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Part 3 Continued

The contribution of the proposed Directive to the fight against tax evasion

c) Technology, encryption and Internet bring off-shore centres to European screens

In the past, one could consider that such safe havens were beyond most people's reach as the man or woman in the street could not feel comfortable dealing with the Bermudas or Bahamas. Information technology, however, is bringing the off-shore world pretty close to the shores as it can take little more than a click of the mouse to move from a EU banking screen to a Bahamas or Bermuda one. The real obstacle is the banking secrecy law of these off-shore centres, but some of them - Bahamas for instance - now include the exception clauses allowing on-line account consulting and management.

In this respect, EU authorities would be well advised to take notice of the recent measures taken notably in Switzerland to make this screen-based geography safe and comfortable. The Big Three Swiss banks invested 120 million dollars in 1997 to 'export the geopolitical advantage of their privacy laws world-wide directly on the Internet'.¹² The technology deployed is provided by R3 Security Engineers, a Zurich company acquired in June 1998 by Entrust Technologies, a leader in public-key infrastructure systems. 128-bit data encryption and randomly generated codes changing every 60 seconds provide on-line clients with the type of security previously associated with large, wholesale fund transfers.

d) The need for ex ante rather than ex post negotiations at OECD

In many ways, in the absence of significant new initiatives, the withholding tax is likely to fail to deal with tax evasion as a deliberate, planned behaviour. It will also serve the useful purpose of discouraging residents of intra EU-border regions (e.g. Belgians living close to the Netherlands and vice versa) to travel a few kilometres to open euro-accounts not subject to tax. This is however much less than what could be achieved.

More specific discussion of what Member States are really committing to and of what can and cannot be done in this respect would be a precondition for the proposed Directive to have any chance of curbing tax evasion as it already exists. The only type of evasion that the proposed Directive would curb otherwise is that of border region and other 'opportunistic' tax evasion (e.g. opening account in a Member State where one is stationed for work). The proposed Directive is likely to leave untouched, or even could exacerbate most planned forms of tax evasion. Ideally, one could hope that the level-playing field that market participants and regulators seek to promote could be achieved through agreements on world standards as has been the case for other aspects of financial operations with the BIS prudential ratios. Work in the OECD context, as stressed by all our interviewees, is absolutely essential. The Commission does not disagree but takes a somehow optimistic view that other OECD countries will quite naturally converge toward the EU approach once the latter is in place.

Clearly, working toward an OECD-wide code of conduct should not be seen merely as a follow-up to the proposed Directive that can be postponed at little cost: this benign neglect will lead tax evaders to leave EU markets ahead of the proposed Directive.

The code of good conduct to be discussed at OECD level should include specific measures regarding 'double bottomed accounts', to avoid having OECD accounts as windows for non-OECD accounts. Some clear signals should also be given that OECD countries considering leaving the Club as one Channel Island is considering - would loose major goodwill and benefits. One such measure could be to consider that any corporate entity incorporated in a tax-rogue centre (e.g. an OECD centre leaving the OECD) would be considered liable to a 20% withholding tax for all operations inside the Union. Raising the issue would at least allow to see how serious Member States are about tax evasion.

The above considerations do not imply that the proposed Directive is not a worthwhile undertaking but it does suggest that rushing it through may quickly backfire as the public becomes aware of the loopholes available to wealthy investors and as tax authorities need to come back repeatedly with technical fixes. The former would lead small savers to take a cynical view of what they could perceive as a two-tier approach to social justice. The latter would be a source of something markets tend to dislike even more than taxes: uncertainty.

3.3. The need to anchor the proposed Directive in a long term positive strategy for the Union

While the EU Ministers of Finance can be trusted to make good progress on the technical agenda before the proposed Directive is finalised, a deeper weakness resides in the partial approach to tax matter taken by the proposed Directive. To put it bluntly, tax evasion is not just about evasion, it is also about taxes.

a) The need for a comprehensive approach

The proposed Directive is part of a package of three initiatives that also include a code of conduct on corporate business and a proposed Directive on intra-group interest and royalty income. But the overall package is of a defensive nature as it aims to fight against harmful tax competition.

If the objective is really to establish a genuine level playing field, the proposed Directive should probably not be implemented as a stand-alone measure. It does not seem very rationale, for instance, to extend a number of tax-haven measures almost at the same time as the Directive is being drafted.¹³

More generally, the discussion of what should be the priorities for tax harmonisation could be intensified: in this respect, the call by Luxembourg to address corporate taxes as a matter of equal priority is still very relevant. Recent initiatives in Denmark regarding holding companies suggest that the 'standstill agreement' among Member States not to introduce new sources of distortion is the most pressing agenda vying for attention.

b) Citizens ready to be led but not to be drawn blindly

Harmonisation of taxes is not a 'business as usual' agenda, even for the post-euro Union. Again, it is a tribute to the Monnet method that such issues can be put on the table before the euro has even materialised. But 'putting an issue on the table' should not be like throwing the dice: after several 'narrow escapes' in their relations with the European voters in a number of Member States, the pro-integration political leaders of the EU would be well advised to draw the lessons from the bitter 'Maastricht debate' of a few years ago and from the frustrations that it brought to light.

A key-lesson from this debate was that public opinion can indeed be led - in the great Monnet tradition - but that the public has less and less appetite for being drawn blindly. Voters are demanding their due share of transparency, clarity and a sense of long-term perspective.

