Seven years after the LIBOR scandal and two years after the Panama Papers, the European Union is facing the next financial scandal. This time, the tax authorities in Austria, Germany, Belgium and seven other Member States were cheated out of tax revenue totalling at least 55.2 billion Euros.
Lack of European cooperation
As early as 2005, Ilona Knebel, employee at the Tax Office in Essen, drew attention to the commercial activities of Cum-Ex. In 2007, these activities were banned in Germany. However, as soon as a foreign bank was involved, the complicated tax refunds continued to be possible. In 2012, these practices were in theory completely prohibited in Germany. Only three years later, the Federal Republic of Germany recorded this tax manipulation in the OECD database: it is the only international organisation, which seeks the exchange of data in respect of systematic international tax fraud. Now, the Danish government demands a full investigation and international cooperation.
How does Cum-Ex work?
These activities brought to light by a consortium of European journalists can be divided into two groups: Cum-Cum and Cum-Ex transactions. Both cases are market neutral. This means that no economic base exists for them. Profit is not based on share prices, but on tax refunds. However, this tax fraud only becomes profitable when investments amounting to several million have been invested.
In Austria, following the receipt of a dividend payment, 27.5 % Capital Gains Tax (CGT) is automatically deducted. By presenting a tax certificate issued by the bank, the CGT may be refunded under certain conditions, if Corporation Tax (companies) or Income Tax (private entities) has already been paid in the country. Hence, this only applies to domestic and not to foreign shareholders. In case of Cum-Cum transactions, domestic banks buy shares of foreign clients just before the ex-dividend date and afterwards sell them directly to the foreign investors again. The tax refund, resulting from this is then divided between the participants.
Cum-Ex transactions are even more complex. Here, investor B sells a share - again before the ex-dividend date (CUM dividend) - to investor C. However, Investor B only delivers the share at a later date, as he or she does not yet possess the share. Hence, this is a so-called short sale. In turn, in the case of investor A, who still possesses the share, 27.5 % Capital Gains Tax (CGT) are automatically deducted on dividend payout. However, investors, who are based in a country that has a double taxation agreement with Austria, are eligible to a CGT refund, and so the game begins: Investor A now sells her share to Investor B minus the paid dividend (EX Dividend), which she, according to the contract, passes on to Investor C. As Investor C formally was also owner of the asset prior to dividend payout, both Investor A and C receive a tax certificate. Now, both are eligible to a tax refund from the state, even though the tax was only paid once.
Tu felix austria?
Cum-Ex transactions cost the Austrian tax authorities at least 50 million Euros. Insiders even think that this figure represents a rather conservative estimate and assume an amount closer to 100 million. Exact calculations of the damage are not possible as the Treasury in spite of parliamentary requests, has so far refused to provide any figures. The Public Prosecutor's Office for Combating Economic Crimes and Corruption has been investigating within the scope of an investigation team in cooperation with the Public Prosecutor's Office Cologne since 2014.
“The biggest European tax scandal”
On 23 October 2018, MEP Sven Giegold (Greens) demanded consequences for these transactions in an urgently convened debate - on the request of Greens and GUE/NGL - in the European Parliament in Strasbourg. Giegold regarded it as intolerable, that exactly those who had been financially rescued by the state 10 years ago would now cheat the tax authorities out of gigantic amounts of tax revenue. A pan-European investigation of events would be required. Sven Giegold was supported by Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs, who also argued the case for improving the exchange of information and for upgrading the European Banking Authority. The Banking Authority would then have the right to issue instructions to individual banks and to claim the market supervision from EU Member States. However, a majority of Member States would have to agree to these proceedings. State Secretary at the Federal Ministry of the Interior, Karoline Edtstadler (ÖVP), said that the Council had acknowledged the investigations and media reports; however, no EU law to tackle such practices existed and one was therefore unable to take appropriate action. Evelyn Regner (S&D), Member of the Special Committee on Financial Crimes, Tax Evasion and Tax Avoidance, demanded a “European FBI” to ensure that the European Union was not shaken by a tax evasion scandal every few years. Member States should at last apply the Directives proposed by the EU to in order to be able to thwart such scandals.
However, Commission, Parliament und Member States had to reach agreement as soon as possible as according to reports of the journalists collective, these transactions were still carried out at the expense of European taxpayers.
Network Tax Justice: Statement concerning the new Cum-Ex revelations