Category Archives: EU

The new political economy and geography of global tax information exchange

The OECD has recently released information on the two most important recent global networks of global tax information exchange. They are, respectively, the networks of exchange of country-by-country reporting (CBCR) and exchange of financial account information (through the Common Reporting Standard, CRS).

These networks give a unique look into the new political economy and geography of global tax information flows. CBCR and CRS data are, arguably, the cornerstones of modern global tax information cooperation, providing crucial data on the foreign activities of national individuals and companies. The CBCR is an annual report for large multinational groups (revenue +€750m) that states their jurisdictions of operation, the nature of business in each country, the tax paid along with a host of economic activity indicators. The CBCR is typically filed in the corporate headquarter’s country of residence, then shared on request with other countries as needed. Through the CRS, each government compiles data from national banks on the financial accounts (balances, interest, dividends, and financial asset sales proceeds) of non-citizens, which is then exchanged automatically with those citizens’ home competent authorities.

Therefore, it is also highly interesting to look at the global network of these information flows – who has access, who doesn’t, and who is connected.

So I scraped the data off the OECD website and analysed it. And what I found provides a very interesting picture of the modern tax information networks.

At the time of writing, there were around 700 (CBCR) and 1600 (CRS) bilateral exchange agreements established. (I’m not sure why OECD say 1800 CRS agreements because there’s only 1600 unique agreements in their data). Given that the CRS was launched four years ago and CBCR only two, the discrepancy is natural. Taken together, the 2300+ agreements are a quite fascinating data set. Let’s look at each in turn, and then the two together.

First, however, a key caution must be noted. While the CBCR and CRS provide key recent mechanisms of tax information exchange, they are by no means the only mechanisms. Preceeding the new CBCR and CRS networks are established networks of bilateral “by request” exchange of information networks (the previous OECD standard), bilateral tax information exchange agreements (TIEAs) and tax treaties with info exchange clauses. Given that these have been in place for much longer, they are naturally more dense than the new networks. Still, CBCR and CRS are the frontier and are replacing these older standards exactly because of their limitations. Thus, the analysis below provides a picture of the emerging state-of-the-art within global tax information exchange.

The global CBCR exchange network

I tweeted out the network the other day, and it looks like this:

cbcr network

(Size by degree (number of links); node colour by region; and network layout by ‘ForceAtlas2‘.)

There are a few caveats to be noted before drawing lessons from this picture. First, the novelty of CBCR shapes the network look substantially. The picture is dominated by European countries, but that is understandable given 55% of all CBCR exchange agreements are formalised by EU Directive 2016/881/EU on automatic exchange of tax information (the rest are individually negotiated CBCR MCAAs). Second, the absence of the USA is noteworthy. While the USA has been reluctant to commit to reciprocal information exchange of bank account data, that is not the cause for CBCR. Simply, US CBCR filing requirements will kick in on 31 December 2017, as in most jurisdictions, but later. It is almost assured that the US will develop an extensive exchange network to protect US MNEs from local filing demands. Other countries with late filing requirements that will be expected to build substantial exchange networks as we go include Hong Kong, Japan, Russia and Switzerland. The whole network is expected to increase substantially over the next few years, as the remaining CBCR MCAA signatories (as of today, there were 57) conclude and report agreements.

That said, what we can see is that the current global CBCR network is all about Europe, OECD members, and a few small offshore centres. That picture likely won’t change too much. The almost complete absence of South America (beyond Brazil and Uruguay), Asia (beyond Malaysia), and Africa (beyond South Africa and Mauritius) stands out. This has attracted renewed criticism that the OECD tax policy-making processes are not inclusive of developing countries. However, it should be noted that the OECD has moved in the direction of bringing developing countries more closely in to its tax work, including through the BEPS Inclusive Framework, so there is potential for a broadening of the geographical concentration in the CBCR exchange network.

It is also worth noting that the picture indicates a very clear “you’re either in or you’re out” trend. There are currently 45 countries exchanging CBCR data, and none of these have less than 23 agreements (maximum of 43). If you are set up to exchange CBCR data, you are ready to exchange it with many partners.

More broadly, I think the network shows quite nicely the varying allegiance to the OECD international tax consensus. The European Union, in particular the European Commission, has become an increasingly autonomous player in international tax affairs but also a close ally of the OECD on many counts. The centrality of Europe in the global CBCR network is a representation of this position.

The global CRS exchange network

CRS exchange network.png

(Again, size by degree (number of links); node colour by region; and network layout by ‘ForceAtlas2‘.)

The global CRS network provides a somewhat more developed but not substantially different picture of the new political economy and geography of global tax information exchange. The fact that we have 62 countries (as opposed to 45) and more than twice the number of exchange agreements makes for a more pronounced illustration.

Again, it is worth noting some points on the data. Once more, EU is massively present. This is partly because of its speed in implementing effective CRS legislation. Thus, 35% of CRS exchange relation are down to EU instruments, including EU Directive 2014/107/EU. However, EU members have also been active in concluding agreements with non-EU members. The remaining 65% of exchange relations are concluded as individually negotiated CRS MCAAs, plus ten exchange agreements through the UK CDOT (Crown Dependencies and Overseas Territories International Tax Compliance Regulations). We can also see that, again, the US is absent. However, here we should not expect it to develop a network at a later stage. Due to the presence of FATCA, the US’ own financial account information standard, there has been no desire to also sign up to the CRS. Finally, the CRS network is also expected to increase and broaden its geographical scope over the coming years as the remaining of the AEOI-committed countries (100 at the time of writing) conclude and report on exchange agreements.

Beyond that, the political geography of the CRS network is notably similar to that of the CBCR network: It’s all about Europe and OECD members, with a few small offshore centres mixed in. Like the CBCR network, the absence of developing states has also contributed to criticism of the CRS standard. Once again, we can also see that it’s very much an “you’re in or you’re out” picture. 62 countries have CRS exchange agreements, and only one (Bonaire, Saint Eustatius and Saba) has less than 29 agreements in place.

