States’ tax administrations to support each other in the fight against tax avoidance, tax evasion and tax fraud. It has already been extended six times – and the Commission is currently working on a proposal for the eighth version of the directive. So far, however, the European Parliament has never evaluated the effectiveness of these directives. All the more important now to take stock: How well has the directive and its first three extensions been implemented? How well does cooperation between tax authorities work in practice? And where does Parliament see the need for improvements? My draft report forms the basis for the first ever “implementation report” of the European Parliament in the area of economic and monetary affairs. The work was carried out in good cooperation with the shadow rapporteurs of all other political groups. This is an important first step towards the European Parliament being able to exercise its political control function also in the area of tax cooperation. The urgent need for this supervision became clear in several respects during our investigations.

What did we find out?

Before we even started, our work was already sabotaged: The Member States (with the laudable exception of Sweden and Finland!) refused to give the Parliament access to crucial information on the implementation of the Directive. The EU Commission in turn has interpreted EU law in a way that is unfriendly to Parliament and has also refused access to this information available to them. All this despite the fact that, according to the European treaties, the European Parliament has the right and the responsibility to control the Commission in its work. Due to a lack of information, we were therefore unable to draft a fully fledged implementation report and can only get near the extent and usefulness of the information exchanged. But it speaks volumes when the Member States do not want to show their cards: From the limited information available, public studies, a report by the EU Court of Auditors and a study commissioned by the European Parliament’s Research Service as well as the accounts provided by several whistleblowers, the following became clear:

  1. Unlike 15 years ago, tax-relevant data is now exchanged between Member States. For example, data on income and assets in simply structured bank accounts and custodial accounts flow automatically between Member States. Although this progress has been written into European law, it was achieved mainly thanks to pressure from the USA, the G20 and the OECD, as well as after scandals such as LuxLeaks and the PanamaPapers. In addition, Member States only have to exchange data which is easily available to their own authorities. There is no obligation to make further data available in order to share it with other Member States. The Directive and its six extensions so far cover the following tax-relevant information, albeit with loopholes: Income from employment, directors’ fees, pensions, life insurance products, and immovable property (DAC 1); financial accounts and related income (DAC 2); tax rulings and advance pricing arrangements (DAC 3); non-public country-by-country tax reporting by large companies (DAC 4); tax authorities’ access to beneficial ownership information collected under anti-money laundering rules (DAC 5); cross-border arrangements for tax planning purposes (e.g. acquisition of a loss-making business or operations allowing for the reclassification of income into a category taxed at a lower rate) and mandatory disclosure rules for intermediaries (lawyers, consultants and accountants as well as banks, trustees, insurance companies, financial advisors and other service providers) (DAC 6); revenues generated by sellers on digital platforms (DAC 7).
  2. There is still too little information exchanged on certain types of income and assets. Only if all tax-related information is automatically exchanged across borders can Member States tax all income and assets earned or held by their citizens across borders equally. The existing directives have brought us closer to this goal. But notably real estate, trusts, shares in companies below the 25%+ ownership threshold, certain forms of capital gains and crypto assets are not yet part of the automatic exchange of information. Non-financial assets such as cash, art, gold or other valuables held in free ports, customs warehouses or safe deposit boxes, as well as the ownership of yachts and private jets, also do not have to be reported across borders so far.
  3. Too little use is made of the information exchanged. It is of little use if more and more information is exchanged while the data exchanged is underused. Our research reveals a lack of trained staff and effective IT infrastructure. There is also a lack of data to assess the reasons behind this lack of capacity. Which information received was used, which was not? And for what reason? The effectiveness of data exchanged for tax purposes is structurally non-auditable. There is much need for improvement here.
  4. There is a lack of control regarding the quality of the information exchanged. So far, only a few Member States check the quality of the data they exchange. This fact significantly increases the risk that the reported data is incomplete or inaccurate. The lack of quality controls is all the more worrying in view of the fact that few Member States check the accuracy of the information they themselves have received from financial institutions. However, experience shows that not all financial market participants can be trusted to comply with regulations, even if others put in a lot of effort and commitment.
  5. Existing European rules have been poorly implemented. The effectiveness and completeness of the information exchanged depends on the accuracy of the information on beneficial owners collected under anti-money laundering rules. But this is precisely where the problem lies. The incorrect transposition and lack of effective enforcement of the anti-money laundering directives and the remaining weaknesses in the anti-money laundering framework undermine the effectiveness of the exchange of information. There are currently 11 infringement proceedings against Member States for the incorrect transposition of the fourth anti-money laundering directive and 16 (!) infringement proceedings on the occasion of the incorrect transposition of the fifth directive against money laundering and terrorist financing. And this is unfortunately only the tip of the iceberg, because many glaring deficiencies continue to be tolerated by the Commission. For example, Germany has a transparency register which is much worse than the one in Luxembourg, making an #OpenGermany analogous to the #OpenLux revelations impossible. These failures have a direct impact on the effectiveness of tax cooperation. Also, the data in the transparency registers is often outdated and incomplete.
  6. The implementation of international standards is unsatisfactory as well. Internationally, both the OECD’s Global Forum on Tax Cooperation and the Financial Action Task Force (FATF) conduct reviews. Between 2010 and today, the FATF has reviewed 18 Member States to see how effective they are in combating money laundering and terrorist financing. The result: none (!) of the 18 Member States has performed satisfactorily on all important indicators. The OECD’s Global Forum paints a similar picture: 10 Member States have not fully implemented the common international standards on the automatic exchange of information between tax authorities. Shortcomings in the implementation of the exchange of information at the explicit request of a partner country were found in a total of 18 European Member States. This is simply not good enough. And yet, the EU Commission has not initiated any infringement proceedings because of these shortcomings.
  7. Different standards lead to avoidable bureaucracy. In addition to the EU and OECD standards, reporting financial institutions must also comply with deviating rules from the US (“FATCA”). This leads to unnecessary bureaucracy. Likewise, varying threshold values do not make the collection of data any easier.

