“Yearly, 825 billion euros in tax payments are being evaded in the European Union. On top of that, the EU loses 160 to 190 billion euros due to tax avoidance.” This is a claim by Belgian politician and MEP Kathleen Van Brempt. Astronomical numbers, but where do they come from? And how reliable can these estimations be?
Kathleen Van Brempt mentions this in an article on the website of her political party sp.a (Belgian party of the social democrats) where she focuses on tax payments of multinationals.
The article is a response to the adaptation of a new detailed roadmap to deal with tax evasion and tax avoidance by the European Parliament. It is essential to understand the difference between tax avoidance and tax evasion. “Tax avoidance is a legal way to avoid tax payment”, explains professor in Fiscal law Michel Maus from the VUB (Vrije Universiteit Brussel – university in Brussels). “For instance, you have a successful company which makes a fortune with the production of chocolate, let’s say 1 million a year. In Belgium, you have to pay 29% of taxes on the profit. However, in Ireland, it’s only 12%. So, smart as you are, you decide to create a daughter company in Ireland. You keep the managing aspect of your business located in Belgium, but you move your operational business, chocolate and your employees to Ireland. This way, you have to pay fewer taxes. Big experts in avoiding taxes are multinationals like Apple, but even small companies do this.”
Illegal chocolate
“By evading taxes, you are committing a fraud”, Maus continues. “There is no legal aspect to tax evasion. It’s the same principle as avoiding taxes: you create a daughter company on paper, but in practice, you don’t move your business to the address where your business is located on paper. For instance, your chocolate that should be located in Ireland is still being true Belgian chocolate on Belgian ground.”
So, based on Kathleen Van Brempt’s claim, 825 billion is being evaded, which is illegal, while 160 to 190 billion is being avoided, which is legal. However, the article does not mention any source or studies on which these numbers are based.
After contacting Van Brempt’s office, her press representative referred to two studies shared by the fractions of social democrats S&D. The first one is ‘The Fair Tax Report’, which was drafted by the S&D. The second one is ‘The European Tax Gap’, which is conducted by Richard Murphy, a professor in International Political Economy (City University London), on request of the S&D.
In ‘The European Tax Gap’ report, Murphy suggests that the EU’s tax gap by evasion is between 700 billion and 900 billion euros and that these figures might even be an underestimation. Furthermore, the number of corporate tax avoidance is even less precise to estimate, and different amounts are suggested: from 50 billion to 190 billion euros a year. And that is a big difference of 140 billion euros a year. Murphy: “(…) it remains hard to estimate tax avoidance. It is certain that the tax gap estimation of €825 billion suggested in this report is understated as a consequence, but rather than present an estimate of the loss it is now considered more prudent to note that the problem exists. (…).”
Still relevant today?
As a source for the estimation for tax avoidance Murphy refers to a study from the European Parliamentary Research Service, which was conducted in 2015: ‘Bringing transparency, coordination and convergence to corporate tax policies in the European Union – Assessment of the magnitude of aggressive corporate tax planning‘.
The press responsible of the European Parliament, John Schrans, says that Van Brempt’s claim is based on the European Parliament resolution of the 26th of March 2019 on ‘financial crimes, tax evasion and tax avoidance’. The two following articles concern the numbers that Brempt mentions:
- In article 24, it is stated that ‘(…) the latest estimates of tax evasion within the EU point to a figure of approximately EUR 825 billion per year’. This figure is the result of the same study of 2015 to which Kathleen Van Brempt referred and which is previously mentioned in the study by Richard Murphy.
- Article 19 of the report states that ‘the European Parliament recalls, in particular, the empirical assessment of the magnitude of annual revenue losses caused by aggressive corporate tax planning (ed. tax avoidance) in the EU which was drawn up in 2015; notes that the assessment ranges from EUR 50-70 billion (…) to EUR 160-190 billion (…).’ In other words, the amount of 160 billion to 190 billion euro is the result of observations.
Decreasing fiscal fraud
Again, these numbers are based on the study of 2015, the same study to which Murphy referred. The following question that should be asked: is the study still relevant to the present day? And how come that a more precise calculation cannot be made concerning tax avoidance and tax evasion?
Professor Maus shares his demur towards the 2015 study. “Fiscal fraud is difficult to measure precisely. To have objective and truthful numbers isn’t easy. The only numbers that we can be sure of are of what has been discovered of fiscal fraud or crime.’’ This explains why the numbers from Murphy balance in such a wide range.
In his opinion, the study from 2015, apart from not being precise, might also not be completely reliable today. He refers to a study from Friedrich Schneider, a professor in Economy at the University of Lind: “Schneider created a model to calculate the black economy. Of course, you can criticise every calculation that has been made concerning tax fraud, but his method is based on comparing 120 countries with each other, and so he is capable of describing noticeable trends.” Schneider’s study, dating from 2017, shows that there is a slight decrease in fiscal fraud in Europe. So, it is possible to conclude that there is a change in numbers compared to 2015.
To conclude, it is safe to state that Kathleen Van Brempt’s claim is based on actual numbers that are traceable to studies made on demand by the European Parliament. However, as professor Maus and his reference to professor Schneider shows, precise numbers concerning tax avoidance and evasion aren’t an exact science. Only assumptions or estimations can be made because we can only calculate what we know. And as you want to make as much money as possible with your chocolate production, you will not share your way of tax fraud with the world.
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RESEARCH | ARTICLE © Lara Richir and Arthur Van Duyse, Thomas More University of Applied Sciences, BE
