Talking With Paul Tang: Tax Fairness In The EU

Paul Tang, a Dutch member of the European Parliament, discusses the challenges facing the international tax community and his goals as chair of the subcommittee on taxation. 

The post has been edited for length and clarity.

Sarah Paez: Welcome, Mr. Tang, to the podcast. It is so good to have you here.

Paul Tang: Good to be here.

Sarah Paez: Before we start, I was hoping that you could tell us a little bit about yourself. How did you first get involved in European tax policy and how did you become the chair of the European Parliament’s first ever permanent subcommittee on taxation, otherwise known as FISC?

Paul Tang: I have a big smile on my face but that’s because I’m not sure it’s a short story. My introduction into fiscal matters is as an economist. I did my Ph.D. and started working for the CPB, which is called Central Planning Bureaus, which was initiated by Jan Tinbergen, a Nobel prize winner. I had the time to do research but also to intellectually develop myself. I was very well aware of the race to the bottom that was ongoing already then.

When I moved from policy analysis to politics it was quite a change. I started in the National Parliament in 2007. I’d seen in my research years the marginal rates on corporate taxes were declining at a rapid pace. This wasn’t the type of tax competition that was beneficial for investment and economic growth. When I started, I was not fully aware of all the complexities and details that there are for the fiscal world and the fiscal systems. 

I started my political life in national parliaments. I became a responsible spokesperson for financial and fiscal affairs, very much with the idea that this had to change. At that time in 2007 I was probably a lone voice in a country which took almost pride in having a very competitive tax system and all the lobbying around it.

But then already you could see there was a disconnect between the world of fiscal advisers and politics. Fiscal advisers saw no problem in advising a zero tax rate for a corporation. In politics, in the Dutch parliament, no one would make the claim. None of the politicians, no matter what political color, would make the claim that it was good to have a fair share of zero. The fair share was something they needed to contribute.

Already then you had a disconnect. Of course the crisis — never waste a good crisis — changed the debate. And now we have two of them. First the great financial crisis and now the COVID-19 epidemic. I may have remained a lone voice, but I think fairness has become more prominent on the agenda as a result of these two crises.

When I came back into the EP in 2014, the first thing I did was say, “I want to work on this again.” I did in the national parliament. Of course I had to overcome some perception that, when you are Dutch, you’re in favor of the Dutch tax system. I had first to convince my own colleagues in a social democratic group that I really wanted to work on this. I also had to convince others in the EP. But the fact that I was the leading a member of EP on files like the consolidated corporate tax base and on digital services taxes. I was leading in naming and shaming.

I took the initiative for the EP to make clear that our EU tax haven included the Netherlands. In my own country people think of the Netherlands as a tax haven. At the same time in the EP there was LuxLeaks, followed by the Paradise Papers and the Panama Papers, so they all saw the dynamic. It was not just the current financial crisis, but also the revelations that we had from good journalistic work or whistleblowers that led to the subcommittee on the fiscal affairs.

It took some time to establish the committee because you need political agreements. I’d like to think my track record in the earlier years got me elected as the chair of the FISC committee. I’ve been working on this issue for quite some time.

It’s also interesting to see the changes over time. Sometimes it’s a slow process, but you can’t go into politics if you’re not by nature an optimist. But I have every reason to be optimistic really because I see the changes and I expect more changes to come. There will be a huge demand for fair taxation and also for more transparency. And you can say a lot about the tax world, but it’s not transparent. It’s not fair, so we’re bound to have some changes.

Sarah Paez: In your short time as the EP’s FISC chair, FISC covered so many different topics. It’s only been a few months ranging from Brexit’s impact on fair taxation to tax tools for countering harmful tax practices. Considering the urgency of the coronavirus recovery effort in Europe, what are your goals for FISC this year and how do you hope to achieve them along with your colleagues?

Paul Tang: I think we covered quite some ground. This is also why the EP can play an important role. People that are familiar with the situation with the EU know that the competencies are at the level of the member states, that they make decisions on the basis of unanimity.

And at the same time, the EP can play a role. The reason is that we are better informed and dig deeper than the national parliaments. For the national parliaments, this is a topic for which they understand the importance, but it’s far away. It’s in the back rooms of Brussels or nowadays it’s in the back rooms of a Zoom meeting. The national parliaments are not on top and the EP is. I think that’s our great strength.