Once they share a common currency, citizens of the 'euro' countries can probably be persuaded that it is now in their interest to share additional elements of tax and financial policy as they have done already with VAT. On this account, setting ambitious objectives is both possible and desirable. But the voters will be asking for more than a set of technical fixes to the immediate problems of their respective tax authorities. In particular, they will want a better understanding of the basic principles, the fundamental 'philosophy' guiding this long march toward a common tax and financial policy. Failure to do so would probably be leading many individual investors and bank clerks to denounce the Brussels technocrats.

In the long run, it seems difficult - and ill advised - to approach fiscal matters from the revenue side only. Member States do not 'own' citizens and their money: they are merely entrusted by their citizens with responsibilities that they must discharge fairly and efficiently. Talking about the levels and nature of expenses is the second half of any meaningful fiscal debate.

The 'level playing field' that the proposed Directive seeks to establish is not a technical notion when the field is Europe, our common Europe. 'Levelling' cannot be carried out without some notion at least of the type of economic and social landscape Europeans are trying to set for themselves.

In this sense, as we already suggested, the term 'harmful' used in the proposed Directive risks to substitute an a priori value judgement to what should be a fully fledged political process. In the wake of the recent French and German elections, the Union is blessed with a very high degree of de facto political convergence, with thirteen countries governed by a Social Democrat or left wing government. Yet, at the same time, the Union as such is not - not yet? - a political Union. Hence, governments of today would be enlightened not to use the European administrative process to 'lock in' political change in ways not respectful enough of the democratic process within countries themselves.

In general, the strength of the Monnet process is precisely to use 'administrative measures' to 'lock in' changes toward a more open, more tightly integrated Europe. But the political gains thereby 'locked in' have to do with the state of relationship among Member States rather than with the political choices internal to one country. Voters and the public at large already resent what they perceive as an effort to restrict their capacity to make political choices.

c) The need not to frighten away the present 'out' countries

As for the citizens of the three 'out' countries other than Greece, they can be expected to scrutinise even more intensely the integration dynamics fostered by the euro and its implications for sovereignty.

The euro is merely an 'Etape' on the road toward this 'ever closer union' mentioned in the preamble of the Maastricht Treaty. Having partially 'opted out' of the latter, the UK, Sweden and Denmark are bound to be quite suspicious of anything sold to them as 'technical' co-operation if what is at stake is really the tax system itself. Those who question the legitimacy of EU integration will not be convinced by a set of technical considerations on the need for instance to reduce 'harmful' tax competition. They will want to know what additional elements of sovereignty are transferred to the Union and the other Member States and for what positive purpose.

As insurgents proclaimed in the Boston harbour 'no taxation without representation'. This suggests that a debate on the level of taxation, even if lively and complex, is better than a 'technocratic' approach.

If politicians fail to create a shared sense of direction, the proposed Directive may go in history as the moral equivalent of the infamous 'cheese Directive' in which guardians of the internal market are perceived (rightly or wrongly) as compelling people to change the way they eat because this will make it easier to administer the internal market. All this while far more important issues, regarding for instance the quality of animal feeds, turn out to have been left unaddressed.

In this respect, and quite aside of the euromarkets issue, the emphasis put by ISMA on the link between taxes and democracy should be taken very seriously indeed. Taxes are not a tax-collector-only matter, they are a shared social concern.

3.4. From the negative agenda of tax collectors to the positive agenda of European cohesion

Even if this involves substantial delays, the proposed Directive should be presented and discussed in ways that do not suggest that governments look at tax-payers mostly as evaders and cheaters. A positive approach of shared objectives and mutual trust is what the Monnet method calls for.

Europe is not a continent of cheaters: on the contrary, unlike other parts of the world, it is a continent where it is widely understood that 'taxes are what we pay for civilisation' or, in more mundane terms, for social cohesion and progress. European voters can be addressed as sophisticated and understanding people rather than as a gang of mischievous tax-evaders. The purpose of European integration is not Michel Foucault's 'surveiller et punir' but Jean Monnet's 'partager et construire'.

Hence in an intra-European perspective, the proposed Directive may well appear, once tested in the national political arenas, as either too much or too little. Too much if sharing tax sovereignty and setting in place highly complex process has no higher purpose than distrust of tax-payers. And too little if its ambition is really, as it should be, to lay the foundation for the next stage in this historic endeavour to create one European economic, civil and political society.

Taxes are a central element of the social contract. The voters on the other side of this contract have a right to be addressed by their Ministers of Finance and tax collectors in this spirit of democratic responsibility rather than in the technocratic jargon of loopholes closing and "harmful" competition. This is even more important when, as we have seen, few loopholes will really be closed. Even if unchanged in its technical wording, the proposed Directive will succeed or fail depending on the relationship it will establish with a broader agenda encompassing issues of social justice, fiscal discipline and the role of government.

In this perspective, the work done and the debate already conducted around the proposed Directive is a very useful beginning. But it is only a beginning.

Having played a key role in unlocking the two most significant initiatives toward a common tax-policy in 1991 and 1997, Luxembourg certainly has a role to play in calling for this informed debate on the general principle of the still-to-be-born common tax and financial policy. Rushing the proposed Directive through to meet this or that "deadline" is clearly less important than inviting the citizens of Europe to a democratic debate on which the legitimacy of this policy will eventually depend.

¹² Source: Doug Dannemiller, Tower Group, Newton, Mass. (USA). For details, see American Banker, 17.7.98 p.12
¹³ Moves to make the corporation tax rate the same for companies in Dublin's International Financial Services Centre (IFSC) as in the rest of the Irish economy have led to a new tax regime being agreed between the Irish government and the European Commission. Reinsurance 8.9.1998 p.7

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