Leading the charge against tax fraud

The Panama Papers demonstrated to the world the severity and scope of tax evasion and fraud. Now the European Parliament is taking up the fight. Danish MEP Jeppe Kofod sits on the parliamentary committee tasked with finding ways to close tax loopholes that siphon trillions of kroner from public coffers every year

In the wake of the Panama Papers leak last spring, the issue of tax evasion and tax fraud became headline news. Celebrities, politicians and large companies were found to have been hiding money away in tax havens through shell companies created by law firm Mossack-Fonseca.

In response, the European Parliament put together a special committee to investigate the extent of illegal tax dealings in the EU, and to suggest punitive measures for individuals and companies engaged in tax fraud. According to the European Commission,  EU countries lose about seven trillion kroner in tax revenue to the havens every year.

Danish MEP for the Social Democrats (Socialdemokraterne) Jeppe Kofod sits on the committee, which is expected to release its findings next summer.

Above: Jeppe Kofof represents the Social Democrats as an MEP in the European Parliament. He sits on the Pana committee, tasked with investigating the Panama Papers.

Above: Jeppe Kofof represents the Social Democrats as an MEP in the European Parliament. He sits on the Pana committee, tasked with investigating the Panama Papers.

Were you surprised by the information revealed by the Panama leaks?

I was not surprised by the information as such, I think there was widespread knowledge that massive money laundering and tax avoidance was happening. What was surprising was the exact structure of how these things were done. Panama has resisted adopting the OECD standards for information transparency. It was well known that drug lords in Colombia laundered their money in Panama. But the exact structure and how it involved governmental figures like Putin, Assad, the Icelandic prime minister, David Cameron’s father and other high profile people, that part was interesting.

The amount of data was also surprising. This was the biggest leak in history, much bigger than Wikileaks and Luxleaks. We also need to remember that this is only one law firm. There are others in the same business and on the same scale, we’ve only seen the tip of the iceberg.

So, this was all known and we just needed proof?

People had a sense that something was wrong. There are certain countries that write their laws in a way that supports secrecy and protects money laundering, so the suspicion and knowledge was there. But exactly how and who it involved was new – that there is a corrupt global elite using secrecy, and that Panama is holding their hand over that and making money of shady business dealings is worrying.

Will the EU be exerting increased pressure on Panama to change its regulations?

We have done so. For example, Panama has now signed a deal with Colombia for exchange of information, something that the OECD is trying to implement globally. But these governments need a lot of pressure put on them. We had the Panamanian ambassador come before our tax committee and he was hostile and asked: “why is Europe interfering in my sovereign country? We have the right to implement our own laws.”

But the fact is that they are a part of a global system with free flow of capital and the global system of capitalism. If they want to be a part of that, then they need to make sure that the system is not being misused by criminals, corrupt politicians or companies that don’t want to pay their fair share of taxes. So we told Panama that if they had that attitude, we could just cut off their access to the biggest market in the world. It was disappointing that Panama had that attitude, because they are protecting dodgy businesses and even mass murderers like Assad.

How serious of a problem do you think this is for the EU, and more specifically a country like Denmark with a relatively high tax rate?

It’s a big and a growing problem. You have cases with big corporations, like the recent case with Apple. They have not paid Ireland 130 billion Danish kroner in taxes over ten years. The tax base is being eroded, and when it becomes smaller, we cannot pay for welfare for our people. So for Nordic countries like Denmark it is a big problem. It means we either have to cut the welfare state or ask ordinary working people to pay even more income tax. In a sense you are putting a lot of burden on ordinary people.

How broad is your committee’s mandate to investigate companies?

It’s an enquiry committee, which means we have quite a lot of resources. We will investigate if our laws in Europe are sufficient, but first we need a deeper understanding of the problem. Tax avoidance and fraud alone costs something like 15,000 Danish kroner per EU citizen per year. But if you take money laundering, political corruption, drug crime, human trafficking and weapons sales, that number becomes even higher.

Have you been in contact with Mossack-Fonseca directly?

Not me personally, but we will summon them and similar law firms from other offshore tax havens in for open, public hearings in the European Parliament. We will ask hard questions and sometimes they will refuse to answer. Our experience is that when you call Apple, Google, IKEA or others, they often avoid answering. The same goes for the biggest banks in Europe. We have also experienced European countries that are also a part of the tax avoidance industry, like Greece, the Channel Islands and Lichtenstein, refusing to answer questions. But it’s good to expose different stakeholders in open hearings.

Would you expect a company like Mossack-Fonseca to comply?

I hope they will, or if they are not willing to then I hope the authorities in Panama will. Because they want to remain on good terms with Europe and be able to trade with our markets. But I’m not so optimistic about how cooperative they will be as they want to protect their business model.

Do you have the possibility of introducing any punitive measures against companies that refuse to cooperate?

We can place a witholding tax on all capital going to Panama that is a de facto sanctions on the country.

Do you have an opinion on which concrete steps should be taken to tackle the problem?

We need to strengthen our laws on money laundering and we need much higher sanctions on the industry that enables criminals and companies to avoid tax. For instance with the bank Nordea in Scandinavia, we saw that the penalty is very low for not ensuring that their clients are not engaged in illegal activity. We need sanctions against banks that systematically and repeatedly try to hide money or avoid paying taxes. We should possibly be able to revoke a company’s business licenses – whether that be a bank, a law firm, or an accountant firm. We also need to create a black list of all tax havens in the world that won’t cooperate and do away with their secrecy and place real sanctions against them.