Another nugget that I found quite interesting in the data: There are around 350 CRS agreements that are only reported by one of the two jurisdictions to the OECD. All other relationships are reported by both jurisdictions. For instance, Anguilla’s CRS exchange agreement with Argentina is only reported to the OECD by Anguilla, not Argentina. And there is a certain trend with these 350 agreements. They are all reported by the following countries: Anguilla, Bermuda, British Virgin Islands, Cayman Islands, Croatia, Cyprus, Korea, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Mauritius, Mexico, Monaco, Montserrat, Netherlands, Romania, Saint Vincent and the Grenadines, Turks and Caicos Islands. Most of these countries are small (island) states with noteworthy financial centres, or what some might label tax havens.

There are a few possible explanations, but my guess as to what is going on here is this: Countries most at risk of reputational damage and political wrath from non-compliance are making sure they report all of their exchange relations to the OECD as soon as possible. They simply want to make sure it is noticed when they are conforming to expectations, when they are “doing good”.

The global tax information exchange network (CBCR + CRS)

Total global information exchange network

(Size by weighted degree (number of links, weighted by strength); node colour by region; and network layout by ‘ForceAtlas2‘.)

Here, I’ve added the CBCR and CRS relationships together, giving us a picture of who is truly able to access modern global tax information flows. The bolder the link, the more weight it has, indicating access to both CRS and CBCR information from international exchange.

Having noted caveats to the data above, the picture that emerges here is, as we might have expected, more pronounced but similarly indicative as the individual CBCR and CRS networks. The observations barely need repeating, but for good measure: there’s EU/OECD dominance with a few financial centres mixed in, an absence of the US and developing countries, and a strong in-or-out dynamic.

Given the current structural factors contributing to this network layout, the main factor with potential to substantially change this picture is change in the overall political economy of global tax governance. This may yet happen, e.g. through the BEPS Inclusive Framework, but may also very well not happen due to geopolitics or other factors.

There will be more analysis to do on this data, and it will be interesting to follow the longitudinal development of these networks. I will certainly continue my work in this area, as I’m sure others will. For now, however, a very interesting picture is emerging of the new political economy and geography of global tax information exchange.

Are American firms really more tax aggressive?

Are multinational groups headquartered in the United States more aggressive in their tax planning compared to non-US competitors?

That is, at least, a very popular strapline in tax circles. Negative media stories about the tax affairs of major US firms such as Apple, Amazon and Starbucks are often described as contributing factors to the OECD/G20 BEPS project and the European Commission state aid investigations. Although of course, by critics these projects are described as undue crusades against American firms.

Given the notorious difficulty in measuring effective tax rates of multinational enterprises (MNEs), there remains little systematic cross-national comparative research on the topic. Studies have varied in approach and results. For instance, economists utilising the prominent Devereux/Griffith methodology have often found relatively high effective tax rates in the United States. However, the D/G approach is based on a hypothetical domestic investment example and is not attentive to international tax arbitrage. Using financial accounts data, legal scholars Reuven Avi-Yonah og Yaron Lahav concluded in a 2011 piece that US MNEs had systematically lower effective tax rates than European MNEs. Another 2011 report from PwC found relatively high book effective tax rates in the US.

However, recent years’ academic literature has provided indications on the stand-out role of American corporate actors in the world of tax avoidance. A 2015 study by Chris Jones and Yama Temouri from Aston University found that US MNEs were more likely to locate investments in tax havens compared to firms headquartered in continental Europe.

Drawing from existing economic literature, Jones and Temouri identify firm characteristics likely to relate to aggressive tax behaviour (in this case, measured as tax haven investments), including technology intensity (R&D and intangibles) and incorporation in Liberal Market Economies (LMEs), such as the US and the UK – as opposed to Coordinated Market Economies (CMEs), such as Germany or Japan. Both of these hypothesis are confirmed by the analysis. They conclude:

“We find that MNEs from the high technology manufacturing and services sectors with high levels of intangible assets are more likely to have tax haven presence. (…)

MNEs from LMEs are significantly more likely to undertake tax haven FDI compared with MNEs from CMEs.”

On the other hand, an interesting new paper by Katarzyna Habu from the Oxford University Centre for Business Taxation, draws these conclusions into question. While Jones and Temouri’s paper draws on financial accounts data, Habu utilises a fascinating new dataset of corporate tax returns, made available by the UK HMRC to researchers. This provides a more accurate gauge of corporate tax bases, although it comes with its own limitations, such as limited cross-country comparability.

In short, the paper compares the taxable profit levels of similar domestic and multinational companies operating in the UK (based on industry and level of total assets).

Buried at the far end of Habu’s paper, a compelling read, is the following table:


Here we see the differential (ATT) between the taxable profits to total assets ratio of the two groups (domestic and multinational) for various ‘home countries’ of the MNEs.

The results indicate that, from the pool of MNEs with subsidiaries trading in the UK, MNEs headquartered in tax havens are most tax aggressive, followed by French, Asian, other European, US and German MNEs. Entirely contrary to Jones and Temouri’s findings, there is no evidence here that US firms are more aggressive than German or Japanese firms. In fact, it rather indicates that French and Asian headquartered MNEs are more aggressive than US MNEs.

There are various potential explanations for the discrepancies in the recent literature.  Tax haven FDI and UK taxable profits avoidance are not necessarily expressions of the same type of tax aggressiveness. American companies could indeed be more aggressive in locating investment in tax havens, while at the same time not being more aggressive in lowering taxable profits through tax avoidance in the UK. More broadly, the wide variety of empirical data sources, theoretical approaches, geographical scope and so forth do not allow for easy comparisons between the studies. 

And then there’s the question of the differential between effective tax rates of domestic and international economic activity – one that is substantial in particular for US technology firms due to the tax system design (thanks Heather Self for that point). Existing studies do not investigate this systematically.

We should also note, as Alex Cobham importantly pointed out to me, that the latter study expresses net numbers – the overall effect of tax aggressiveness, which may hide significant flows of profit shifting in or out of the UK. US firms could conceivably be shifting profits into the UK in a tax aggressive manner without it showing up here. However, the evidence can’t say.

Thus, we should be careful in drawing firm conclusions from this ascending literature, but we should take both studies as interesting results that shed light on our understandings of the dynamics of MNE tax planning. There may be continuing suspicions that US MNEs are generally more tax aggressive, but further research is needed in order for us to firmly confirm or deny such assumptions.

Technical politics, sovereignty and the prospects of tax multilateralism

International tax cooperation is hard. Especially when it challenges national sovereignty. Sovereignty is close to heart for politicians. Taxation remains a cornerstone of the nation-state and of the social contract. Governments are not liable to relinquish absolute authority on tax matters.