What do we propose?

All tax-relevant information must be exchanged consistently. For this to succeed, several improvements are needed:

  1. So far, Member States are not obliged to exchange all types of income and assets already covered by the Directive. This means that although six categories of income and assets are covered by the Directive (e.g. income from employment and pension benefits), nine Member States only shared information on three of the six categories in 2017. This needs to change.
  2. Furthermore, the directive must be extended to the assets mentioned above (yachts, crypto, etc.), again combined with the obligation to also exchange them consistently. This applies especially to automatic access to information when EU citizens acquire real estate and company shares.
  3. To ensure the exchange of high quality information, Member States must commit to actively provide information. This means that Member States must work on the quality and availability of data and cannot just rely on existing data. The EU Commission must be proactive with on-site visits. Actors obliged to report information need easy access to an EU verification system for tax identification numbers (TINs).
  4. In order to ensure that the exchanged information can really be attributed to the actual owners, there is a need for consistent recording of the beneficial owners. So far, far too often only the legal owners are recorded, which can also be a lawyer who manages a fund on behalf of a wealthy family. But this is not good enough, because the fund must be attributed to the family – they are the beneficial owners who can dispose of the assets and the profits.
  5. This example also explains why company shares below the 25%+ threshold must also be reported: under the current rules, four or more family members can own a company without this highly tax-relevant information being recorded, let alone exchanged.
  6. In this context, it also needs to be reviewed whether the reporting requirements for financial institutions and other asset managers should be extended. The same applies to the disclosure of tax benefits for individual companies, so-called “tax rulings”, for which there are still gaps in the exchange.
  7. Currently, the data exchanged may not even be used for all law enforcement purposes. The EU states from which the data was sent must explicitly authorise its use in individual cases, for example to fight money laundering and organised crime.

In order to be able to recover billions of euros in lost tax revenue, Member States must increase the capacities of their tax administrations. Research by the European Court of Auditors shows the importance of sophisticated IT systems that can effectively process large amounts of data and perform automated tasks. The European Union is already providing support for capacity building in the Member States. This support should be expanded and complemented by a European monitoring system. This system should record the amount of information exchanged per type of asset and income, as well as the additional tax revenue gained. However, this also means that the Member States must be much more transparent about the information they use, to what extent and with which results. The journey of tax-relevant information across Europe must be traceable. Here we propose that each data set be marked with the flag of the country that provided the information. Our aim must be that the added-value of tax cooperation among European neighbours finally becomes visible and measurable.

Member States must consistently check the information provided by financial institutions and impose penalties where information is false. To this end, a uniform catalogue of measures is needed to standardise sanctions across the EU. The work of financial institutions and state inspectors can be facilitated by a Europe-wide verification mechanism for tax identification numbers (TINs). If the bank can immediately check a person’s tax number, this will put a stop to misinformation.

Member States must be allowed to decide for themselves whether they want to use information obtained through the exchange of tax information for other law enforcement purposes. Combating crime should not need cross-border authorisation between EU states.

