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The LuxLeaks scandal is a classical example of the growingly frequent clash between the level of integration of the European economy (and the global for that matter) and the national sovereignty. Greece was first to prove that four years ago when it put to the test the very survival of the euro area, but then many other cases followed revealing a conflict between the measures at EU level and those at national level. The latest case is precisely LuxLeaks. The International Consortium of Investigative Journalists published last week thousands of documents proving that Luxembourg has for years supported taxation policy that practically made the country a tax haven. 340 multinational companies registered their profits in Luxembourg in exchange for minimum taxes, thus depriving the countries they earned them of solid revenues to the shrunk, sometimes to the extreme, state budgets.

The affair broke on the fifth day of the new European Commission led by the long-serving prime minister of Luxembourg Jean-Claude Juncker. He was at the helm of his country for almost 20 years being in the same time a minister of finance as well. In these capacities of his, he participated in many EU summits and was also the first and longest serving president of the Eurogroup. In the course of a week after the documents were published, Jean-Claude Juncker was silent. His spokesman was saying that Juncker would make a statement probably around the G20 summit in Australia on 15-16 November. Surprisingly, Mr Juncker appeared after the College meeting on 12 November when it was expected Vice President Kristalina Georgieva to present a solution to the problem with the excessively big budget corrections of some countries, like Britain.

Some background

The 2008 financial crisis unleashed a continuous debt crisis in the EU and especially in the area of the common currency. The search of a solution to an undoubtedly common problem led to austerity which in some countries had colossal scale like in Greece, Portugal, Ireland, Spain. Together with the spending cuts a way was sought to increase revenues which proved a difficult task in a period of recession and uncertainty. That is why the EU decided to focus on the fight against tax fraud and tax evasion. The Union has been trying for years to agree on common rules in the area of taxation, but it was never a priority. Lately it has started to turn into one. The member states even held a special summit during which they agreed to expand the automatic exchange of information at EU level and at global level. Generally, however, they decided the battle to be led at global level first - in the framework of the G8 (as of this year just G7 because Russia is currently isolated and does not take part in this format because of its invasion in the Ukraine) and G20.

Back then, there was consensus in the G8, G20 and the EU to develop global standards for automatic exchange of information. The Organisation for Economic Cooperation and Development (OECD) took the task to develop such standards which were presented in July this year. This boosted the activities at EU level. In mid-October the EU ministers of finance have reached an agreement on a draft directive which expands the coverage of the mandatory automatic exchange of information among the tax administrations allowing them to fight tax evasion and improve the efficiency of tax collection. The draft directive broadens its coverage to include interest, dividends and other income, as well as account balances and sales proceeds from financial assets. It is foreseen the new directive to come into force as of 2017 but this proved a problematic deadline for some member states.

In the margins of the ECOFIN meeting on 14 October there was a public debate on the issue during which Austria raised, in the words of its Finance Minister Schelling, a purely technical matter. Hans Jörg Schelling said that most G20 countries will begin applying the automatic exchange as of 2018 and the EU is sticking to 2017. Currently, Austria does not have a data exchange infrastructure between its banking sector and the administration. A brand new system has to be built from scratch, Mr Schelling said, which will take time. That is why he requested Austria to receive an exception and to be given one year additionally. If the country completes the work earlier then it will join immediately.

The Austrian minister of finance raised another issue which is to create mandatory public and corporate registers in the framework of the money laundering directive. Many member states have blocked this initiative, he said and asked his colleagues for support because this would mean that the EU really means to fight tax evasion. Luxembourg's minister of finance also pointed out that his country had similar technical problems but said that the country will make it by 2017. He, however, put three conditions. The first is the Commission to repeal the savings directive because its content is now being merged with that of the directive on the exchange of information. The second is to apply only the OECD global standards and the third is the Commission to revise the agreements with third countries.

According to the now ex-commissioner on taxation Algirdas Semeta, when an agreement is reached on the administrative cooperation directive the Commission will repeal the savings directive. But it should continue to be valid for Austria in the transition period until the country fully joins the exchange of information mechanism. In order to meet the set deadlines the negotiations on the draft directive must be completed by the end of the year. Regarding the agreements with third countries the negotiations are ongoing and at the moment there are no reasons to believe they will fail, Mr Semeta assured.