So, at least, the story goes. Indeed, the reality – and the associated perception – of taxation as the ultimate prerogative of sovereigns (alongside the use of force) has fundamentally shaped all kinds of analysis of international tax matters. In political science, for instance, the predominant approach to international taxation relies on realist models of inter-state power battles. When tax is the point of discussion, states are the relevant players and power is the game, with sovereignty at the core of the underlying dynamics.

That’s why, it is said, for instance, that the European Union has never been able to take control over direct tax regulation, although its powers span an otherwise extensive array of national legislative agendas.

Sovereignty is also cited as a key criticism of the European Commission’s recently re-launched proposal for a Common Consolidated Corporate Tax Base (CCCTB). The CCCTB, of course, is the Commission’s flagship initiative to harmonise calculation of companies’ taxable profits, ridding the private sector of having to deal with 28 (soon to be 27) different such rulebooks. The CCCTB would revolutionise the corporate income tax system in the EU, moving from one of tax base allocation based on the arm’s length and separate entity principles, towards one based on unitary taxation, with tax base allocation through formulary apportionment, i.e. divided between Member States according to local sales, labour costs and assets.

More importantly, the CCCTB would mean EU Member States surrendering national sovereignty on tax matters. Effectively, rules for deductions, incentives and so forth would come under the control of the EU system, with individual countries having to obey rules agreed at the supranational level, and going the multilateral EU route to any substantial changes.

Whereas the CCCTB has been lamented as largely ‘doomed’ because of the EU’s sovereignty-challenging, hard law, bargaining-based policy process, another major multilateral tax initiative, the OECD-led, voluntary, soft law, consensus-based Base Erosion and Profit Shifting (BEPS) project, has been praised for its speedy and effective solution-building.

However, both projects are indicative of increasing international tax cooperation. They have much more in common than usually discussed, and that tells us something about the general prospects for tax multilateralism. While national sovereignty and power politics are important barriers to tax cooperation, they have been overemphasised at the expense of alternative understandings of the lack of traction for the CCCTB and similar initiatives.

Here, I want to expand on this argument, drawing two key distinctions, namely between political and technical policy arenas, and between legal and effective sovereignty, in understanding the outlook for international tax cooperation.

Technical vs. political levels

Every policy decision, every policy process, develops at the intersection of two key policy arenas: the political arena and the technical arena.

At the political level, we see most clearly the distinctions described above. Hard law vs. soft law; sovereignty vs. cooperation; my country interests vs. your country interests; etc. The primary actors are states, embedded in distributional conflict.

The technical level, however, is different. I have written elsewhere on the topic so I shall keep it short. Suffice to note that the protagonists here are primarily experts and professionals, bureaucrats and advisers, working to build credible technical solutions, with country interests and high politics in the background.

Each level is important in a policy process, although one may weigh more heavily at certain points and in certain settings. But the relation is key. The technical level shapes the political level, and vice versa. Experts influence what can and cannot be proposed and discussed and accepted as policy issues and solutions; politicians influence the framework in and speed of which certain policy topics are taken up, and so forth.

At the same time, the ‘technical’/’political’ distinction should not be overemphasised. What is technical is political: a minor, seemingly technical addition to a policy recommendation may have enormous distributional consequences. And what is political is technical: politicians’ ability to promote technically authoritative arguments in proposing issue solutions is central to policy success.

While popular explanations typically highlight dynamics at the political level – country interests, national sovereignty and distributional politics – as the preeminent cause of policy success or failure, the technical level remains underappreciated.

The success of the BEPS project, for instance, has not merely been down to goodwill from the G20 and OECD nations, but, to a great extent, it is a consequence of dynamics at the technical level, as I have written elsewhere. Consensus around key technical BEPS provisions throughout a significant international community of professionals has played a central role in effective policy uptake. The delivery of technically strong, agreeable solutions from the technical level to the political level, while still needing to be ratified, was essential in inclining political decisions and a major contributor to widespread implementation.

Similarly, while the CCCTB’s difficulty is usually ascribed to power politics, I would argue that it may have as much to do with technical opposition. The Commission’s proposal faces a number of key technical-level barriers. Several specific provisions have received negative scrutiny, in particular the R&D superdeduction. More generally, the CCCTB is an attempt at wholesale replacement of 28 distinct corporate tax systems, each with vested technical stakeholders, along with the complete overhaul of the international tax system and demolition of entrenched, well-established and well-supported legal and economic principles. It is safe to say there is extensive technical-level resistance to the proposal.

Thus, technical-level entrenchment may provide a barrier just as significant as power politics to the CCCTB and EU tax multilateralism in general – even if the interplay of high politics and technocracy is decisively different in OECD and EU. Power politics may play a more significant role during policy formulation and decision-making in the EU compared to the OECD. But there are also important overlaps. For instance, there is significant similarities in the nature and make-up of the community of professionals involved in the technical levels in the EU and the OECD. Differences are, in my view, not so substantial that they undermine the importance of the technical arena in the EU.

Legal vs. effective sovereignty

Another underappreciated distinction in analyses of tax multilateralism is that between effective and legal sovereignty. Many analyses of international tax cooperation have highlighted governments’ aversion to surrendering (legal) sovereignty on tax, their desire to retain the full right to design policy, in explaining lack of traction for tax multilateralism. However, this argument unduly evades the fact that tax multilateralism may, and indeed does, effectively challenge national sovereignty even if it does not do so strictly as a matter of law.

Going back to the BEPS and CCCTB, from a sovereignty perspective, these projects again seem entirely different on the surface. CCCTB is hard law, requires formal pooling of sovereignty, is embedded in the complexities and frictions of the EU system, and has immediate and highly visible inter-nation distributional consequences. BEPS is soft law, based on consensus cooperation, born out of a flexible, technicised OECD process, and has fewer obvious ‘cui bono’ implications.

But although BEPS is seemingly of a softer nature, indications are that it actually behaves similarly to legally binding projects. Countries around the world are implementing key BEPS provisions in a way remarkably close to recommendations. As a matter of law, there was no imperative to do so, but as a matter of practice, there is. The technical-level consensus and dissemination of policy discourse plays a central role here, alongside national political commitments to the OECD and its tax policy processes. Indeed, OECD tax outputs have been known to take on legal ‘hardness’ (cf. 1, 2, 3). Formally, the BEPS recommendations retain ‘soft’ qualities – they can be unilaterally changed at political will – but in practice, there is a strong normative allegiance. As a matter of law, it is non-binding, but effectively… well, if not outright ‘binding’, then certainly something closer to binding than non-binding.

