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Alex Cobham, Javier Garcia-Bernardo ■ Time for the EU to close its own tax havens

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Tax justice reports
Tax justice reports

Time for the EU to close its own tax havens

The coronavirus pandemic has exposed the grave costs of so-called “tax competition” between countries. For years, the Netherlands, along with other European corporate tax havens, has provoked a race to the bottom within the EU, handing over more and more wealth and power to the biggest corporations - and taking it away from nurses, doctors and public service workers risking their lives today across Europe to protect ours. Now more than ever, EU countries must work together to prioritise the wellbeing of society over the interests of the wealthiest corporations. However, the EU cannot rebuild its economy on top of a tax haven trapdoor. 

EU countries locked in negotiations over a recovery plan to help member states hit hardest by the Covid-19 pandemic have been revealed to be losing over $10 billion in corporate tax a year to the Netherlands. New analysis shows that the EU countries with the highest reported cases of Covid-19 have been the biggest historical losers of corporate tax to the Netherlands, which is currently a leading opponent to solidarity measures proposed by the EU.

The Tax Justice Network is urging the EU to stop tolerating tax havenry within the EU, cautioning that the European economy cannot be rebuilt on top of an “economic trapdoor”.

The report from the Tax Justice Network analyses data published this year by the US detailing where US firms declared their costs and profits in the EU in 2016 and 2017. Instead of declaring profits in the EU countries where they were generated, US firms have shifted billions in profits into the Dutch tax haven each year ($44 billion in 2017) where corporate tax rates in practice can be under 5 per cent. This resulted in huge, yearly reductions in tax bills for some major US firms on their operations across the European Union. Tax losses were biggest in the four EU countries with the highest reported cases of Covid-19: France, with over 74,000 cases, lost over $2.7 billion in corporate tax to the Netherlands, Italy, with over 132,000 cases, lost over $1.5 billion, Germany, with over 99,000 cases, also lost over $1.5 billion and Spain, with 135,000 cases, lost nearly $1 billion to the Dutch tax haven.
The new findings come as EU countries struggle to agree on a recovery plan. The Netherlands, understood to be a leading opponent to the EU’s proposed measures, received harsh criticism last week for opposing the EU’s proposal to issue joint debt to EU member states afflicted by Covid-19. The Netherlands, which ranks as the world’s fourth greatest enabler of corporate tax avoidance on the Corporate Tax Haven Index 2019, has proposed that EU countries could “gift” contributions to an EU emergency fund to support economically weaker EU countries. The Netherlands said it is willing to donate €1 billion ($1.08 billion) to the fund – falling short of $1.5 billion in corporate tax Italy is estimated to lose to the Netherlands on a yearly basis. In comparison, Italy’s $1.5 billion annual tax loss is equivalent to more than twice the annual cost of running San Raffaele Hospital, one of the largest hospitals in Italy with approximately 1350 beds.

The report highlights the stark inefficiencies of the Dutch tax haven model. In return for costing EU members $10 billion in lost corporate tax a year, the Netherlands collects just $2.2 billion in additional corporate tax a year. For every $1 dollar the Netherlands collected from the shifted profits of US corporations, the EU as a whole lost nearly $4 in corporate tax from the corporations.

US firms booked more profit in the Netherlands alone than the rest of the EU, excluding the corporate tax havens of Ireland and Luxembourg. However, the Netherlands’ low effective tax rate and its frequent use as a conduit for profit shifting to other corporate tax havens like Bermuda, results in a huge transfer of wealth out of Europe and into the offshore bank accounts of the world’s richest corporations and individuals.

The report highlights three main measures that the EU can, and should, take to end the abuses of its own tax havens. First, the long-delayed introduction of unitary taxation (the Common Consolidated Corporate Tax Base) would end the opportunity to separate taxable profits from the real economic activity that generates them. Second, a 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. Lastly, 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.

Alex Cobham, chief executive at the Tax Justice Network, said:
“The coronavirus pandemic has exposed the grave costs of so-called “tax competition” between countries. For years, the Netherlands has provoked a race to the bottom within the EU, handing over more and more wealth and power to the biggest corporations – and taking it away from the nurses and public service workers risking their lives today across Europe to protect ours.

“Now more than ever, EU countries must work together to prioritise the wellbeing of society over the interests of the wealthiest corporations. The EU cannot rebuild its economy on top of a tax haven trapdoor. To stop the loss of billions in tax to corporations shifting profit into tax havens like the Netherlands, EU governments must shift to a unitary tax approach that makes corporations pay tax based on where their employees do real work, and not where their accountants hide their profits. Tax revenues must arise where the real activity is – just as health needs do.”

Key findings

  • EU countries lose $10 billion in corporate tax a year to the Netherlands due to US firms shifting profit into the Dutch tax haven.
  • US firms shifted $44 billion in profits from the EU countries where the profits were generated to the Netherlands. 
  • The Netherlands’ corporate tax rate in practice can be under 5 per cent, allowing US firms to cut their tax bills across the EU by billions.
  • In return for costing EU countries $10 billion in lost corporate tax a year, the Netherlands collects just $2.2 billion in additional corporate tax a year.
  • The biggest losers of tax to Netherlands are: France, $2.7 bn; Italy, $1.5 bn; Germany, $1.5 bn; Spain, $0.9 bn (as of 08 April 2020)

Key recommendations

  • Introduce unitary taxation via the the Common Consolidated Corporate Tax Base to prevent firms from separating taxable profits from real economic activity.
  • Set a minimum corporate tax rate of 25 per cent or higher to remove most incentives for profit shifting. 
  • Require public country by country reporting to ensure transparency for multinational corporations and EU member states alike, and deter profit shifting.

Additional resources

One page briefing document: https://www.taxjustice.net/wp-content/uploads/2020/04/Time-for-the-EU-to-close-its-own-tax-havens_one-page-summary.pdf