I very much would like to develop the FISC committee as a European hub for discussion of tax matters. We need to crack open the back rooms. That’s what Tax Notes also does. You try to explain the world, right? And this is what we need. It’s not just country-by-country reporting that brings about transparency. It’s what happens on the size of corporations.

I think transparency is a powerful tool for change because many of the current tax policies can’t stand the light of day. Just shine the light on it. Just show it. See if people agree with this. Probably not, but OK.

The same is true with decision-making on tax matters. I think it’s very close to the heart because people have a very strong feeling and central notion of fairness that is pretty simple that’s broad throughout political spectrum. I already mentioned it: Everyone has to pay a share, right? You don’t have to be a loony left like I am to think that. And that’s why I think we can also have broad consensus on this.

It’s an important issue, but decision making is still very much behind closed doors. What we try to do with the FISC committee is to break this open and to make the debate public. That’s one thing that we need to do.

Another thing we need to do is strengthen the position of national parliaments. I’ve been a member of national parliament. I’m now a member of EP, but I want also to strengthen the position of national parliaments. They must understand the roles they can and can’t play because they are not as well informed and because they coordinate among each other.

We need to reinforce the democratic scrutiny of tax policy. Like I said, we want to be the European hub, and to crack open the back rooms where the dealing takes place. That is the institutional role that I would like the FISC committee to have. Then of course you do that for a purpose — transparency — and support it.

Now we have the CbC reporting on the table, but we also have a lot of reforms coming up. Digital taxation is one of them. It is not confined to digital companies. Right? But it’s very much linked to the OECD negotiations on pillar 1 and pillar 2 with the minimum effective tax rate. The greening of the tax system will be on the agenda. We are in a period where we can see major changes. I expect that to happen at the end of the first half of this year or the second half of this year.

What we very much hope for and what we, the EP and FISC commission, will push for is price studying. It is coming up with the opposition is the tackling of tax avoidance, right? I come from a country that I think is a tax haven and I think that should change.

I’m a bit optimistic. I see a change going on in the Netherlands. But we need the outside pressure again to complete this change. I very much hope that we will have measures aimed at tax planning that is distorting the internal market in Europe. That could be a base for majority voting in the EU to come forward as well. I see a lot of changes. 

I see the huge inequality in wealth and in tax avoidance of wealth. The inequality is so staggering. I think this will be an issue as well. Remember, we’re going to a time when we were still in the middle of the pandemic and where you see a huge imbalance in the public sector with high expenditure support for firms. Sometimes the same firms that avoid taxes. And on the other hand, little revenue. We need to re-balance at one point.

Now this time around, after the great financial crisis in 2010, we saw cutbacks and proposals for reforms. The [European Central Bank] also raised the interest rate. I think this time will be different. We can’t go back to a policy of austerity and reforms. I very much expect that there will also be a policy that aims to raise revenue. And what better place to start with the big corporations that do not pay their fair share; the big polluters and the very wealthy? This is why I expect also this will come within reach, which doesn’t seem very likely now, right? But I think we are in a very interesting period.

Sarah Paez: Just a note for our listeners: It is true that the EP is only able to consult on tax matters? Would you say you have more of an advisory role?

Paul Tang: That’s true. By being better informed, digging deep, and feeding information into the public debate, we will change the public debate. Public awareness is growing and this will lead to political action. That’s what I have in mind.

This is why I also want to be very much in touch with national parliaments. We need to bring debate. We should not keep the debate in Brussels, but very much move to the capitals. This is why I like to be a European hub. If we can bring part of the work of the FISC committee to the capitals, I think there’s already enrichment of the debate. But it also increased public awareness and raise public pressure for change.

Sarah Paez: How could FISC help the EU hold member states accountable for harmful tax practices within their own borders?

Paul Tang: The unique position of the EP nowadays is that we are the only European institute that is there to criticize the individual member states. That is an important role. Like I said, I worked very hard on that in the last period mandate up to 2019.

Now I want to go a step further and have these countries very closely considered. What we’re discussing here is apart from the Netherlands, which is obvious, but also includes Ireland, Luxembourg, Malta, and Cyprus. We have them in the spotlight. We also come up with proposals on what they can do to change and to see what impact they have.

I always say to my compatriots that these European partners are being robbed because the money that flows through the Netherlands comes from Germany and France. They miss the tax revenue because these are the countries with the highest marginal statutory corporate tax rates. We steal from our neighbors. Once people start to be aware of that, public awareness leads also to political pressure.