In the same way that international tax competition de facto undermines national sovereignty (effectively constraining national policy choices), while de jure leaving it untouched (nations formally retain the right to design policy), we might say that BEPS de facto is a pooling of sovereignty, although de jure it is not. National sovereignty has effectively been pooled or surrendered as a result of the BEPS process.

Of course, policy-makers may not perceive it as so. They may never articulate it. And they may rightfully hold that the distinction remains crucial. But the increasing trend towards tax multilateralism – indicated by both BEPS, CCCTB and a host of other international initiatives – may well be a result of increasing recognition that pooling of sovereignty is essential in order to improve the international tax system, whether that is effective or legal sovereignty-pooling. As German political scientists Thomas Rixen and Philipp Genschel have argued, countries can only curb tax competition by relaxing sovereignty or unilaterally engaging in double taxation:


Thus, the emphasis on governments clutching to legal national sovereignty is perhaps somewhat overemphasised in accounts of tax multilateralism.

The Prospects of Tax Multilateralism

So what does this mean for the prospects of tax multilateralism more broadly?

In my view, the lack of traction for the CCCTB, due to continued challenges at the political and technical levels, should not be seen to crumble the overall prospects of tax multilateralism in the EU or beyond.

On the contrary, it seems to me that the underlying dynamic of political-technical interplay in international tax provides fertile ground for tax multilateralism, as both BEPS and the attempt at CCCTB testifies to. The lesson, rather, is that tax multilateralism has to happen under the right circumstances.

The CCCTB may be a dead fish, but this may be less about absolute adversity towards pooling/surrendering tax sovereignty than it is about adversity towards the particular modality and scope of pooling/surrendering tax sovereignty in the CCCTB case. It is the specific characteristics of the CCCTB – the extensive scope of the overhaul, the distributional implications, etc. – that explains its inability to get off the ground, while BEPS has shot out of a cannon. The long list of technical issues associated with the CCCTB regime, alongside the political squabbles, is not a recipe for success. In that sense, the CCCTB may be more fraught than BEPS ever was, asking for a more expansive and apparently unappealing pooling of sovereignty, underpinned by slow and friction-filled decision-making processes, compared to the perceived speediness and efficiency and technical OECD discussions.

Thus, while existing initiatives international tax cooperation may fall flat, we should not take that as evidence that tax multilateralism is failing. We should take it as evidence that we have yet to hit the right approach in the interplay of technical politics and political politics.

Running thoughts on EU Apple-Ireland state aid decision

While the storm is raging in wake of the European Commission’s decision in its state aid investigation of Apple’s Irish tax structure, and while we wait for the 130 page decision documentation, here is a log of my thoughts on the issues:

1) This is historic

Before any more analytical thoughts, I must remark that this is absolutely historic. The significance is not to be understated. Although the €13bn is not formally a fine imposed on Apple, the payback order will feel like one to everyone involved. And the amount would be the largest EU fine ever.

But it’s not just the numbers. With this decision, the international tax landscape will fundamentally change. States would certainly become more cautious about granting Advance Pricing Agreements (APAs) for companies, and the normative environment for corporate tax structures would definitely change. Regulatory traction is up, tax risks are up for companies, disputes will be up. A new world indeed.

Apple’s response, as expected, is skeptical, and outlines what it thinks would be the implications:

The European Commission has launched an effort to rewrite Apple’s history in Europe, ignore Ireland’s tax laws and upend the international tax system in the process.


The Commission’s move is unprecedented and it has serious, wide-reaching implications. It is effectively proposing to replace Irish tax laws with a view of what the Commission thinks the law should have been. This would strike a devastating blow to the sovereignty of EU member states over their own tax matters, and to the principle of certainty of law in Europe.

2) The EU-US tax war is set to reach lava-like heat levels

The European Commission is doubling down on its pursuit of fair tax competition via state aid. The EU-US tax war should be extreeemely interesting after the EC decision.

When the US Treasury last week released a White Paper on state aid, it was clearly a last-gasp attempt to persuade the EC to change its stance on Apple’s Irish tax structure – or else. Repercussions were threatened, in a diplomatic manner of course.

After rumors of a payback order in the range of €0.5 to €1bn, the €13bn finding indicates that the EC in no way sought a compromise solution on their analysis – something which I had certainly expected. They are standing firm on their findings.

Although Competition Commissioner Margrethe Vestager reiterated in her press conference the strong cooperation between the EU and the US in the G20 and OECD forums on tax issues, she also remarked very clearly that, “this is an EU tax issue”, and that she was not positioned to “discuss the US tax code”.

Even so, the EC press release included a snappy retort to the US White Paper, suggesting that the US should not be complaining about the EU state aid investigation, when it could just go ahead and tax the profits themselves! A clear reference to the deferral rules that allow Apple to pile up its.


3) The EC doesn’t want Apple to pay €13bn to Ireland.

Huh? Yes, that’s correct. Sure, the EC wants €13bn paid, because its analysis finds that is the correct amount of tax outstanding. But it does not want Ireland to collect it all (which Ireland doesn’t want either).

In fact, the EC wants the €13bn distributed among the EU Member States, where Apple’s sales have been located. Also of interest is that the EC opens the door for the outstanding tax to be paid in the US (as noted above).

Both the EC press release and Vestager in her conference emphasised repeatedly – they practically pressed for it – that other EU Member States may seek for Apple’s profits to be allocated to their states, rather than to Ireland:

Furthermore, Apple’s tax structure in Europe as such, and whether profits could have been recorded in the countries where the sales effectively took place, are not issues covered by EU state aid rules. If profits were recorded in other countries this could, however, affect the amount of recovery by Ireland (see more details below).

The EC has not looked into this issue – Vestager was also clear on this. But she was also clear the the analysis provided by the Commission could be beneficial for those ends. In other words, “EU Member States – go ahead and pursue Apple profits using our findings”. As France and others have sought for Google’s European taxes, we might soon see a surge of EU Member States pursuing a share of Apple’s European profits over the past ten years.