All problems of the EU stem from the lack of tax harmonisation

During his explanatory statement in front of journalists on Wednesday, Jean-Claude Juncker said that the special tax rulings are a very well established practise not only in the Grand Duchy, but in almost all EU member states. Currently, the European Commission is investigating three countries for corporate tax agreements with the companies Apple, Starbucks, Fiat Finance and Trade. Those are Ireland, The Netherlands and Luxembourg. The investigation was launched in June this year and is trying to establish whether there are violations of the European state aid rules. According to the then competition commissioner Joaquín Almunia, in times of tightened public budgets it is very important the big multinationals to pay a fair share of taxes. According to the European state aid rules, national authorities cannot undertake measures allowing certain companies to pay less taxes than they should if the tax rules of the member states are applied in a fair and non-discriminatory way.

Jean-Claude Juncker claims that Luxembourg did not apply discriminative practises toward any investor. Everything was done according to national legislation and international rules. He admitted, however, that it is possible the interaction between the national rules in some member states and national rules in others to lead to lower tax bases. It is true, he continued, that sometimes, when divergent tax rules are applied, this could lead to results that go beyond the ethical or moral standards. All this is a result of none or insufficient tax harmonisation. He said that he had tasked Pierre Moscovici, the economic, financial and taxation affairs commissioner, to draw a directive that should ensure automatic exchange of information on taxation rules. It will force the member states to exchange information when they decide to change their taxation rules. He added that he will bring this matter up at the G20 summit in the weekend. It is not clear whether this will be a different directive or will only supplement the one on administrative cooperation which is currently being revised.

Mr Juncker also said that achieving progress on the currently frozen legislation about the common tax base for corporation tax will be a major priority for his team. "If we reach an agreement on this issue many of our problems will disappear", he assured. Currently, the divergences among the national legislations and definitions what income is taxable are so big that it is possible to even engage in some forms of fiscal engineering, the European Commission chief explained. The news about the revival of the directive on consolidated tax base is not well accepted, especially by Ireland which does not want to be forced to increase its corporate tax. Jean-Claude Juncker recalled that he is a proponent of tax competition but is an opponent of unfair tax competition. This means that in a future legislation the definition of fair competition should be very precise.

In addition to finally breaking his silence for media, Jean-Claude Juncker also responded to the invitation of the European Parliament to answer questions by MEPs during their mini plenary session in Brussels. He appeared in front of them almost immediately after his statement in the European Commission. The group of the European People's Party (EPP) expressed full support and conviction that Juncker will be able to resolve this problem because, as Manfred Weber, leader of the group, explained, it is not only Luxembourg. Though expressing indignation with the LuxLeaks revelations the chief of the group of Socialists and Democrats (S&D), Gianni Pittella, also said that this is a European or even a global issue. He proposed to withdraw banking licenses of institutions which allow tax evasion as well as to prepare a list of countries where multinational companies take advantage of favourable legislation. Kay Swinburne of the group pf European Conservatives and Reformists (ECR) warned, however, that there is no need of tax harmonisation but of tax competition.

She urged to await the outcome of the investigation before jumping to conclusions and launching a witch hunt. She welcomed Jean-Claude Juncker's quick reaction to see the MEPs but pointed out that it was the competition commissioner, Margrethe Vestager (Denmark, ALDE), who should have answered their questions. The leader of the Alliance of Liberals and Democrats for Europe (ALDE) Guy Verhofstadt used the occasion to again hunt down Nigel Farage asking why was he not attending the hearing since he is a "specialist" in offshore tax practises on the Isle of Man. Last year it was revealed that Farage had a trust fund in the offshore zone Isle of Man but he denied any wrongdoing. He admitted then that he had established a family education trust fund in 2003 to limit the size of the inheritance tax his children would have to pay after his death. This case caused sharp criticism on behalf of Farage's opponents in the European Parliament and since then he is often a subject of attacks. Mr Verhofstadt called for the establishment of a special parliamentary committee to look into this matter.

Phillipe Lamberts from the group of Greens/European Free Alliance expressed strong indignation. According to him, this is a tax war which can be stopped only by tax harmonisation. The biggest victims of this war are the public finances and the citizens. Paul Nuttall from Farage's group Europe of Freedom and Direct Democracy (EFDD) suggested that history was repeating itself. He recalled that the previous European Commission president from Luxembourg Jacques Santer had to resign over corruption charges.

