AN interesting report that found its way to my inbox by way of Inter Press Service (IPS) revealed an example of human civilization’s talent for collectively missing the point: In the wake of the Luxembourg Leaks, or “LuxLeaks” financial scandal in late 2014 – which exposed tax agreements between the Luxembourg government and more than 300 multinational companies – secret tax deals in Europe increased by about 50 percent.
The LuxLeaks were revelations by the International Consortium of Investigative Journalists of tax rulings set up in Luxembourg for some clients of financial services firm PricewaterhouseCoopers between 2002 and 2010. The information was leaked by two PwC employees, Antoine Deltour and Raphaël Halet, who were both criminally charged for it. Technically, the information they leaked was confidential government information. Just last week, Luxembourg’s Court of Appeals upheld their convictions, but reduced their sentences to fines of 1,500 euros for Deltour, and 1,000 euros for his colleague Halet.
In spite of the scandal inspiring the creation of new measures to reduce tax avoidance schemes benefiting multinational companies, data from the European Commission, the IPS report said, showed that unpublicized tax deals between companies and governments in Europe increased from 545 in 2013 to more than 1,400 by the end of 2015, an increase of 160 percent in two years.
The reason this is a problem, on the face of things, is that tax accommodations for businesses are equated with foregone public revenue. Although the European Commission only gathered data about European governments, the IPS report pointed out that developing countries lose an estimated $1 trillion annually to corporate tax dodging according to Global Financial Integrity.
Another organization, Eurodad, a coalition of civil society organizations campaigning for greater tax transparency, said that tax treaties between European governments—everything from special tariff agreements to concessions for European multinationals—lower effective tax rates in developing countries by an average of 3.8 percent.
The “opportunity cost” argument is not very solid, once one looks more deeply into the issue. Where the “LuxLeaks” probably did do a public service was in terms of revealing actual fraudulent behavior in some cases—arrangements in which PwC allegedly assisted client companies to hide or move profits to avoid host country taxes. The larger part of the leaked information, however, was about legal deals, specific arrangements for favorable taxes between governments and companies.
The assertion that this sort of activity is ethically or economically wrong is almost impossible to support. Taxes levied against foreign corporations can be viewed in two ways: Either as a charge for using the country’s resources to generate a profit, or as the earnings of the country for engaging the services of a foreign company to utilize resources the country cannot, for whatever reason, make use of effectively on its own. Either perspective suggests that the most efficient way for a host government to approach taxation of foreign companies is on a case-by-case basis.
While there may be a case to be made for making the details of tax arrangements public, the implication that tax structures must somehow be uniformly applied to all companies (and must be set at the highest level the businesses can bear) does not make much sense. Foreign companies contribute to a host economy in different ways—they employ different parts of the workforce, make use of different supply chains, use different basic resources, and put strains on different parts of the country’s social and physical infrastructures. The taxes levied against a particular company should take all that into consideration, and if they do, then the taxes are going to invariably be different for different companies.
That is not the way things are done, of course; taxes, or rather the reduction of them from some already established level, are used as inducements to attract foreign companies to a host economy, particularly in developing economies. And whether those who bemoan the “opportunity cost” of tax deals like it or not, as long as enough economies are willing to cut companies a break to attract their business, it’s the way things will continue to be done. That was the point that was missed in the wake of the “LuxLeaks”: expecting everyone to see things the same way is foolish; ideals will almost always take a back seat to practicality, and one man’s ethical taboo is very often another’s opportunity to earn a buck.