Fighting Evasion and Avoidance: Why the Difference?

Over the past decade, a series of scandals have raised the political salience of international tax policy. Some of these scandals, including the Panama and Paradise Papers, uncovered how rich households exploited financial secrecy offered by tax havens to hide income from the tax office. Others like the Luxembourg Leaks focused on the profit-shifting strategies of multinational firms, in some cases minimizing the tax payments of highly profitable companies to zero. Irrespective of their specific focus, both types of scandal uncovered how the most potent taxpayers shirked theirfiscal responsibilities at a time of austerity.

By creating widespread popular indignation, the scandals thus pushed govern-ments in the Group of 20 (G-20) into action. The G-20 tasked the OECD to develop countermeasures to tax evasion and tax avoidance. The organization responded with a CRS for the multilateral and automatic exchange of information on bank accounts held by non-residents and a major overhaul of international corporate tax law intended to curb base erosion and profit-shifting (BEPS) (Lips 2019; Hakelberg 2020).

Despite the existence of potential workarounds, most analysts consider the introduction of the CRS a significant breakthrough (Eccleston and Gray 2014;

Emmenegger 2015; Palan and Wigan 2014). At the time of writing, all traditional secrecy jurisdictions had begun to regularly report the account balances and capital income of non-residents to their respective home countries (Ahrens and Bothner 2020). To this end, the governments of countries like Austria, Luxembourg, or Switzerland had to overcome considerable domestic opposition to the dismantling of banking secrecy provisions that had provided their private banking sectors with a crucial competitive advantage and had become essential

⁶ In this respect, international tax policy follows the maxim voiced by Margaret Thatcher on the occasion of the establishment of International Banking Facilities in London:‘If you can’t beat them, join them’(Eden 1998, p. 659).

elements of national identity (Eggenberger and Emmenegger 2015; Hakelberg 2015). Assessments of the BEPS project are less euphoric. Analysts acknowledge the underlying ambition and complexity of the task, but stress that the funda-mental legal principles enabling profit-shifting remain in place (Büttner and Thiemann 2017; Picciotto 2015). Why have OECD governments not reduced the scope for corporate tax avoidance to the same extent they have for tax evasion by households with offshore accounts?

In contrast to previous accounts, emphasizing distinctive balances of power in international negotiations over countermeasures to tax evasion and avoidance (Grinberg 2015; Lips 2019), our research shows that the US government domin-ated negotiations over the CRS and the BEPS project’s final recommendations.

Owing to the country’s unique combination of internal market size and central-ized regulatory authority, the Obama administration could credibly link market access to compliance with its tax policy demands. Instead of the power balance between states, differences in the discursive and structural power of affected interest groups in the United States provide the decisive explanation for progress in the fight against tax evasion and stasis in the fight against tax avoidance (Hakelberg 2020). Discursive power refers to an interest group’s ability to shape the interests and perceptions of policy-makers and the general public by linking its demands to established norms and ideas (Fuchs and Lederer 2007). Structural power is based on an interest group’s ability to make credible threats of disinvest-ment (Hacker and Pierson 2002).

When entering office, the Obama administration was committed tofighting tax evasion by households with offshore accounts and tax avoidance by multination-als artificially shifting profits to tax havens (Office of the Press Secretary 2009). In the wake of the UBS scandal, which revealed how the bank and its US clients had circumvented preexisting reporting requirements, the administration’s proposals for the removal of corresponding loopholes faced little political opposition.

Households break the law when they underreport foreign capital income in their tax return. Hence, they face the difficult task of raising political support for crime when trying to prevent countermeasures. Moreover, they play a negligible direct role in job creation, and their wealth and income usually result from their embeddedness in a network of social ties that make relocation difficult (Young 2017).

Against this background, congress adopted the centrepiece of the Obama administration’s anti-evasion efforts in March 2010. The Foreign Account Tax Compliance Act (FATCA) obliges foreign banks to automatically report US taxpayers’ foreign income to the Internal Revenue Service (IRS) (Hakelberg 2015, 2016). The act draws its force from a built-in threat of sanctions that makes foreign banks, which do not comply with reporting requirements, subject to a 30 per cent withholding tax on payments from US sources. Because of the dominant role of the American financial market, no international bank could

afford this penalty. Instead, they lobbied their home governments to repeal secrecy legislation that prevented their compliance with FATCA (Grinberg 2012;

Emmenegger 2017). The exchange relations were codified in bilateral intergov-ernmental agreements (FATCA IGAs) with foreign jurisdictions. Virtually all important tax havens entered into such agreements (Eccleston and Gray 2014).

By forcing tax havens to abolish secrecy provisions, the US government enabled the EU and OECD to request equivalent cooperation from these countries and multilateralize the AEI (Hakelberg 2015). In the EU, large member states and the Commission invoked a most-favoured-nation clause contained the Directive on Administrative Cooperation to break Austrian and Luxembourgish opposition to an automatic information exchange of bank account data in the union (Hakelberg 2015). Likewise, the OECD developed its automatic information exchange policy with the support of the G-20. In 2014, the common reporting standard (CRS) was adopted on a multilateral basis (OECD 2014). However, it contained a significant exception. Since the USfinancial industry, which musters considerable discursive and structural power over the political process, opposed additional reporting requirements for US banks, the IRS still does not reciprocate the AEI, providing wealth managers in secretive US states such as Nevada or South Dakota with a comparative advantage in the attraction of hidden wealth (Hakelberg and Schaub 2018).

Similarly, the Obama administration’s efforts to curb profit-shifting by multi-national cooperation facedfierce opposition from affected industries. In response to its initiatives, multinationals invoked the legality of tax planning, blaming legislators for the drafting of incoherent tax codes. Besides, they claimed to serve the public good by stressing their obligation to maximize profits on behalf of shareholders, and by linking a lower tax burden to more investment and jobs (Elbra and Mikler 2017). With these arguments, multinational corporations convinced enough members of Congress to block proposals from the Obama administration that would have forced them to repatriate foreign profits they had hitherto hoarded in tax havens to avoid tax payments in the United States. As a result, the Obama administration lacked a national regulatory model when Germany and the United Kingdom put corporate tax avoidance on the G-20’s agenda (Hakelberg 2020).

Although the US Treasury hoped at the beginning that the BEPS project would exert additional pressure on US multinationals, concern over the redistributive consequences of countermeasures proposed by European governments soon became the central issue. Contentious proposals included greater leeway for tax examiners in the recharacterization of controlled transactions between branches of the same group, an extension of the permanent establishment definition, determining when a government has the right to tax a company operating on its territory, and the reporting of information on profits, payroll, and intra-firm payments on a country-by-country basis. From the US perspective, all of these

proposals threatened to redistribute taxing rights away from a company’s country of residence and towards source countries where it produces or sells its goods and services. Ultimately, the Obama administration preferred a low foreign tax burden of US multinationals to the taxation of their foreign profits by EU countries. Its negotiators significantly pared back each of the contentious proposals, thereby essentially defending the international tax system’s status quo (Hakelberg 2020).