Update 1 (31 Aug):

4) Of course Ireland doesn’t want the €13bn

We should not be surprised that the Irish government has immediately appealed the decision. Still, many are. As one Twitter user remarked (sorry, couldn’t find the tweet again), the heavily indebted Irish government will now spend millions on lawyers and years of time to argue that the world’s deepest private pockets should not pay them €13bn.

Why? Because it would ruin the Irish economy. Or so the thinking goes. Ireland has spent years building its reputation as a highly tax competitive investment environment. And whatever you might think of the strategy, it has succeeded in some sense. Apple, Google, Facebook and a host of major global corporations have chosen to invest in Ireland – and it’s not just virtual relocation; the influx has come with plenty of local jobs as well.

If suddenly now the carpet is pulled from under a key component of this strategy (favourable tax rules), the hit to Ireland’s investment attractiveness could be considerable. The added uncertainty and the potentially negative outlook for other companies with special tax deals could mean a serious chill in foreign investment inflows. It might also speed up outright withdrawals of investment. Which in turn could hurt the real economy by making workers less productive, etc. etc.

All of this, of course, is arguable. Does the Irish economy really benefit from foreign relocations when you consider the price paid elsewhere? And is it even fair for Ireland to engage in this kind of tax competition to the detriment of other countries? But from the Irish government perspective, it is clear that maintaining the status quo is the best possible outcome.

Update 2: 3 Sep

5) Does the decision harm state sovereignty?

One of the more prevalent criticisms of the Apple state aid decision is that it harms Ireland’s sovereignty. And that the continued use of state aid rules to clamp down on national tax rulings threatens to harm sovereignty more broadly in the EU. What right does the EU have to reverse an independent, authoritative decision made by a sovereign government to agree on a certain profit allocation for a multinational company? In particular as the EU does not have competence over national direct taxes.

The sovereignty criticism activates a profound concern held by many Europeans that the EU has gone too far, has too much power, meddles too much in national affair (witness Brexit). So it’s no wonder that the state aid decision will be queried in this light.

The criticism rests on a central point: The EC has re-interpreted state aid and international tax law in order to pursue the case. If it hadn’t, it would not be able to leverage state aid rules to prosecute Apple and others. This is the central tenet of critics’ claims, even if it isn’t always recognised outright.

In response, the EC has been clear: We are not infringing national sovereignty, and we have not reinterpreted state aid or international tax law. The EC outlined its approach to tax rulings and state aid in a White Paper, arguing that state aid rules have applied to tax and transfer pricing issues for decades. No new practice, they are saying, just new cases.

In fact, the EC has been hinting that it is enforcing state sovereignty with its Apple pursuits, rather than harming it. The EC has been vocal about the fact that these are not Irish profits to tax; rather other Member States, where the products are sold, and the US, where the IP is held, are entitled to (some of) it. So Ireland has perhaps infringed the sovereignty of those countries.

Which side is right remains to be seen, as the Irish government has now appealed the state aid decision to the European Court of Justice (ECJ) General Court of the EU (thanks hselftax). There are a few possible outcomes:

If, as also the US has argued in the Treasury White Paper, the EC has extended beyond its mandate on state aid, then yes, there is clearly an infringement on sovereignty. I personally think it is unlikely that the Court(s) will find the EC guilty of outright trespassing, as there seems to be a solid basis for undertaking the investigations in the first place – but anything can happen.

Second, if the Courts rule in favour of Ireland on the basis of the substance of the case, rather than the scope of EC’s activities, it will reaffirm that EC has not infringed national sovereignty de jure, even if it may have hurt public trust in the EU institution and its acceptance of sovereignty de facto.

Finally, the Courts could rule in favour of EC, thereby confirming that EC is not infringing sovereignty and has correctly analysed the situation. I note that such an outcome would probably not defuse but spur on criticism of ‘the sovereignty-defying EU’, but in a legal sense that argument would now be wrong.

The Commission has indicated that the Apple state aid decision will be released within the new few months. Once we know more, the real scrutiny will set in…

More to come..
Relevant links:

Five years of EU tax policy recommendations: Key trends in European taxation

The European Union is a major player in international tax politics. Alongside the OECD, the EU has arguably been the most significant actor in redesigning international as well as national tax rules and norms over the past decade.

So it matters what the EU’s institutions and its Member States are doing and saying on tax policy. It gives us a glimpse at the current status as well as the future of international and national tax policies, certainly within the Union but also beyond, as European norms spread throughout the world.

Luckily for interested observers (like me), the EU is very open about its tax policy work and its favoured tools and approach – which makes it accessible and analysable.

Since 2011, the European Commission (EC) has published an annual analysis of Member States’ economic and social policies, along with a set of policy recommendations, called country-specific recommendations (CSRs). Included in the CSRs are proposals on tax policies. In fact, there are many tax policy recommendations. Over the past five years, it comes to around 250 by my count, with an average of 20 Member States receiving tax policy proposals each year.

I mapped and categorised each country-specific EU tax policy recommendation over the past five years, based on of their tax policy subject and the specific recommendation given.

What does this tell us about EU tax policies and politics of European taxation? Quite a lot, in fact. Firstly, the recommendations show us the current paradigms within economic and tax policies at the international level. The EC tax-related CSRs are not random ideas for countries’ tax systems cooked up by European bureaucrats. Where recommendations are perceived as needed, it is largely because national tax systems deviate from an understood, accepted norm of ‘best practice’. For instance, the “broad base, low rates” mantra in taxation has long been a favourite of the OECD and the European Commission, which, as we shall see, shines through in the tax policy recommendations.

Secondly, the analysis tells us something about the political economy of tax policy within the EU. The number and nature of CSRs to Member States reveal patterns of national deviation from international tax policy paradigms, but it also shows us intra-EU politics – what can be said about which countries, and which topics can we recommend on? The fact that France (themes: need to simplify tax system and reduce inefficient tax expenditures) and Germany (improve tax admin. services and reduce tax on labour) received more than 15 tax policy recommendations whilst the UK received just four probably does not fairly reflect the volume of issues with those national tax systems – but from an EC perspective, it made sense. Similarly, the fact that recommendations to reduce the tax gap are almost always directed at the Eastern block (Belgium was the only Western/Northern EU Member to receive such a CSR) probably neglects the tax evasion issues faced by Europe’s largest economies – but as seen from Brussels, the Eastern European economies are hurt more by immature tax compliance systems.