Sarah Paez: The EP has managed to keep this pressure on both the EU Council and the European Commission to enhance member state screening processes in relation to the EU blacklists for noncooperative jurisdictions in tax. We’ve talked a lot about this and this has come up a lot in FISC meetings.

Besides the EP resolution that came about earlier this month demanding transparency from the code of conduct group and calling for new blacklisting criteria, what other efforts is the EP and specifically the FISC committee planning to force more transparency and action from the Council on this topic of blacklisting countries?

Paul Tang: That’s a very good point. In fact, as the EP we are here to break open the back rooms. The council has these meetings and doesn’t feel the need to be held accountable. That’s the problem we have as the EP. We try to break open the situation and we need to find ways of doing that.

First of all, it’s public pressure. At the end of the day there are politicians responsible and they feel public pressure. We also try to find legal ways of doing it. I know that Sven Geigold, a German member of the EP, is now involved as is the OECD’s Pascal Saint-Amans in [directive on administration cooperation] DAC7. We tried to use this to improve our position vis-à -vis the council.

I’m involved now in securitization, where I try to where we have also included the black and the gray lists. Now the council is arguing, “Well, the gray list shouldn’t be part of it.” What I tried to do is say “OK, if you don’t want this change, that’s fine.” But then let’s have an open discussion on how to deal with the black and gray list from now on. Trying to force them in a position they can no longer afford us. It’s also an institutional fight, but we will get there. I have no doubt. We will find a way.

Sarah Paez: What is something that you would like to see in the development of the blacklist? Because it’s been criticized for the things that you mentioned; for example, this lack of transparency within the code of conduct group. But also that some of the listing criteria is applied inconsistently and that the blacklist doesn’t apply to countries within the EU that you would consider tax havens.

What is something that you think might be able to change that or maybe make it more fair across the board?

Paul Tang: I think the blacklist is potentially a very important instrument to set the rules of the game. The EU engages with other countries’ jurisdictions, but we try to set the rules of the game. That in itself is a potentially very forceful and powerful instrument. Of course, the council f- – – -d up. That’s a pity. There’s this very good instrument, but they throw it out of the window.

Things will change. Don’t worry. It will take time and it’ll take pressure, but it will change. The criteria we have now is insufficient. For example, the Cayman Islands doesn’t even have a corporate tax system. And then you meet a minister from the Cayman Islands explaining that it’s a perfect place for banks for many reasons, but they don’t have corporate taxes. Of course this is the reason why the Cayman Islands are attracting a lot of investments on paper, so you should change the criteria.

This may also prove you need to be consistent in applying this criteria. We had the discussion. I am now involved with Australia because of the [State Tax Service], the securitization file. Australia is on the gray list. They have this offshore banking regime. This is a detail in the tax system. But they are on the gray list and we have tried to help them with this gray list in the legislation blocking this offshore banking regime in Australia. And of course, Australia objects to it and gets away with it. At least not in the EP, but with the council. They remain on the gray list whereas they have done nothing to have it changed. 

The other example in this case is Turkey. You see the political pressure, but we now pay in terms of tax avoidance for it to Turkey. You need to apply the criteria consistently. The criteria is political, I would say, but the follow-up with the enforcement of the list should not be political. They set the rules of the game. 

You can develop the instrument to a great deal and you can in this way change the rules of the game. I think that I will say the EU is an economic powerhouse but a political dwarf. We don’t set rules of the game in this world whereas we have every reason to do so, especially when we make the system more fair.

Sarah Paez: The EU has made commitments to introduce new own resources, these new EU-wide taxes and revenue streams to fund its €750 billion coronavirus recovery package and also separately the multi-annual financial framework, the long-term budget. What own resources proposals do you think that we’re likely to see this year? Do you think that FISC will contribute to this debate at all? And how?

How might an agreement— an international agreement at the OECD level on a plan to reform the global tax rules—affect the EU’s efforts to fund the recovery?

Paul Tang: I’ll just start with the latter. This last half year the European Commission was cautious and the reason is twofold. First we have the recovery resilience funds that need to be ratified by the national parliaments. This is may not be the time they think to address the tax avoidance in Luxembourg and the Netherlands. That makes the European Commission cautious.

