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Do multinationals really cost us one trillion euro per year?

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Fact-check

Pagella Politica, Italy

28 March 2019, Updated: 3 April 2019

A claim from Elly Schlein, a MEP for left-wing Italian party Possibile, allow us to take a closer look at the cost of tax evasion and tax avoidance.

On February 19th Elly Schlein, appearing on Italian television, cited a figure concerning multinationals’ unpaid taxes in Europe. According to the MEP for the left-wing party Possibile, every year large multinationals “avoid 1 trillion euros in taxes”, leading to a problem of unfair competition.

In short, the EU supposedly loses hundreds of billions of euros in tax revenue, benefitting multinationals to the detriment of other competitors on the market (especially small to medium sized businesses), with negative consequences on government budgets and European taxpayers. Is the figure correct? We checked.

What is tax avoidance?

Generally, when reference is made to illegal methods designed to avoid paying taxes, we use the term “tax evasion”: when a taxpayer knowingly decides not to give the state what they owe, thereby breaking the law. However, the concept of tax gap – or the total taxes not collected by governments – is broader than this description suggests. Indeed, there is a range of more legally opaque activities, including all the decisions taken by those taxpayers who manage to pay less tax than owed, usually by exploiting ambiguities in the interpretation of the law.

In such cases, economists use the term “tax avoidance”, which indicates those cases where a citizen or company – as the Treccani encyclopedia explains – “uses in an ‘improper’ manner one or more legal means to reach a given objective, realising in such a way a reduced tax burden”.

This phenomenon involves individual countries as much as it does the European Union as a whole, as certain recent examples demonstrate.

The most famous recent examples in Europe

On January 10th, 2019, for example, the European Commission published a press release announcing that they had begun an investigation into the beneficial tax treatment of Nike – the US sportswear company – in the Netherlands in recent years. The procedure could lead to fines, as has already happened with other multinationals.

Indeed, in 2016 the EU reprimanded Apple for having avoided 13 billion euros in taxes between 2003 and 2014, exploiting specific tax benefits in Ireland which the Commission deemed illegal and had allowed the Cupertino company to pay just 0.005% on profits.

Then in October 2017 the European Commission ordered Amazon to pay around 290 million euros for exploiting a tax advantage over competitors in Luxembourg, which European authorities deemed illegal.

Finally, in December 2018 the EU established that various multinationals had enjoyed beneficial but illegal tax treatment in Gibraltar, with a loss to the public purse of 100 million euros – which the companies now have to pay.

What is the cost of tax avoidance to European taxpayers?

Precisely because of the shadowy nature of evasion and avoidance, it is very difficult to precisely quantify their cost to either national budgets, or, in this case, the European Union.

There is a diverse range of taxation systems to contend with, where official and effective tax rates differ from state to state.

In recent years, however, some estimates have been produced, which range from 200 to 1000 billion euros – the latter figure cited by Schlein.

In 2016, for example, the European Commission calculated that between 160 and 190 billion euros in revenue was lost each year by member states due to multinationals not only evading taxes but also exploiting advantageous tax regimes. However, as the European institution explains, this is a “conservative” estimate.

In 2018, three economists, Thomas R. Tørsløv, Ludvig S. Wier and Gabriel Zucman, presented their working paper “The Missing Profits of Nations”, in which they estimate the cost of tax avoidance by multinationals – especially US companies – for various countries around the world.

According to the study, during the year in question – 2015 – 40% of multinational profits, more than 600 billion dollars, was shifted to tax havens. As the researchers explain, the European Union is the region most affected by this phenomenon, but with the added peculiarity that businesses avoided paying around 100 billion dollars thanks to legislation in individual EU member states, namely Ireland, as well as Luxembourg and the Netherlands.

As shown by an appendix to the study, it is estimated that multinational profit shifting in 2015 had a value of 23 billion dollars in Italy, 55 billion in Germany and 32 billion in France.

In this way, every year EU member states lose on average around a fifth of the revenue rightfully due to them from multinationals.

If we combine the figures for individual EU countries – France, Germany, Italy, the UK, Spain and others – the estimated total (more than 210 billion euros) exceeds by some tens of billions that produced by the European Commission in 2016.

The LuxLeaks investigation

But where does Schlein’s figure of one trillion come from? The likely answer is a journalistic investigation begun in 2014 by the international Consortium of Investigative Journalists (ICIJ), which became known as LuxLeaks (Luxembourg Leaks) and has given fuel to the “trillion estimate”.

In November of that year, in fact, the international journalists’ network came into the possession of an archive of around 30 thousand documents taken from the Luxembourg headquarters of the consultancy firm PricewaterhouseCoopers (PWC). According to the investigation, from 2002 to 2010 more than 300 multinationals benefited from advantageous tax rates, saving hundreds of billions of euros thanks to Luxembourg.

“A situation of unfair competition between states which, according to the same European authorities, causes a total loss, from both evasion and avoidance, amounting to the astronomical figure of one trillion euros per year”, wrote L’Espresso – a member of the ICIJ – in October 2018 when presenting the investigation.

The estimate comes from a report released a few years earlier. In February 2012, a European Parliament group, The Progressive Alliance of Socialists and Democrats, published a report conducted by the British economist Richard Murphy from City University in London, which calculates the cost of both tax avoidance and evasion for the EU to be one trillion euros. The same figure is found in the 2017 report entitled Panama Papers: Dirty Money and Tax Tricks – published by another European Parliament group, European United Left – which cites as its source the same report by Murphy.

The same figure was also reported in a press release published by the European Commission the following year. However, the total of one trillion, states the report, consists of 860 billion euros per year due to evasion, and 150 billion euros per year due to avoidance.

Summary

Let’s take another look at the figures: in 2012, a report – conducted by a British economist and published by European socialists – calculates the cost of tax avoidance in Europe to be around 150 billion euros. in 2016, the European Commission presented a study in which this cost – only taking multinationals into account – was estimated to be between 160 and 190 billion euros. In 2018, three economists put forward an even greater estimate: tax avoidance by large multinationals could exceed 200 billion euros every year.

The Verdict

According to Possibile MEP Elly Schlein, the European Union loses one trillion euros every year due to unpaid taxes by multinationals; but this estimate – however imprecise, given the nature of the phenomenon – is exaggerated.

The estimates from recent years place the annual total cost of tax avoidance between 100 and 200 billion euros.

It is true that, again according to the estimates, Europe loses around a trillion euros every year when it comes to taxes: but one can only arrive at such a total if avoidance is combined with evasion, which involves small to medium sized businesses, large multinationals and individual citizens alike, and often has a greater estimated impact than avoidance. The Possibile MEP is partly right, partly wrong.

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