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Javier Garcia-Bernardo, Hatem Mahbouli, Alex Cobham ■ The axis of tax avoidance: Time for the EU to close Europe’s tax havens

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Tax justice reports

The axis of tax avoidance: Time for the EU to close Europe’s tax havens

US firms were found to have shifted billions in profits ($115 billion in 2017) to the UK, Switzerland, Luxembourg and the Netherlands, where corporate tax rates in practice are far lower, in order to underreport their profits elsewhere in the EU and consequently pay billions less in tax. Due to this, EU member states are losing over $27 billion in corporate tax a year from US firms abusing the law to shift their profits into the Netherlands, UK, Switzerland and Luxembourg, where corporate tax rates in practice range from 10 per cent to 0.8 per cent.

US firms were found to have shifted billions in profits ($115 billion in 2017) to the UK, Switzerland, Luxembourg and the Netherlands– the “axis of tax avoidance”, where corporate tax rates in practice are far lower, in order to underreport their profits elsewhere in the EU and consequently pay billions less in tax. Due to this, EU member states are losing over $27 billion in corporate tax a year from US firms abusing the law to shift their profits into the Netherlands, UK, Switzerland and Luxembourg, where corporate tax rates in practice range from 10 per cent to 0.8 per cent.

The “axis of tax avoidance” is costing the EU 12 times the budget of the European Research Council, a pan-European science and technology funding body currently funding over 70,000 researchers and that has funded seven Nobel Prize winning projects. The report highlights the highly wasteful nature of the corporate tax haven model. In return for costing EU members over $27 billion in lost corporate tax a year, the axis of tax avoidance collected just about $4 billion in additional corporate tax a year. For every $1 dollar in corporate tax the axis of tax avoidance collected from the shifted profits of US corporations, the EU as a whole lost nearly $7 in corporate tax from those corporations.

The report highlights three main measures the EU can take to end the abuses of its own corporate tax havens:
– The long-delayed introduction of unitary taxation (the Common Consolidated Corporate Tax Base, in its most ambitious form) would make the practice of shifting profit into corporate tax havens in order to reduce tax obligations elsewhere obsolete, since corporations would be required to pay tax based on where the corporation employed workers to generate the profit instead of where the profit was ultimately declared.
– Adopting an EU-wide minimum corporate tax rate of 25 per cent or above would remove most incentives for profit shifting; and an excess profits tax of 50 per cent or 75 per cent during the crisis would ensure that companies making profits from the pandemic are sharing those fully with the states where they derive them.
– The introduction of public country by country reporting would ensure transparency for multinational companies and member states alike, ensuring accountability for any continuing profit shifting. 

In addition to these recommendations, the Tax Justice Network has also published a “bail or bailout” test to clarify uncertainty on how governments can determine which companies are discreetly using tax havens to pay less tax, following bans in Denmark, Poland and France on companies registered in tax havens from receiving Covid19 bailouts. The 5-step test is designed to prevent tax payer’s money from ending up in corporate tax havens and to ensure tax transparency from bailout recipients into the future.

Key findings

  • EU member states are losing over $17 billion in corporate tax a year from US firms abusing the law
  • US firms were found to have shifted billions in profits ($115 billion in 2017) to the UK, Switzerland, Luxembourg and the Netherlands, where corporate tax rates in practice are far lower
  • Corporate tax losses have been biggest in the four EU countries with the highest reported cases of Covid-19
  • For every $1 dollar in corporate tax the axis of tax avoidance collected from the shifted profits of US corporations, the EU as a whole lost nearly $7 in corporate tax from those corporations.

Key recommendations

  • Unitary taxation (the Common Consolidated Corporate Tax Base, in its most ambitious form) would make the practice of shifting profit into corporate tax havens in order to reduce tax obligations elsewhere obsolete, since corporations would be required to pay tax based on where the corporation employed workers to generate the profit instead of where the profit was ultimately declared.
  • Adopting an EU-wide minimum corporate tax rate of 25 per cent or above would remove most incentives for profit shifting; and an excess profits tax of 50 per cent or 75 per cent during the crisis would ensure that companies making profits from the pandemic are sharing those fully with the states where they derive them.
  • The introduction of public country by country reporting would ensure transparency for multinational companies and member states alike, ensuring accountability for any continuing profit shifting.
  • A “bail or bailout” test to clarify uncertainty on how governments can determine which companies are discreetly using tax havens to pay less tax,

Additional resources