By analysing every single tax-related policy recommendation made by the EC over the past five years, we get a nice and clear picture of the nature and trend of European tax politics, both in terms of tax policy paradigms, European countries’ deviation from the consensus, and in terms of the intra-EU games surrounding tax policy analysis.

I want to highlight three key trends in the analysis below:

  1. Focus on tax compliance, tax shifts and base broadening
  2. The Commission’s prerogative on tax avoidance and tax havens
  3. Eastern European tax evasion, French and Italian deviants, and other country trends.

1. Focus on tax compliance, tax shifts and broadening the tax base

Observers of international tax policy probably won’t be surprised by the top EC tax policy recommendations – because it largely aligns with what the EU has been shouting for the past five to ten years. The EU wants national tax systems to strengthen tax compliance, to shift taxation from capital and labour onto consumption and property, and to broaden the tax base.

Heard it before? Yup. Top EU reps repeat it again and again and again. The mission letter by EC President Jean-Claude Juncker to new EU tax commissioner Pierre Moscovici, for instance, reads like a pretty accurate representation of the EU tax-related CSRs:

While recognising the competence of Member States, the modernisation of tax systems is essential for delivering on the priorities of the European Semester of economic policy coordination. Reforms should involve promoting a broadening of the tax base, shifting the tax burden away from labour, improving tax compliance and addressing the debt bias in corporate and personal income taxation. All efforts should also be made to combat tax evasion and tax fraud.

The absolutely most popular tax policy recommendation by the EC is, by far, that countries improve tax compliance and reduce the tax gap. Tax justice campaigners can rest assured their cause is on the agenda. Every fifth EU tax policy recommendation concerns the strengthening of tax law enforcement by tax administrations.

There is good reason for the EU to emphasise the need to strengthen tax compliance. It’s an area that has garnered significant attention in Europe after the crisis, and it has occupied a central place in EU tax policy work over the past few years. This includes EU work on automatic exchange of tax information, VAT fraud, the Code of Conduct on Business Taxation, the revised Parent-Subsidiary Directive, the 4th Anti-Money Laundering Directive, and more. It is simply a high-profile area, where the EU has contributed significantly to policy initiatives, and for which they advocate national support and implementation. No wonder then that it shows up atop the policy recommendations list.

Number two on the list is recommendations for EU Member States to shift the tax burden away from productive factors (labour and capital) onto property, consumption and green taxes. Slightly more than 10% of all EU tax policy recommendations are on this topic.

This is another topic that has been high on the agenda for the EU in the post-crisis era. As a recent Commission working paper on tax shifts notes:

Shifting taxes away from labour to tax bases which are considered least detrimental to growth remains a common policy recommendation from the European Commission and other international institutions.

A cornerstone of the current paradigm in international taxation, the EC and the OECD are touting the benefits of defined tax shifts at every opportunity. In tax economics and policy circles today, it is simply accepted wisdom that corporate and personal taxes are most detrimental to growth, whereas property and consumption taxes are less harmful. Thus, it makes perfect sense for the EU to keep pushing this wisdom as part of its national tax policy recommendations.

Broadening the tax base is the third top recurring policy recommendation. A total of fifteen policy proposals concerned base-broadening (with a peculiar spike of eight recommendations in 2014 alone). It’s another familiar EU tax policy area. Alongside reducing the burden on labour (which is highlighted in the tax shift recommendations noted above, as well as through proposals to reduce the tax wedge) and fighting tax evasion, base-broadening is the third leg in the European Commission’s “smart taxation” strategy. And as mentioned in the introduction, the “broad base, low rates” mantra is clearly an EC priority, with base-broadening a popular proposal and tax reductions (in particular on labour and low-income earners) adding the low rates element.

The full lists and counts of CSRs based on the tax policy subject and policy recommendation is shown below:

2. The Commissions’ prerogative on tax avoidance and tax havens

While the top recommendations align closely EU tax policy work and current policy paradigms, others are surprisingly conspicuous in their absence. Not a single tax policy recommendation concerned tax avoidance, even though the Commission and the Parliament are happy to advertise massive numbers lost by European public coffers. There was no mention of customs procedures and cooperation. Nada on the Common Consolidated Corporate Tax Base (CCCTB), which the Commission has been working on since 2011. Nothing on the Financial Transactions Tax (FTT), ditto on tax havens. These are not trivial policy areas; they are all priorities for the European Commission and the Union more broadly, yet there is no trace of them in the CSRs.

But why would the Union not make any recommendations over five years on some of its key tax policy priorities? The answer, to me, seems straightforward: To discourage Member States from taking unilateral action. From a Brussels point of view, the issues of (corporate) tax avoidance, tax havens and FTT are international problems calling for international fixes. Thus, the Commission would not want to propose country-specific action. Rather, they want to be in the driver’s seat and lead towards European solutions. The CCCTB’s international nature and policy process, the EU Anti-Tax Avoidance Package and its upcoming tax haven blacklist are good illustrations of this.

3. National trends: Eastern Europe, France, Italy and others

Beyond the in-/exclusion of certain tax policy topics in the country-specific recommendations, the distribution of policy proposals across geographical and economic divides is another valuable point of analysis. It is clear that certain countries are more likely to receive certain recommendations. For instance, as noted above, proposals to improve tax compliance were largely aimed at Eastern European economies.

This is interesting because it shows us the extent of as well as how national economies deviate from current tax policy paradigms, as seen from Brussels.

To gauge these differences between country groups, I applied EU country clusters generated by my colleague Mikkel Mondrup Pedersen based on Whitley’s business systems framework from a 13-year longitudinal study of national institutional indicators in 30 OECD countries. However, as this grouping covers only two-thirds of the EU Member States in my data, I added another cluster (Eastern Europe) to widen the coverage.


In terms of the overall number of tax policy proposals, the Commission finds most issues with the state-organized economies (119 recommendations), followed by the collaborative business systems (48), Eastern Europe (48), the compartmentalized business systems (11) and the Nordics (six). (To be clear, this is not just because this order reflects the number of countries in each group – the number of recommendations per country number within a group is in the same order). It is clear that the state-organized economies (in particular France and Italy) – with significant state and involvement in the economy and often extensive, complicated tax systems – and Eastern European countries are perceived as deviating mostly from Brussels’ ideal tax system, while the Nordic tax systems are EU favourites.

