June 25, 2012 / 4:31 PM / 5 years ago

EU exec sets steps to tax 2.4 trillion euro shadow economy

BRUSSELS (Reuters) - The European Union is losing around 1 trillion euros a year in tax evasion at a time when governments are struggling to improve public finances, the European Commission will say on Tuesday as it proposes steps to deal with tax fraud.

The 27-nation EU, and especially the 17 countries in the euro zone, badly need higher tax revenues at a time when the economy is stagnating or contracting and investors lose confidence in government's ability to service large debts.

"In the current economic climate, Member States need every euro that they are due for fiscal consolidation and to rebuild their economies," said draft statements from the Commission, the European Union's executive arm, prepared for release on Tuesday.

"Member States have, in some cases, almost reached the limit in the expenditure they can cut and taxes they can raise, while honest taxpayers must carry the burden of austerity," the drafts, obtained by Reuters, showed.

"Meanwhile, an estimated 1 trillion euro is being lost from public finances due to tax evasion and avoidance, and the shadow economy is estimated to be around 20 percent of GDP on average," they said. The 20 percent is around 2.425 trillion euros.

The Commission will therefore call on the 27-nation bloc to improve tax collection nationally, boost cooperation between EU countries in fighting tax fraud and increase pressure on tax havens outside the EU to limit tax evasion.

The Commission will call for better exchange of information on tax evasion among countries and suggest the creation of a Identification for EU citizens who do business across EU borders.

The EU executive will also call for setting up a quick reaction mechanism to Value Added Tax fraud and for the creation of teams of dedicated auditors to deal with cross-border tax fraud.

SAME PENALTIES FOR FRAUD

To make it easier to comply with fiscal requirements, taxes need to be simpler and it should be possible to deal with them online, the Commission will say.

EU countries should also have the same minimum penalties for tax evasion, so that fraudsters cannot choose less risky locations, the drafts showed.

The EU already has a savings tax directive, which allows governments to tax those who earn in one EU country, but keep their savings in another.

To catch those, who want to avoid tax by moving their savings to Switzerland, Andorra, Monaco, Lichtenstein and San Marino, the EU signed savings tax deals with these countries.

The EU is in talks with Singapore, Hong Kong and Macao to sign similar deals.

"Well-known and marketed financial centers with strong banking secrecy laws continue to dominate the international cross-border deposits market," the Commission draft statement said.

"Cayman Islands and Switzerland alone, with a total of USD 1352 billion deposits by non-banks represent almost 20 percent of all worldwide deposits by non-banks," it said.

To make the system more effective, the Commission would first of all like to see the existing savings directive strengthened to close existing loopholes that are being exploited by tax evaders.

Writing by Jan Strupczewski; editing by Ron Askew

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