Europe's lost trillion in taxes

May 21, 2013: 5:31 PM ET
europe lost trillions tax
Europe wants to get some of the 1 trillion euros lost through tax fraud and avoidance.
LONDON (CNNMoney)

Europe misses out on one trillion euros in taxes each year. Little wonder its leaders are stepping up efforts to tackle fraud and aggressive tax avoidance.

Apple's showdown Tuesday with U.S. senators over its tax affairs is another reminder that the issue is rising up the international political agenda as governments struggle to control borrowing in the face of low growth or recession.

In a speech to the European Parliament, European Commission President Manuel Barroso said that, at a time of austerity, EU states were missing out on tax revenue equal to nearly double their collective annual budget deficits.

"That is a huge amount of money to simply let through the net," he said.

EU leaders are getting serious about loopholes and seeking international agreement on new rules to counter the ease with which individuals and companies can move money around to minimize tax. They'll discuss the issue at a summit this week.

Related: How Apple sidestepped U.S. taxes

Much of the focus so far has been on improving the exchange of information between tax authorities, and cracking down on offshore tax havens.

But big international companies, such as Apple (AAPL), are also coming under close scrutiny.

Starbucks (SBUX), Amazon (AMZN) and Google (GOOG) have faced tough questions from British lawmakers over corporate structures that allow them to pay little tax in the U.K. despite sales worth billions.

Starbucks volunteered to pay more U.K. tax this year and next after a public outcry. All three companies insist that they comply with current tax law.

But Margaret Hodge, chair of the U.K. public accounts committee, last week accused Google of doing "evil" with arrangements that allow it to claim its U.K. sales were transacted with Google Ireland and should not be taxed in Britain.

Google's Eric Schmidt, writing in Sunday's Observer newspaper, said companies should be taxed according to their profits, not revenue, and politicians were responsible for setting the rules. That said, there is reason to reform international tax laws, he added.

"Change won't be easy because it will require the renegotiation of international tax treaties, not just action by individual nation states," Schmidt wrote. "And many of those countries will doubtless have competing interests."

Ireland, which has a corporate tax rate of 12.5% compared with the U.S. rate of 35%, is also home to five Apple subsidiaries, a fact that has caught the attention of the Senate.

Deputy Prime Minister Eamon Gilmore said Ireland was not to blame for Apple's low tax rate.

"They are issues that arise from the tax system in other jurisdictions," Gilmore said. "That is an issue that has to be addressed, first of all, in those jurisdictions and secondly... it needs to be tackled by having robust international agreements and Ireland is very much in favor of that."

EU leaders meeting this week will consider a proposal for automatic information sharing among member states on all forms of income from Jan. 1, 2015.

Related: UK to tax cheats: Wake up and smell the coffee

And the U.K. will use a G-8 summit next month to promote international tax reform among the world's biggest economies.

Major tax haven users exposed

Prime Minister David Cameron on Monday urged 10 British overseas territories, including Bermuda, the Cayman Islands and the Isle of Man, to become more transparent about their tax affairs, and to collect and make available to tax authorities "full and accurate details on true ownership and control of every company."

"This goes right to the heart of the ambition of Britain's (chairmanship of the) G-8 to knock down the walls of company secrecy," he wrote.

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