No One Likes a Free Rider

It doesn't just feel unfair to see someone get ahead by cheating. We also know our own ticket would cost less if everyone paid their fare.

When it comes to a $3 subway ticket, this might just be a nuisance. It's harder to stomach when the ride costs $30 million or more.

But for some multinational corporations, that sort of free ride has become the norm. So-called "profit-shifting" arrangements help them avoid paying tax in the countries where they do business, by making it look as though they made their profits somewhere else. And just like the subway, it's those who play fair -- those who can't or, out of principle don't, move their income around the world -- who end up paying the price.

The latest media news on the #Panamapapers clearly underlines the need for cooperation in tackling these types of international challenges together.

Individual countries can try to tackle this problem by reforming their tax systems. But many loopholes that multinationals use to avoid tax are there because different countries agree with those companies to treat the same transactions in slightly different ways. Fixing that problem calls for coordinated global action.

In recent years, we've seen huge progress toward a global consensus on closing those loopholes. The United States has worked with the EU and other international partners in the OECD on limiting Base Erosion and Profit Shifting (BEPS). This reached an important milestone in November 2015 when G20 leaders endorsed the BEPS Action Plan.

We now need to ensure its implementation in practice. For its part, the European Commission put forward a package of measures in January to help to ensure corporations pay tax where they make their profits. This Anti-Tax Avoidance Package, alongside other legislative measures, is an essential step to making sure all companies contribute to the national infrastructure on which they rely to do business.

But tax avoidance isn't just a problem for national budgets. It seriously distorts competition. Since it was set up in 1957, the EU has had "state aid" rules that ensure national governments cannot undermine competition by giving handouts to a few favoured corporations. And we know the effect is the same whether a hand-out is in cash, or in the form of lower bills -- including tax bills. Thanks to state aid control, the EU protects not only fair competition but also prevents a race to the bottom between governments in providing benefits for selected favoured companies.

Every business that operates in the EU knows it will have to return any special favours received from a government that aren't in line with our state-aid rules. These rules apply indiscriminately to all companies operating in Europe. Very few of our cases have involved U.S. corporations -- since 1999, only a handful of the 150 or so businesses that have had to pay back illegal state aid were American. And in three recent decisions relating to tax-ruling practices, European companies were asked to pay back more than €500 million of the €700 million to be recovered. This doesn't mean U.S. corporations are exempt from these basic rules on competition when they operate in the EU. Quite simply, it is only by applying the rules in the same way to everyone who does business here that we can defend our Single Market and our credibility as an investment destination, where everyone can compete on equal terms.

In Copenhagen, where I lived for many years, there are no turnstiles in the subway. That doesn't mean free riding is any more widespread in Denmark than in the U.S. It's just that the subway authorities in Copenhagen find spot checks more cost-effective. The aim is the same; only the means are different.

The same goes for our action against tax avoidance. The way we take action is shaped by our rules, which can be different from those in the United States.

Those differences can lead to misunderstandings. But that shouldn't get in the way of working together. Because, as the BEPS project shows, the U.S. and EU agree on the aim. We all want to close the loopholes that are allowing multinationals to avoid paying their fair share of tax. And we owe it to our taxpayers to make that aim a reality.