New analysis shows simple tax transparency measure could raise $20bn across the EU annually – and set the course to end European tax havenry
With the European Union set to resume troubled negotiations over a recovery fund that could provide the necessary support for countries hit hardest by the pandemic, the Tax Justice Network has called out the hypocrisy of Netherlands Prime Minister Mark Rutte’s blocking approach: while fronting up the “frugal four” countries that have sought to weaken the fund in the name of fiscal responsibility, the Netherlands’ tax haven model causes EU member states to lose billions of euros in corporate tax every year.
New analysis published today by the Tax Justice Network shows EU governments can raise nearly $20 billion in corporate tax from the largest corporations by immediately requiring multinational firms to publish their country by country reporting data.1;2
Research published earlier this year by the Tax Justice Network identified the Netherlands as one of four European tax havens – known as the “axis of tax avoidance” – responsible for the EU losing $27 billion in corporate tax every year from US firms alone.3 By enabling multinational firms to shift profit4 into its jurisdiction and consequently underreport profits elsewhere in the EU, the Netherlands costs EU members state $10 billion in lost corporate tax from US firms alone every year.
For each additional $1 in corporate tax the Netherlands collected from the profits of US firms that were generated in other EU countries and shifted into the Netherlands, the EU lost nearly $5 in corporate tax. The Tax Justice Network previously called out the economic wastefulness of the Netherland’s corporate tax haven model, criticising the members of the “axis of tax avoidance” for “handing over wealth and power in the EU to the biggest corporations and taking it away from the nurses and public service workers risking their lives today to protect ours.”5
The Tax Justice Network is calling on EU governments to immediately make it a requirement for multinational firms to publish their country by country reporting data. First proposed by the Tax Justice Network in 2003 and used by the OECD to collect the watershed aggregated data published earlier this month about multinational firms’ profit reporting, the method is designed to detect and deter the profit shifting practices multinational firms use to shift an estimated $1.3 trillion in profit each year away from the countries where real economic activity takes place and into tax havens like the Netherlands.6
Where company-level country by country reporting has been required to be published, under the EU’s fourth Capital Requirements Directive, research shows that tax payments of the banks and other financial institutions subject to the additional transparency measure increased their tax payments by around 10 per cent compared to those unaffected. Multinational firms subject to OECD country by country reporting pay some $200 billion in tax in the EU each year – a 10 per cent rise would likely raise around $20 billion in corporate tax revenues.
This transparency would also ensure public visibility of the full extent of profit shifting to the Netherlands and other EU member states, allowing citizens to hold EU governments to account and providing the basis for deeper reforms needed to EU corporate tax rules.
Alex Cobham, chief executive at the Tax Justice Network, said:
“The idea that the Netherlands can be called ‘frugal’ while it deprives EU countries of billions in corporate tax every year – revenues that are desperately needed to meet the costs of the pandemic – is nonsensical and deeply offensive. For years our research has shown how European tax havens like the Netherlands have been fuelling a race to the bottom in the EU, that hands over wealth and power to the biggest corporations and takes it away from the nurses and public services we all rely on. Landmark OECD data published last two weeks ago finally confirms that far from being a leader of fiscal responsibility, the Netherlands is one of the world’s greatest enablers of corporate tax abuse.”
“The coronavirus pandemic has exposed the grave costs of an international tax system programmed to prioritise the interests of corporate giants over the needs of people. Now more than ever, EU governments must reprogramme their tax systems to prioritise people’s wellbeing and they can start today, right now, by making it a requirement for multinational firms to publish their country by country reporting. Member states already require multinational firms to submit country by country reports privately to their tax authorities – and evidence shows that simply making that data public can curb corporate tax abuses and raise substantial revenues.
“At a stroke, EU governments can begin to raise billions in corporate tax that are sorely needed and would otherwise be smuggled into European tax havens like the Netherlands. And this is a measure that Mr Rutte’s government claims to support – the southern European countries should make it a condition of any package they agree with the misnamed ‘frugal four’.”
In the longer term, the Tax Justice Network is urging governments to switch over to a unitary tax system that taxes corporations based on where they employ staff and do real business, instead of where they report profit after it’s been shifted. EU governments have long discussed a switch to a unitary tax system in the form of the Common Consolidated Corporate Tax Base, which the Tax Justice Network believes could raise corporate tax worth far more than the recovery grants currently being negotiated.
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Notes to Editor:
- The sample was constructed using all 15 countries reporting on UK profits and taxes. We used cash taxes as our measure of taxes paid. The jurisdiction “Stateless” was excluded to avoid double counting tax-transparent entities. This will also exclude companies without tax jurisdiction. The total tax paid reported by the 15 countries in EU jurisdictions (including the United Kingdom) was $70 billion. Correcting for data completeness (the data in 2016 does not include all MNCs) and extrapolating to all countries increases this figure to $200 billion. As in Overesch & Wolff (2019), we assume that the introduction of public country by country reporting would increase tax paid by 10 per cent.
- Country by country reporting is designed to expose and deter profit shifting, a practice that involves multinational corporations moving profits from the countries where they were generated to tax havens, where corporate tax rates are low to non-existent, in order to underreport how much profit they made outside of tax havens and consequently pay less corporate tax. By requiring multinational corporations to publish how much profit they made and how much cost they incurred in each country they operate, public country by country reporting makes it impossible for corporations to shift profit into tax havens for the purpose of artificially driving down tax obligations elsewhere without being detected. This also exposes the cost of corporate tax havens aggressive tax policies to other countries.
- Read our report on how the UK, Switzerland, Luxembourg and Netherlands – aka the axis of tax avoidance – costs the EU over $27 billion in lost corporate tax a year.
- There are a number of ways corporations can shift profit into corporate tax havens in order to artificially drive down their tax obligations elsewhere in the world. One method involves is basing the corporation’s intellectual property in a tax haven and charging subsidiaries in other parts of the world fees to use the intellectual property. For example, a coffee company can place its brand’s intellectual property in Luxembourg and then charge its subsidiary in Italy a fee to use the brand. For each cup of coffee bought in Italy, the subsidiary in Italy would pay the Luxembourg subsidiary a branding fee, in so doing reducing the profit made in Italy. Often there is no reason to park a brand intellectual property in a corporate tax haven like Luxembourg other than to shift profit to the tax haven and pay less tax. Another way to shift profit is for a corporate group to lend money to itself with interest. A subsidiary in the Netherlands that gives a loan to a subsidiary in France would then receive interest on the French subsidiary’s loan repayments, helping shift the French subsidiary’s profits into the Netherlands. Again, it is not uncommon for such loans to be given for the purpose of rerouting profits into a corporate tax haven. For more examples of profit shifting, see chapter 3 of our report on how British American Tobacco avoided tax.
- See note 3.
- Read our analysis of watershed OECD data published earlier this month indicating more than a trillion dollars of corporate profit is smuggled into tax havens every year