The correct and comprehensive implementation of existing tax and anti-money laundering legislation is a prerequisite for the meaningful expansion of cooperation between tax authorities. It is the task of the European Commission to check the implementation and correct application of EU law and to take action where this is not the case. The Commission should fulfil this task consistently and initiate further infringement proceedings. In addition, the Commission should analyse the state of administrative cooperation between tax authorities every year and publish its findings. Then the European Parliament will no longer have to rely on information from international organisations to learn more about the state of tax cooperation in the European Member States. Member States must no longer hide behind a wall of missing information. European taxpayers and their representatives in the European Parliament have a right to know how well the tax authorities are working and to demand improvements.

Unify standards, abolish thresholds and exemptions. To reduce red tape, the EU should work within the OECD to harmonise US FATCA rules with EU and OECD standards (“CRS”) and to close loopholes and gaps. In Europe, we should remove all thresholds and exemptions. Simple and comprehensive rules are easier to implement and more effective than a system full of loopholes. In the digital age, tax authorities can filter for themselves what data is of interest to them.

Initiate infringement proceedings immediately. The EU Commission has precise information from three sources on the inadequate implementation of EU law in the area of tax cooperation. The Global Forum of the OECD has documented deficiencies, as has the FATF. In addition, the Member States have reported directly to the EU Commission. Now the EU Commission must fulfil its mandate as guardian of the treaties and initiate infringement proceedings for the widespread lack of effective implementation.

Democratic consequences: Access to documents! The European Parliament must by no means let the decision to deny access to documents stand. I will insist that all legal means be exhausted by the Parliament to force the EU Commission to give us the documents. If necessary by going to the European Court of Justice. Only with these documents on the implementation of the directive in the Member States can a proper implementation report be drawn up!

Majority decisions in tax matters. Seven reforms to a directive that is only 10 years old is too much bureaucracy. As tax issues in the EU are decided unanimously in the Council without co-decision of the European Parliament, progress in cooperation on tax matters is a snail. Therefore, in the context of the Conference on the Future of Europe, which is now starting, we as the European Parliament must insist that decisions in the area of taxation be taken by majority vote, including parliamentary participation. Slow progress only creates tax losses and avoidable bureaucracy.

My conclusions.

There is still a lot of information about income and assets that is not systematically shared across borders. The information which is being shared is underused. The failure of states to collect tax revenues, especially from the richest 10 per cent of the population, further widens the gap between rich and poor. This ongoing tax injustice not only undermines trust in our democracy. It is simply no longer tenable in the face of empty coffers in the Covid-19 pandemic and, at the same time, necessary public investments for a sustainable economy and infrastructure. That is why I call on the Commission: Use the eighth revision of the directive, which is now planned anyway, for a great leap forward in tax cooperation! Small steps are not enough to put a stop to tax fraud. I will do my utmost to ensure that the Commission takes the results of Parliament’s investigations into account.

And to the Member States, I can only repeat the European Parliament’s appeal of 10 March: finally give yourselves the means to collect unpaid taxes! The European Parliament presents you with readymade solutions – without any tax increases. In the parliamentary vote in March, the pro-European parties voted with a large majority for a consistent extension of the directive, effective sanctions and a systematic review of its implementation. Now is the time to take tax cooperation to a new level.

Your input needed

Below you will find my entire report, including my own amendments, which I will only be able to submit later. I now have a request to experts, insiders and practitioners: send me your concrete (!) feedback and suggestions on my report by 11 April, which I will look at closely in order to further improve the planned amendments to the report.

Next steps going forward 

Together with the amendments of the shadow rapporteurs, I will endeavour to create a report with broad support. The shadow rapporteurs have until 15 April to submit their amendments. On the basis of the amendments submitted, we will then jointly work out compromise amendments that can be supported by as broad a majority as possible. This common position will then be voted on in the Committee on Economic and Monetary Affairs on 27 May. The plenary vote is planned for June. On the basis of this parliamentary position, we will then approach the EU Commission and the Council in order to implement as many of the recommendations as possible. I will continue to push for greater cooperation in tax matters and beyond!

With resolute European greetings,

Sven Giegold

My draft report can be downloaded here:

However, I could only submit part of my research findings as a draft report, as there are fixed guidelines on the maximum length of such texts. My full draft report can therefore be viewed via the following link:

The paragraphs in normal font correspond to my submitted draft report. The parts in bold and italics will be submitted later as amendments, subject to further changes of course.


UPDATE: this document contains my draft report and all amendments submitted on 16 April:

P.S. Petition: Digital Tax Now! – Shops are closing, Amazon & Co are making huge profits without paying their fair share of tax: a digital tax must come now! Together we have the chance to finally overcome the blockade on the digital tax: Please sign our petition and share it with your contacts!

Category: Economy & Finance

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