American corporations using Europe as tax haven

Finance ministers from the 28 states of the European Union have recently held a meeting in Valetta, Malta to discuss the issue of tax evasion by large corporations. Ironically, Malta called the meeting, despite its reputation as a tax-evasion paradise for multinational companies.  

These companies have been able to avoid paying taxes in Europe by using subsidiaries in low-tax areas. One trick they use is called “transfer mispricing.” This is when subsidiaries of the same company that are located in different countries trade with each other at non-market prices, which allows the parent company to reduce their taxable income.

Measures have already been put in place in an attempt to curb tax evasion; however, they have not worked as they were intended to. The Organization for Economic Co-operation and Development (OECD) introduced “Base Erosion and Profit Shifting” plans a few years ago.

These strategies were meant to fix loopholes in European tax law, but their execution has not gone as smoothly as planned. Countries have been having been slow to enforce them. Members of the European Union have yet to come up with a policy immediately addressing the problem of tax evasion. In February, there was a meeting, also in Malta, in which members of the EU created a plan to close loopholes; however, the rules established will not go into effect until 2020.

The EU needs laws that will be implemented sooner rather than later. It is estimated that corporate tax fraud is responsible for the loss of 50 to 70 billion euros a year for the EU. This could be avoided if the member states of the EU and similarly influential countries like the United States and China worked together to crack down on tax evasion.

Giant American companies such as Google and Amazon take advantage of European tax loopholes. America should cooperate with the EU states in order to reform international tax policy to help close loopholes and to prevent things like this from happening.  

Due to conflicting views about the magnitude of the issue, the recent meeting of EU finance ministers in Malta did not result in any solutions to the problem. Some ministers, such as Germany’s Finance Minister Wolfgang Schäuble, believe that tax evasion is a major problem that should be dealt with on an international level by the EU members.

Others, such as Luxembourg’s Finance Minister Pierre Gramegna, reject the idea of international tax reforms. He believes that tax disputes should be settled between individual states and corporations. This is no surprise since Luxembourg has attracted hundreds of international corporations due to its tax rate being nearly zero percent.

Tax fraud by multinational corporations badly affects not only the European economy, but also other countries. The United States misses out on a lot of tax dollars because its companies can simply use their subsidiaries in low-tax countries around the world to avoid paying their full taxes. It is estimated that if all the Fortune 500 companies paid taxes as they were meant to, the U.S. would get nearly $700 billion, according to Citizens for Tax Justice.

Tax evasion through loopholes in law is a worldwide problem that is especially difficult to deal with because it is technically legal. This is why lawmakers around the world need to act on this issue as soon as possible.