Isn’t the problem that a lot of what we see is immoral, but not illegal?

If you hide away money that you should be paying taxes on, then that is clearly illegal. If you create a shell company within an offshore structure, that is not illegal, but the construction can be used for illegal activities. It is right, that it’s not illegal to create a company in Panama, but it can be used for illegal purposes. The way to get around that problem is to ensure that we know the beneficial owners of all companies and that we can track any transaction of money. That way authorities can decide if it is illegal activity. It is very important to get rid of the secrecy around a company registration, because these companies don’t just deal with money, they also own a lot of real estate in London and big yachts, gold, and so on.

Should the EU have a coordinated tax policy, and possibly even its own tax authority?

Definitely, I believe in a strong European cooperation and coordination around issues that are trans national, which a lot of tax issues are. If cash flows from one part of a company in one country, to another part of a company in another country, or from a rich individual’s account to an offshore company, then you need the tools to ensure that what is happening is legal, and not an attempt to avoid taxes or to hide assets.

I also want the EU to establish a minimum corporate tax rate, because globalisation will erode the welfare state and create a downward pressure on taxes, especially on corporate taxes and capital gains. We’ve already seen that over the last 30 years in many European countries. Following Brexit, the UK government is possibly planning to lower corporate taxes in an attempt to attract businesses to the UK.

We need to stop that race to the bottom. Because without everyone paying their fair share of taxes, we will not be able to have hospitals, elderly care and so on. So this is a fundamental political fight for a civilised welfare state.

Does the recent Apple case show that the EU is very ill-equipped to deal with their member states on taxes?

Definitely, this is a failure in the construction of the single market. When we created the free flow of services, capital and labour, we forgot to ensure that member states have tools to protect their tax base. The EU has focussed too much on the free flow of everything and has forgotten that in order for a market to function in a fair way then we need instrument that ensure companies can’t play different countries against each other.

Has the tax burden shifted more onto income tax and away from corporate tax in recent decades?

It is clear that, compared to corporate taxes, income tax has not been declining, I think it has been quite stable and maybe even rising in some countries. The sole argument for low corporate and capital gains taxes is that we are losing in the free flow of capital under globalisation. But it is important to remember that a market is a political construction. There are laws that enable me to open a bank account in Luxembourg. We have been too much on the side of market fundamentalism at the expense of fair competition and democracy.

As exemplified by the Brexit vote, we seem to have reached the nadir of public trust in the EU, but at the same time the public has shown a strong opposition to tax evasion. Do you believe that fighting tax evasion could help reinvigorate trust in the EU?

Definitely, the EU is really about dealing with transnational problems that no country can solve on their own. No country can deal with tax dodging and tax havens alone. Already good things have happened, but we still have a long way to go. So we need to show people that the EU is taking action to protect our tax base and the economic security of our member states.

Do you think that Brexit will have an effect, especially considering low tax areas that belong to the UK?

Yes, discussions need to be held with the UK about capital flow to crown properties, and to make sure it is taxed. You have to remember that if the UK leaves but wants an agreement to stay in the single market, then they need to fully accept the EU and regulations on financial services, and establish tools to prevent tax dodging. So either the UK has to separate totally from the single market, as some in the hardcore Brexit camp advocate, otherwise we need good tools to deal with Channel Islands such as Jersey, Guernsey.

For example, the EU has made agreements for the exchange of information with Switzerland, Lichtenstein and Monaco. The deal with Switzerland, which I was a part of making, will take affect next year and will be the de facto end to bank secrecy in Switzerland, which has been in place for a hundred years. That is a big step forward and we will fight to make sure the same kind of agreements are implemented for the Channel Islands and crown dependancies.

Do you expect, or possible fear a strong backlash from big companies like Apple?

I do. Take Tim Cook’s [Apple CEO] reaction to the commission’s ruling. He used the classic argument, ‘we’ve created a lot of actives and employment in Ireland’. But that is not the point. They have created a lot of jobs and technological advancement, but it has to be done in a fair way. And when they have 100 billion Danish kroner in tax breaks, then it is not a fair competition. They have to understand that companies of that size have to pay their fair share of tax like everybody else. So I don’t buy the argument that ‘we are so innovative, and therefore we have special rights’. No, everybody has to follow the same rules and pay their share, also Apple or Google, or other big tech companies.

Do you fear that they will come after you personally?

No, I don’t fear that. I sense huge public support. This summer I was in the US for the Democratic National Convention and I talked to Bernie Sanders and others in the Democratic Party about the issue. There is also huge support in the US, so I think we have a good chance of winning this fight. But there will always be companies that will look for ways to maximise their profits through tax evasion. Politicians have a responsibility to end that. Politicians have for too many years failed, for many different reasons, to do a proper job.

Will a part of your work include trying to find concrete ways to protect and help whistleblowers in cases like these?

Definitely, that is a very important topic. We’ve called for strong guidelines to protect whistleblowers, because under criminal law whistleblowers are very poorly protected. The Luxleaks whistleblowers were prosecuted in Luxembourg, which was a disgrace as they exposed illegal activities. If we don’t create laws to protect whistleblowers, and I see some governments hesitating, then we are effectively deterring people from coming forth and that will be catastrophic for us. I think it will deter big banks or law firms from engaging in tax dodging, or illegal business if they know that there are strong protections for employees who make public illegal activities within their companies. M


By Elias Thorsson

Managing editor. @Eliasthorsson

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