The other reason why the European Commission is cautious is because we have the OECD negotiations. I think many people, including myself, think it’s worthwhile to make sure that we complete the OECD process. Not that the outcome will be perfect, but certainly there will be great steps forward.

There’s also conditions on the proposals you get from EU. If the EU does a proposal, the EP will come with a proposal. 

The EP, the FISC committee, will be the first to come forward with a form of proposal. But it’s always in mind that it should help to make the OECD process succeed and put pressure on the international process. But the European government leaders already conceded and already mentioned the possibility of a digital levy as a form of own resource. There are at least some member states, including the Netherlands, Sweden, and Denmark, who very much dislike the idea of own resources. There will be a political fight as to whether the EU should have own resources.

But the digital levy is still certainly one of the candidates. The other obvious candidate comes from the greening of the tax system or the greening of our incentive system because it also includes the trade and emission allowances and the revenue from a non-carbon border adjustment that comes along with that. That’s also a very good candidate for funding the EU budget.

Now of course the EP is very much in favor of having its own resources. It’s not because we want to spend money. Yes, some of my colleagues want to most definitely, but also because it helps to make the debate more democratic, I think. You have no taxation without representation, but I also think it refers to no representation without taxation. If you have a full-fledged democratic process, you need to have the right to tax so that you have a good debate and they need a balancing between between revenue and expenditures. I think it very much helps to increase the legitimacy of the democratic debate in the EP. So the EP is generally in favor of their own resources, but it boils down to the discussion we will have among the member states and it won’t be easy.

Then again, there are member states against, or you could say even dead against, own resources. But there are many, many member states that are willing to take this step and now have an extra reason. They fear that’s the cost of the recovery resilience funds will come at the expense of the ordinary budget.

They fear that the burden, the interest and redemption that we have from the fund will in the end come from the ordinary budget. They are the net receivers. You will see also a distinction between net payers and net receivers in the EU. This is a discussion that should come and that will come.

Sarah Paez: The EP, the [Economic and Monetary Affairs] committee, and FISC had a discussion about the draft report on digital taxation recently. What is the purpose of this report and how does the EP hope to use the report to apply pressure to European governing bodies?

Paul Tang: That depends maybe on your political view. That’s also a political discussion. Personally, I think it would be good for the EP. I say this not as the chair of the FISC committee, but as a social democrat. I think that it would be good that the EP also backs the national initiatives. We have seen quite a few. They will put a pressure just like the EU can put a lot of pressure on the OECD negotiations.

In fact, I was repertoire on the DST file and I didn’t come to an agreement. It wasn’t really pushed to the end and didn’t come to agreement, but it had the effect of really bringing the United States back to the negotiation table and restarting [base erosion and profit-shifting] 2.0. 

I very much, for example, hope that the EP will also support the nationals and make clear at the same time that if we want to have an international solution that we should be ready to have plan B. That is a European tax. And if not a European digital tax, it should be a variety of national digital taxes. This is the way to put pressure on the international negotiation.

Because you know what will happen? Big tech doesn’t like to pay taxes just like any other ordinary company and corporations don’t like to pay taxes. I understand that. But to pay different taxes in different countries makes life even more complicated. That should certainly weaken their opposition to this type of taxation.

Sarah Paez: I wanted to come back to something that you had mentioned before — the CbC reporting. I think you’re right that that’s a very exciting development. As you said, right now we’re seeing movement in the council driven by the Portuguese presidency on the public CbC reporting proposal for the first time — really the first time in over a year, but actually more like four or five years.

What do you make of this? How likely are we to see agreement on this CbC reporting proposal this year? And what would that mean for tax transparency and fighting tax avoidance?

Paul Tang: Like I said, I’ve been doing this for quite some time. I’ve started to appreciate the power of transparency. In fact, if you think about it, much of the work in the EP has been driven by, I say, accidents of transparency — LuxLeaks and so on. Transparency is very powerful.

Maybe I’m too optimistic on this, but I very much hope now that the council will come to a decision that we will we start negotiations between on the one hand the Council and the EP, and that will lead to a result. Let’s face it: the extraction industry and the banking industry already have CbC reporting. The idea that it’s not feasible or that it will hurt the competitiveness of companies has been proven wrong. We already have it. Now we can apply it. It can be crucially important.

