EU Faces Tough Battle to Curb Tax Avoidance and Evasion - by Christoph Pauly and Christoph Schult

German BASF, the world's largest chemical group, is primarily known for its paints, state-of-the-art plastics and perhaps its natural gas dealings with Russia. The down-to-earth managers at the company's headquarters in Germany's Palatinate region have occasionally criticized the greedy banking sector, but otherwise have quietly gone about their business of generating billions in profits. But innovation isn't the only source of BASF's profitability.

The chemical group, based in Ludwigshafen in southwestern Germany, has a large tax department, whose work consists partly in moving money around between continents. But now the company has discovered a tax haven right at home in Europe.

In addition to a large plant, the company operates the BASF Belgium Coordination Center in Antwerp. Some 160 employees at the center spend a portion of their time searching for legal ways to reduce BASF's tax bill. In 2011, the company paid taxes on its many millions in profits at a rate of only 2.6 percent.

BASF is by far not the only company to take advantage of favorable tax conditions in a neighboring EU country to improve its bottom line. Volkswagen, currently the most profitable company in Germany, was even greedier. In 2012, Belgian subsidiary Volkswagen Group Services paid no taxes at all on profits of €153 million, and in the previous year it raked in €141 million in tax-free profits -- and it was all completely legal.

Again and again, major European multinationals manage to take advantage of loopholes in national tax laws. They outwit the tax authorities in different EU countries by moving around their capital and profits, and not just to faraway tax havens in the Caribbean, but to nearby countries like Belgium, Ireland and the Netherlands.

There has never been a more favorable time for tax reform. Europeans are outraged over several cases of high-profile tax fugitives, including that of FC Bayern President Uli Hoeness in Germany, who stashed away millions in Switzerland, and French actor Gérard Depardieu, who acquired houses in Belgium and Mordovia, as well as Russian citizenship, to avoid paying taxes in France.

Nevertheless, there are strong national forces resisting change, as was evident at a meeting of EU finance ministers last Tuesday. Their goal was to adopt a guideline on the taxation of interest income, but Luxembourg and Austria refused to play along. As a result, tax flight is still possible with the help of anonymous foundations, life insurance policies and other income from capital.

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