18/01/23

GLOBAL REGULATION: European Parliament votes to expand proposed rules targeting shell companies after Pandora Papers highlighted their role in tax evasion.

As published on icij.org, Tuesday 17 January, 2023.

The European Parliament voted today to widen the scope of proposed regulation designed to prevent the misuse of shell companies, and fight tax evasion and avoidance across the bloc.

The parliament adopted a report by its Committee on Economic and Monetary Affairs that suggested amendments to “Unshell,” a proposed directive that introduces new criteria to identify entities in the European Union that are solely used to obtain tax advantages.

The amended version lowers the thresholds below which companies are exempt from the reporting requirements, and further details penalties for entities that fail to comply with the new regulation, including those with zero or low income. It also clarifies that “there can be valid reasons for using companies with minimal economic substance.”

“The battle against fraud and evasion has never been so important to our citizens [as it is now],” Lidia Pereira, the Committee’s rapporteur, said on Monday during a debate to discuss the parliament’s position on the proposal.

“We need to be uncompromising when it comes to abuses but we can’t create too many barriers for companies,” she said ahead of the vote. The proposal does not target “financial undertakings,” like banks and other regulated institutions.

The European Commission proposed the new regulation in December 2021, after the International Consortium of Investigative Journalists and 150 media partners published the Pandora Papers, an investigation based on a leak of 11.9 million in files from 14 offshore service providers.

ICIJ’s investigation revealed the use of shell companies and trusts by 29,000 people around the world, including politicians, business people and criminals. It also showed how sanctioned Russian oligarchs and their associates used the entities to circumvent sanctions and own assets in European countries.

In the amended version of the directive, the committee cited the Pandora Papers as evidence that “further measures are necessary to tackle specifically identified practices of tax avoidance and evasion.”

The proposed regulation introduces a so-called “gateway test” to help member states’ authorities identify and prosecute entities that lack “economic substance” by looking at the nature of their income and cross-border transactions, and at whether management is outsourced.

Suspected companies will have to provide additional evidence to prove that they conduct commercial activities, have an active bank account, and staff and offices in the country where they are based.

The proposed directive also aims at improving information exchange between the member states.

In an earlier version of the report, the committee stated that the misuse of shell entities for tax purposes in the EU leads to a tax loss estimated at about $24 billion per year.

“These entities will allow tax piracy to occur on EU territory,” said Ernest Urtasun, a European parliamentarian from Spain during the debate.

Today’s vote is just one of the many steps the directive has gone through since the European Commission proposed it in 2021. The directive requires unanimity in the Council for its adoption and negotiations are ongoing, according to an official briefing.

“In principle, most delegations supported the objectives of the proposal,” according to a December report by the Economic and Financial Affairs Council. “But [they] were of the view that further important technical work will be necessary before an agreement could be feasible.”

At the Monday debate, Gilles Boyer, a member of the European Parliament from France, called on the Council to “rapidly adopt the directive.”

Tax justice advocates welcomed the proposed directive but remain cautious about its effectiveness going forward.

Chiara Putaturo, a tax policy advisor at Oxfam, an international charity, said it’s now up to the council.

The report the Parliament adopted today “is not binding and we know that the [European Commission’s] proposal risks to be watered down by some EU tax havens in the Council.“In a report released this week, Oxfam found that decades of tax cuts for wealthy individuals and corporations have helped the ultra-rich grab nearly two-thirds of an estimated $42 trillion new wealth created since 2020. A lack of transparency on the ownership of shell companies also enables the 1% to hide their wealth and avoid scrutiny, the report says.

According to Moran Harari, a lead researcher at Tax Justice Network, the “Unshell” directive is an important step in tackling tax evasion but it is “ultimately a missed opportunity and too weak to significantly curb corporate tax abuse.”

“The limited scope of shell entities to which the directive applies and the weak measures to tackle them, mean the directive will make little more than a dent,” Harari told ICIJ.

She added that lack of financial transparency and the European Court of Justice’s decision to strike down a 2018 requirement that member states publish databases of company owners are still hindering the fight against tax evasion.

Among prominent Europeans identified in the Pandora Papers, ICIJ found that then-Prime Minister of Czech Republic, Andrej Babis, used a web of shell companies to hide ownership of luxury property worth $22 million in Southern France. Last year, French authorities launched an investigation into Babis’ dealings on suspicion of tax fraud.

Reporting partners in the Netherlands also found that then-Dutch Finance Minister Wopke Hoekstra invested in a shell company with interests in a safari enterprise in Kenya.

Both Hoekstra, who is now foreign minister, and Babis, who is running for president, denied wrongdoing.

During the debate on Monday, Margrethe Vestager, the European Commissioner for competition, said that the commission is also preparing a new proposal stemming from the Pandora Papers’ revelations on the role of intermediaries.

The proposed directive is called SAFE, an acronym for Securing the Activity Framework of Enablers. It targets professionals who enable tax evasion and aggressive tax planning, and is expected to be ready by mid-2023, Vestager said.