Taxing may be the most important outcome of the COVID-19 crisis. More protectionism, new value chains, quantitative easing and new taxes through the EU could be the new normal of 2020.

Recently FrancePoland, Scotland and Denmark ruled out coronavirus aid for tax-haven businesses. In the midst of the pandemic and the need to stimulate the economy maybe its time for new taxes on EU level.

France and Germany want to create a common financial scheme with revenue coming from member states but taxes could be better in creating a true independent budget.

New data from Gabriel Zucman published in April 2020 shows that about 40 per cent of the profits of international corporations – 700 billion dollars – go to tax havens every year. This reduces global corporate income tax (CIT) income by almost 10 per cent – equivalent to $200 billion dollars.

According to Missing Profits of Nations data, some EU countries are the largest beneficiaries of artificial profit shifting – 40 per cent of CIT income in the Netherlands, 60 per cent in Luxembourg and almost 70 per cent in Ireland is the result of this process.

Germany, France and the United Kingdom lose the most – 20 to 30 per cent of CIT income each.

Before going broke

In the Visegrad group, the revenues lost are smaller. Hungary loses 13 per cent, Poland – eight, Slovakia and Czechia – six per cent each.

Before going broke, because of COVID-19, many European governments need to use their natural piggy bank, i.e. tax havens and international corporations shifting profit.

The EU should give itself new tax-raising powers and clamp down on tax havens as it looks to curb the economic damage brought by the coronavirus pandemic.

On the EU level, we can introduce a financial transaction tax, a digital tax, a carbon border tax and a fee for using the common market.

Digital tax

The European Commissions’ proposal from 2018 did not pass a vote yet. Work in the EU was suspended by the end of 2020, but the EC is expected to return to the topic if the OECD fails to reach a wider agreement.

International corporations operating on the Internet must pay their fair share in those jurisdictions where they profit. This could raise about 5 billion euros per year.

After talks at the EU and OECD levels collapsed and countries failed to reach an agreement on how to fairly tax digital behemoths, most of them American, Czechia and Slovakia followed the likes of France, which has spearheaded efforts to tax large internet companies accused of paying little to no taxes in countries where they operate compared to their local competitors and started discussing its own domestic tax until a multilateral agreement is found.

Hungary also plans to introduce its own tax on digital giants in the coming months. This tax is going to happen, especially because internet-based companies tend to profit during the pandemic.

Market entry-fee

Another idea that was disused in 2019 among EU governments but yet not implemented is a fee for using the single market.

The revenue could total to 15 billion euros per year. This is a sort of compensation for unfair practices of large entities which avoid taxation. This tax intends to strengthen the competitive opportunities of European small and medium enterprises.

Only international corporations with a revenue of over 750 million euros would pay this new  tax.

This proposition is in the interest of Visegrad countries but it is difficult to say if all countries from the region would vote in favour of it.

Financial transaction tax

Since the 2008 financial crisis, financial transaction taxes (FTTs) have been debated as a potential instrument to address financial market instabilities and as a source for tax revenue.

The FTT could bring about 5-7 billion euros per year if a 0.2 per cent rate on trading in shares of large companies (worth more than 1 billion euros) would be imposed.

In 2011, the FTT was proposed to cover all financial transactions, which would amount to approximately 57 billion euros. However, negotiations came to a halt due to resistance from several EU member states, and an EU-wide policy has not been adopted.

It means additional costs for stock market investors and encourages the transfer of financial transactions outside the EU, e.g. to the UK. Ten EU countries, including France, Germany, Italy, and Spain, are still interested in the common tax and negotiations on the design of that tax are ongoing.

Nations that oppose the proposal include the United Kingdom, Sweden, the Czech Republic and Bulgaria. Poland was neutral but could see this tax being introduced.

Passive income tax

This new tax not discussed too often in Brussels but could give approximately 3.3 billion euros per year.

Intra-EU tax havens (as the European Parliament described Netherlands, Ireland and Luxembourg) are the largest recipients of untaxed financial transfers within the EU.

The cashflow which results from unfair tax competition should be taxed by the EU and the revenue then redistributed.

Suffice it to add that the largest investors in Poland are the Dutch (the largest recipient of tax-free dividends from Poland – 13.08 billion zlotys in 2018, four times more than to Germany) not to Germany – Poland’s largest trading partner.

A one per cent rate on untaxed financial flows (dividends and interest) could make a difference. This is a form of taxation not too many times debated but interesting for CEE countries as it is directed at multinationals and some unfair practices with aggressive tax optimisation within the European Union.

Carbon border tax

The European Commission plans a carbon border tax aimed at shielding European steel producers and other energy-intensive industries against cheaper imports from countries with less strict climate policies.

It would stop what is known as “carbon leakage” when climate action in one country pushes polluters to shift to another, and overall emissions stay much the same.

In the process, it would reduce the risk of making domestic industries less competitive than rivals abroad. It also offers the distant (but possible) prospect of the EU joining forces with like-minded nations to create “climate coalitions” e.g. with the US, Japan or other countries. This tax would apply a charge on goods imported into the EU, based on the emissions emitted during their production.

One of the biggest objections to carbon border measures is the difficulty of calculating the carbon content of, say, a car made of components from many countries, each with different climate and energy policies. The EU is sensibly looking at rolling out its system in stages and starting with simpler goods.

If we shield only the cement and steel producers this creates approximately 0.1 billion euros per year.

The carbon tax has already provoked a response in Russia and the United States while pending trade talks with the UK will also prioritise environmental standards to prevent Britain from undercutting EU businesses.

The most important outcome

Taxing may be the most important outcome of the COVID-19 crisis. More protectionism, new value chains, quantitative easing and new taxes might be the new normal of 2020.

Our economies will struggle to grow this and next year. According to our estimates, this shakedown of tax optimising corporations would give a total of additional 170 billion euros in the next seven years.

A revenue the EU deeply needs in order to invest, rebuilt and reinvigorate the European economy.

 

Head of the Polish Economic Institute


Eastern European Futures

In 2009, the European Union and six of its Eastern neighbours launched the Eastern Partnership (EaP) with the stated aim of building a common area of shared democracy, prosperity, stability and increased cooperation. A decade on, however, progress has been mixed.

Visegrad Insight is published by the Res Publica Foundation. This special edition has been prepared in cooperation with the German Marshall Fund of the United States and supported by the International Visegrad Fund.

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