Can Pay, Won’t Pay: Tax Evasion, Profit Shifting Rife in Central, Eastern Europe
The LuxLeaks and Panama Papers scandals aroused shock and outrage the world over. However, reaction from Central and Eastern European statesmen and citizens was decidedly more muted. A new report has suggested profit shifting and tax dodging by businesses in the region is endemic – perhaps accounting for the lack of political and public outrage.
The report was compiled by five civil society organizations in six Central and Eastern European countries — Za Zemiata in Bulgaria, Glopolis in the Czech Republic, Demnet in Hungary, Lapas in Latvia, IGO in Poland and Slovenia.
The group’s work was inspired by Bulgarian tax justice campaigner Dimitar Sabev, who in 2015 set out to determine exactly how much corporation tax the top ten companies in Bulgaria paid.
His findings, dubbed “startling” by the report, suggested Bulgaria’s most profitable corporate dectet in fact received more from the state in terms of tax rebates and offsets than they put back in.
The group decided to repeat Sabev’s exercise in five other countries — and while no other state yielded such extreme results as Bulgaria, the conclusions will certainly be troubling for tax campaigners.
For example, one of Slovenia’s biggest firms, white goods manufacturer Gorenje, has not paid any corporation tax for five years — and there’s no suggestion the company has done so unlawfully.
Furthermore, Hungary has effectively established itself as a regional tax haven, with the government seeking to cut its headline corporation tax rate to 9 percent — although the country’s top companies don’t even pay that much, via liberal use of tax exemptions and allowances. In fact, the tax rate paid by these firms is less than 0.5 percent in Hungary.
The study also investigated how the tax burden was divided between workers, corporations and consumers.
Hungary also fared poorly in this regard — Hungarian businesses as a whole contribute relatively less of their profits to the tax bill than citizens, who pay a larger share through value added tax and other levies.
The Czech Republic was the only country where the amount of corporate tax as a proportion of total tax revenue was comparable to the amount of tax paid by individuals in respect of income — in every other country studied, there was a significant gap between the amount paid by corporates and individuals. For instance, while the gap between corporates and individuals was one percent in the Czech Republic in favor of individuals, it was 14 percent in favor of corporate in Latvia.
The report notes that taxes hold “a variety” of social connotations in the region, and are rarely seen as a fair means of redistribution by everyone, for everyone. Moreover, public debate on the issue tends to concentrate on more “visible” forms of taxation voters can relate to, such as personal and consumption taxes, rather than corporate and business rates. Outrage over tax is almost exclusively centred on VAT fraud. Corporate tax evasion and tax avoidance rank relatively low in terms of public concern.
Moreover, “specific historic and cultural conditions” mean many in the region interpret European Union discussions about transparency and cooperation in respect of tax as an attack on their hard earned sovereignty — and a lack of uniformity on rules in turn makes tax reporting complicated, creating loopholes that can and do get exploited.
As a result, the report’s authors stress the need for tax harmonization, and much-enhanced transparency.
When information on what is going on in international and corporate taxation becomes publicly available, they believe, critique of iniquitous tax rules will become much better informed, and a desire for an alternative structure will become inflamed.
Moreover, the findings suggest that contrary to a common economic theory, that low and/or flat taxes increase corporate tax revenue by stimulating economic activity, tax cuts for big business and higher earners simply shift the tax burden onto ordinary citizens, producing a disproportionately large tax burden on goods and services in Central and Eastern Europe when compared with the OECD average. Charging the same tax rate on lower and higher earners has also encouraged income inequality, although governments are increasingly wise to this — Estonia, the first country to introduce a flat tax, has started to dismantle the regime.
Overall, they found the amount of corporate tax paid as a percentage of GDP in five of the six countries studied was considerably lower than the OECD average — again, only the Czech Republic was an exception.