I’ll give you an example— let’s say Shell, the British-Dutch oil company. I’ve been challenging Shell for years that they didn’t pay corporate income tax in the Netherlands. While I was not successful in that, not too long ago, they, unprovoked by me, admitted in the national Parliament that they don’t pay corporate income taxes in the Netherlands. Immediately there was a proposal to change the law so that Shell would pay its taxes in the Netherlands. This is the power that you derive from transparency.

There’s a [Global Reporting Initiative] template that’s available, which I studied and I think is very good. You see already companies embracing the GRI template. This is the interesting part that I also see among the corporations: they are concerned about the public debate on tax avoidance. They think it’s poisonous, and it is for them. Part of the corporations is willing to break from this debate and if you want to break from this debate, you need to change your policy. To win the trust, you also need to be transparent about what your policy is.

Transparency is crucial for this change. Transparency brings change and transparency can also bring the trust back. More and more corporations are starting to see that the base tax avoidance is poisonous for them. It just hurts their working environments.

Sarah Paez: Commission President Ursula von der Leyen has said that the recovery will be green and it will be digital. I think we’ve covered digital pretty well, but how do you see tax policy being utilized in achieving a green recovery?

Paul Tang: What are the chances of seeing a carbon border adjustment tax and an expanded EU emissions trading system within the next year like the commission has said that they will propose?

I told you about my research days. In those days we ran models to find out what the impact would be of an emission trading system and also included a carbon border adjustment mechanism. The ideas are already modifiable. What we need to do is to come to workable systems.

This especially applies to the carbon border adjustment mechanism. I think the commission has to set them up with a way on how to do that. It could be tradable import allowance or it could be an import duty. I think the commission still has to decide. We need to move from theory to practice.

The second thing above all is we need the political will to live up to the Paris Agreement. When the COVID-19 pandemic started, I was a bit concerned about the green deal. I think the support is still pretty high and that it’s widely accepted. Of course there are fringes in society and politics that don’t. There was wide support for the change to make the economy and society more sustainable. But you need the political will to do it that. Without that we can have any system or instrument in place, but it won’t be as effective.

But like we have seen in the emission trade for the last 20 years where I think the CO2 prices are way too low. We have too many exceptions in the carbon leakage list. It is very long, including the steel industry, frozen potatoes, and others. We need to get rid of those exemptions.

In that sense, I see the commitment at European level to reduce the CO2 emissions by officially 55 percent in 2030. That’s pretty ambitious. I think EP is more ambitious, but even 55 percent is ambitious, but it requires the instrument. It will come.

Sarah Paez: You mentioned there needs to be political will for these changes to happen, especially in greening the economy. One of these things that has come up within the last year, especially on the emissions trading system, was that there was a block of predominantly eastern European countries that were opposed to the [emissions trading system] in its currently proposed form.

How exactly do you kind of break through this complex difference in economies? These economies are much more reliant on coal and less green forms of energy. Is there any sort of discussion happening that can sort of break through that?

Paul Tang: You’re pointing to one of the difficult issues that we have. I prefer the word sustainability because that’s broader than greening. Sustainability for me means it needs to be in line with the restrictions on climate and environment. It should also be in line with social fair distribution. This applies to countries, but also within the countries, right?

If you could look at the entity taxes that are in place, usually the households have a high burden of energy taxes whereas that of the industry is much lower. Agriculture is even even lower than that.

But to make this transition, you need to have a notion of fairness. You can start with households. But if you start with households and do not address the big polluters like the oil refineries or the airports, this feels uncomfortable to say the least.

Same is true for the difference between western Europe and eastern Europe. I think there are important differences. Eastern Europe is much more dependent still on the coal and fossil fuel. This leads to heated debate on, for example, the use of gas is that their transition technology or not.

The only way out is to have an open debate. We need to find a balance in this that you define sustainability broad to include both environmental and social considerations. That’s also part of negotiation. You’ve already seen it. There’s a just transition funds which is intended to do exactly that and help countries that have a backward position in terms of sustainability. I think it’s simply not large enough really to be effective. This will be a continuing debate. I think that’s important, because you need to strike a balance here.

Sarah Paez: Well, my last question for you might be a difficult one: What is your favorite ice cream flavor?

Paul Tang: I’m not such a sweets guy actually. But when I’m in Italy, which is one of my favorite holidays, when I do take ice cream on a hot day, I like very much to have two flavors — lemon and chocolate.

Sarah Paez: Thank you so much. It was a pleasure getting to talk to you about all of these very, very interesting topics.

Paul Tang: Of course. My pleasure.