A split personality

During this year's hearings for members of the European Commission a huge contradiction emerged between the past of a national politician and the present of a European one. This happened with at least three commissioner-designates - the French Pierre Moscovici, the Hungarian Tibor Navracsics, the Finnish Jyrki Katainen. All of them had in their past of prime minsters or ministers many faults but in front of the European Parliament they promised to stick to the EU rules and, practically, to be different. For example, Mr Moscovici was not welcomed by the MEPs because, while he was a minster of finance of France, he did not respect what was agreed at EU level and failed to put the French public finances in order. Tibor Navracsics had to defend himself from attacks that as a minster of justice and then a minster of foreign affairs in Viktor Orban's government he was an accomplice in the erosion of the European values in Hungary. And Jyrki Katainen was attacked because, when he was a prime minster of Finland, he demanded the triggering of Greek guarantees as a pre-condition to agree on the second bailout.

All of them made clear distinctions between their being of national politicians and their European commitments. A split personality but in a much larger scale demonstrated Juncker, too, who was attacked not only by the European Parliament but also by a large part of the European and international press. There are numerous calls for his resignation. The American business medium Bloomberg also called, in an editorial, on Juncker to resign. Juncker told the journalists and the MEPs on Wednesday that he was addressing them in his capacity of a European Commission chief not of an ex-PM. He tried to disperse the fears that he is in a conflict of interest by practically investigating his own self. He assured that he will not interfere in the investigation led by Ms Vestager, firstly because the commissioners are quite independent in their work and, second, because in this way he would ruin the authority he enjoys now in the Commission and he would not want that.

Gabrielle Zimmer, leader of the group of the far left in the EP, reminded him that he does not suffer of split identity and cannot split himself into two capacities - of a former prime minister and of a minister of finance and of European Commission president. She demanded him to answer for what he did in Luxembourg. Juncker admitted that he bears political responsibility and said that if the Luxembourg tax rulings had led to non-taxation he would regret that. The situation with the split personality at national and European level is a very interesting phenomenon which drew attention during the selection of new members of the European institutions because it revealed a strong deviation in the application of the European standards at national and EU level. The LuxLeaks case expands this phenomenon to national legislation showing that a competitive advantage of a country could be very harmful to another.

It is no accident that many of the MEPs reminded Juncker that while the Luxembourg gross domestic product was rapidly growing and currently this is the country with the highest standard of living in the whole EU, in countries, like Greece, the governments are forced to cut spending. When presenting the country-specific recommendations in the beginning of June, the former European Commission President Jose Manuel Barroso said that one of the reasons for the slow and fragile growth of the EU and especially in some member states is the high taxation of labour. This is the main reason why the multinational companies are trying to escape it by applying tax planning strategies. Often, they take advantage of the technical peculiarities and divergences of the taxation systems. The cross-border dimension of many of the structures for tax planning and the increased mobility of capital make the fight against aggressive tax planning very difficult for the individual tax systems, the Commission analysis said.

That is why, it is necessary the member states to urgently deal with this individually and at EU level because such corporative behaviour leads to erosion of the tax bases in the countries that already have financial constraints. Some member states should specifically focus on the sustainability of the tax revenues while awaiting the European and international efforts to resolve the issue with the erosion of the tax basis and the shifting of profits to deliver. The Commission believes that some tax conventions need to be reviewed and the mechanisms to prevent fraud to be enhanced. It seems that the new European Commission chief will follow the same path. During the pre-election debates he was stating that he would fight against tax dumping and for more tax harmonisation. The question is, though, how will the member states respond. He recalled several times during his explanatory statements on 12 November that it is necessary all the 28 member states to engage in the fight against tax evasion accentuating on "all the 28".

It is a bit exaggerated to hold only one person accountable in an affair of such a scale simply because he was several terms a prime ministers because, certainly, he did not act individually. Moreover, these practises are visible in other member states as well. Cyprus even ended up in a pre-default condition and is currently connected to life-supporting systems precisely due to similar practises. So, before judging, one key question has to be answered - how far does national sovereignty go when capital, labour, services and goods know no boundaries?