Unavngivet 2

What about specifics? Which (groups of) countries have received certain tax policy recommendations? Let me list some of the other interesting trends, as seen from the Commission’s point of view:

  • All groups of economies needs to reduce the tax wedge, shift the tax burden away from labour, and enhance the environmental friendliness of their tax systems – except the Nordics.
  • Outside of tax gap reduction, the main issues for state-organized economies, where the state is highly involved in directing the economy and trade unions are relatively weak, are to reduce tax expenditures and shift tax away from labour.
  • Tax compliance proposals are heavily targeted at Eastern Europe (70% of such CSRs). In fact, tax compliance accounts for half of all Eastern European CSRs.
  • Tax base broadening proposals are almost exclusively aimed at Europe’s top economies (the G5).
  • Germany really needs to improve its tax administration services, having received a recommendation to that effect every year since 2014.
  • France really needs to simplify its tax system and reduce inefficient tax expenditures. The French received a policy proposal on tax expenditures every year for the past five years.
  • The Netherlands and Sweden are pretty much the only ones who need to reduce debt bias for property investments. (As a Dane, I’m surprised that Denmark has not received this proposal, given that we have one of the highest property-related private debt rates in the world).


These are some of my top takeaways from looking at the EU tax policy recommendations over the past five years. In particular, we clearly see the deliberate spread of a tax policy paradigm concerned with tax compliance, tax shifts and base-broadening. This is likely to continue and EU Member States are likely to converge to these policy agendas in the future. We also see EU institutions looking to control international tax agendas on tax avoidance and tax havens. The European Commission is increasingly working to gain position as a top international institution in tax matters, and this is another mechanism for it to build towards that aspiration. And finally, we see some interesting trends with certain recommendations often targeted at specific (groups) of EU Member States. France, Italy and Eastern European countries are, in particular, being disciplined to conform to the consensus model.

The full data set is available here for your scrutiny. I encourage anyone to dig through the data and I am very happy to hear your comments, suggestions and additions to the approach and the analysis!




Thoughts on the final EC public country-by-country reporting proposal

A week ago, I blogged on the (at the time) upcoming proposal from the European Commission on public country-by-country reporting, saying it was “in no man’s land”. With the benefit of being a week on, and the actual proposal having been presented on Tuesday, I thought it would be good to reflect on my earlier blog and the proposal itself. It is still early days, of course, and the proposal is months if not years of negotiations away from coming into effect, but still I might provide some initial comments:

Firstly, assessing my previous blog, I may have been wrong on some points. In particular, I had thought there was continued US opposition to the public nature of documentation in the proposal. However, Jonathan Hill, the EU Commissioner for financial stability and financial services, explicitly said at the press hearing that the Commission had consulted with US regulators before publishing the final proposal, indicating that they were, at the least, not opposed.

Furthermore, the accompanying impact assessment on public CBCR made it clear that the proposal is viewed as an alignment with US Dodd-Frank rules, which require certain companies to file country-by-country-like information to the SEC. Clearly, this is an important reason why the EC chose the particular reporting model it did, i.e. public EU-zone + tax haven reporting for EU-based companies (headquartered or with subsidiaries), with group turnover above €750m, of course.

Thus, from the EC perspective (and, probably, the US Treasury perspective), the proposal could be marketed as creating a level playing field between EU and US companies:

I am not sure how accurate that is, given the wide discrepancies between the US rules and the EC CBCR proposal, in particular as Dodd-Frank rules only apply to extractive companies.

Next, I could have overestimated the lack of consistency of the EC proposal with the OECD/B20 BEPS consensus, reached just last year on the exact same topic. The EC would not put forth this proposal if there wasn’t significant support behind it. And it seems that those in the supporting ranks do not care about the OECD agreements from a year past. Or maybe it is exactly the agreement on the template that is underpinning the EC proposal? My intuition was, and still is, that the BEPS consensus would weigh heavily. But even OECD’s “Tax Director” Pascal Saint-Amans sounded rather resigned to the EC proposal in an interview with  TPWeek.

Still, I predicted the straightforward dismissal of the proposal from NGOs, and similarly with business criticism (although it has been rather more quiet than I expected, in particular compared to the BEPS process).

Of course, I had not predicted the inclusion of “tax havens” in the report, but this was only made possible by the PanamaPapers, although the Commissioners were not shy to frame the revision in terms of “their continued work on transparency”.

Now, on to the proposal itself: It was, all in all, as expected. There will be things here and there once people dig through the details, e.g. on definitions of subsidiaries and specific data points. But the main question people are left with is: How on earth is the EU going to agree on a tax haven blacklist? The EC tried in 2015, was heavily criticised, and then had to give it up. And they have tried before, like others before them, often with similar and predicted results. They have given themselves six months to find agreement, having previously failed for years. Tough job.

Blacklisting is fundamentally a political power game hiding behind “objective criteria”. It can be effective (in particular if you are targeting small states), but there are a host of issues associated with it. You can be sure that anyone trying to put UK overseas territories, Switzerland, EU-members Luxembourg or Ireland, or the US on the agenda for the list will find strong opposition. Even if the EU countries do find agreement, there are indications it will be along the lines of the OECD Global Forum work where, currently, only three (four, if you include the US, which the OECD doesn’t) jurisdictions do not comply with agreed standards. So it might be a very slim list, and then what’s the point of going through all the trouble?

In terms of justifying the chosen approach, the Commissioners made some very interesting remarks. Two key reasons came forward: 1. Level playing field (cf. above), and 2. Avoiding double taxation. Now, the second point was highlighted especially with regards to the scope of the reporting, i.e. 3rd country data. It was clear from Jonathan Hill’s remarks that, besides the competitiveness of EU companies, the key concern was that 3rd country tax authorities would get their hands on the data and use it for “improper purposes”. Now, this is rather astonishing. The EU and its Member States have agreed in the OECD BEPS process to provide 3rd country tax authorities with the exact same data, as long as they sign tax treaties or information exchange agreements with, e.g., EU countries. So if the EC is now saying that they are concerned the data will get to 3rd countries, is that not to undermine the entire BEPS framework for filing and sharing? Or was it the thought all along that developing countries should not easily be able to obtain the data? I could also be overinterpreting, but that was my reading of Hill’s comments.

A few other interesting tidbits from my read through the impact assessment:

  • The version made available on the EC website was marked “provisional”, and with good reason. It was based on the original, leaked proposal, where the preferred outcome did not include reporting on tax haven activity. This, to me, is a rather clear indication that the EC is adjusting its impact assessment to fit the preferred political outcome, which, again to my mind, seems somewhat problematic.
  • The OECD actually, formally lobbied the EC to follow the BEPS approach. This is highly unusual. Why would they need to? They coordinate with great frequency. Perhaps the OECD felt the need to formally express concerns over EU’s actions not being in line with BEPS.
  • One reason put forth by the EC why they did not pursue a common, voluntary EU ‘Fair Tax label’ was that the Fair Tax Mark has, so far, attracted very few large companies. EC thinks a voluntary code would not be successful. And they’re probably right, given the limited discussions of the role of tax in the corporate responsibility agenda.
  • The impact assessment also included the figure below, which provides a very good overview of the EC conceptualisation of the public CBCR proposal. It’s interesting to see how they framed the issue in terms of public scrutiny as a driver of corporate responsibility (i.e. not engaging in aggressive tax planning, etc.). They could have chosen a number of other angles, so the choice bears significance.


Finally, I will add that the impact assessment is a great read for anyone interested in tax politics, tax research, tax economics, transparency, etc. It is an extremely thorough piece of work, with detailed discussions, references and analysis throughout. It provides a useful encyclopedia for understanding many of the topics related to tax and transparency.

And it’s only 162 pages. Happy reading!

The EU public country-by-country reporting proposal: In no man’s land?

On Tuesday, the European Commission will present its final proposal for public country-by-country reporting, alongside its impact assessment. We know quite a lot about this proposal, given that it was leaked a few weeks back. It is based on the OECD BEPS template for country-by-country reporting, but has key differences from the rest of the recommendations. In particular:

  • The CBCR report is to be made public. (BEPS recommendation is only to file with tax authorities, who can then exchange the report.)
  • 3rd country (non-EU) data is to be aggregated, rather than broken down country-by-country. (BEPS recommendation is for data broken down country-by-country).
  • Other smaller changes

Tons of reactions have ensued, covering every range of the positive-to-negative spectrum. Here, I will try to formulate my own thoughts on the leaked proposal, from the perspective of someone who has closely studied the evolution of country-by-country reporting and its policy processes over the past few years:

My overarching impression is that the proposal is in somewhat of a no man’s land.

I will explain what I mean below, but first I should note that the leaked EC proposal is exactly that, a proposal. And an unfinished one at that. It’s a draft. That means there is still scope for changes before the publication. In fact, the leak might be purposeful on side of policy-makers, in order to manage expectations and get a better grasp of the reactions of stakeholders, as a basis for potential changes before or after publication. The Commission may also have used the opportunity to flag a real or carefully constructed position in order to guide the direction of the policy debate going forward. (This was a tool used, for instance, by OECD policy-makers in the BEPS process).

But back to the no man’s land:

In terms of political support, we know there is backing from some EU Member States and certainly from EU institutions (EC and EP in particular) for the type of transparency proposed in the draft. However, we also know there are reservations among key EU Member States for publication of the data contained in the country-by-country report.

And we know that this proposal is directly opposed to the hard-fought OECD/G20 BEPS Action 13 consensus, agreed and endorsed by OECD members and G20 countries – many of which are EU states – just one year ago. It also sticks in the opposite direction, in terms of publicatioon, from the EU non-public country-by-country reporting Directive, which was presented just two months ago(!).

And we know the Treasury of the US, the EU’s largest trading partner and key partner in the OECD BEPS project and other international tax reform efforts, is strongly against publication of the country-by-country report.

We also know that NGOs and tax justice campaigners, are wildly unhappy with public country-by-country reporting, a priority campaign point for years, being restricted to the EU zone (they’d want to see activity broken down for countries deemed tax havens, etc.).

And we might say that developing countries would not have much use for a report that aggregates 3rd country numbers (which includes, of course, both developing countries, smaller financial centres and large economies), as it would not reveal much detail on the activities pertinent to developing countries. (Although you might also argue that developing countries care less about public CBCR than, e.g., tax administration capacity-building and other issues.)

Businesses, meanwhile, largely favour (relatively) narrower reporting requirements and certainly not public reporting, as the OECD BEPS Action 13 process and recent years’ EU-level debates have shown. So the proposal does not seem to come close to their interests either.

And I think it is fair to say that, generally, tax lawyers and other tax professionals have not been particularly positive towards public reporting.

Now, the European Commission is, of course, not in the business of legislating based on US or OECD interests, developing country interests, NGO interests, business interests nor tax lawyer claims as such. First and foremost, it is tasked with proposing legislation by and for the group of EU Member States. However, it would be wrong to assume that businesses, NGOs, developing countries, key trading partners and tax experts are considered EU rule-making.

This is, I concede, to simplify things greatly. The actors concerned with public country-by-country reporting are not inherently cut into neat categories – there are shades of grey all along the spectrum. But I it is a fair conclusion to say many of the actors involved in the country-by-country reporting debate would find the EC proposal unsatisfactory.

So is it all just a big compromise – hitting the middle ground, so to say? Maybe. Or maybe hard, perceived, material interests are not all that matter in EU rule-making. Ideas might matter too, in the tax arena. As Martin Hearson discussed recently, the power of rhetoric should not be underestimated in international tax. And neither should the expertise and networks of professionals involved in the technical policy process. Could these explain the EC public CBCR proposal? Is the European Commission on the right track in the ideational battleground of international tax transparency? Maybe. It can certainly ride along on the transparency wave, most recently boosted by the #PanamaPapers. It may work, although there’s not a strong connection between the Panama leak and CBCR. And has the EC public CBCR proposal been brokered successfully by well-connected and knowledge experts? Maybe, but my impression is “probably not”. The EC usually do their groundwork well, but this time it doesn’t seem to align with the BEPS Action 13 consensus, which I would argue was successfully negotiated in the technical community.

So, can a proposal seemingly in such a political no man’s land succeed? Or could the analysis above be wrong on key points, and the proposal will smoothly sail to implementation? The proposal is still to be formally presented, negotiated, amended, agreed, enacted and implemented, so there is a long way to go. I am looking particularly forward to following its route.