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Three researchers from the EU Tax Observatory, co-funded by the European Union and hosted by the Paris School of Economics, published a report entitled: “Have European banks left tax havens? Evidence from country-by-country data”. The analysis, conducted by Giulia Aliprandi, Mona Baraké and Paul-Emmanuel Chouc, focuses on 36 systemic European banks, required to publicly report country-by-country data on their activities since 2015. Thus, this study is based on new data, which demonstrates how important and powerful country-by-country reports are, for monitoring profit shifting and corporate tax avoidance. The study is accompanied by an online roundtable on the use of tax havens by banks and measures to reduce them. The online conference will be held on 8 September 2021 from 12:30 to 14:00 CET:
The methodology used in the report – which is publicly available – contains a list of tax haven jurisdictions used by the banking sector, which was created by the researchers. In this study, a country is identified as a tax haven when it combines the following two criteria: an effective tax rate on bank profits of 15% or less (which, in tax havens, is often between 10 and 13%), and a very high rate of profitability per employee. On average, annual profits in tax havens are around €238,000 per employee, compared to around €65,000 in other European countries, suggesting that much of the profits booked in tax havens are transferred out of other countries where services are produced. 17 jurisdictions are included in the list: The Bahamas, Bermuda, British Virgin Islands, Cayman Islands, Guernsey, Gibraltar, Hong Kong, Ireland, Isle of Man, Jersey, Kuwait, Luxembourg, Macau, Malta, Mauritius, Panama and Qatar. The analyses carried out on the countries in this list are supplemented by analyses of other, more extensive lists (1) of tax havens, to ensure their validity and objectivity.
1: Tørsløv, T., L. Wier, G. Zucman (2018), “The Missing Profits of Nations”, NBER Working Papers 24701, National Bureau of Economic Research (NBER).
The report highlights the constant presence of banks in tax havens since 2014. Mona Baraké, thus, underlines that: “The analysis of these data has established that nearly €20bn, or 14% of the total profits made by the 36 banks, are located in these tax havens. A situation that has hardly changed over the period studied.” However, it should be noted that the use of tax havens varies considerably from bank to bank, ranging from 0% to a maximum of 58%. Thus, the average percentage of profits booked in tax havens per bank is around 20%. Finally, while the amount of profits present in tax havens remains constant over the period, the study observes a decrease in the number of subsidiaries of the banks in tax havens since 2014.
Using country-by-country data, the researchers calculated the effective tax rate and tax gap of the banks in our sample, which is defined as the difference between what they currently pay in taxes and what they would pay if they were subject to a minimum effective tax rate in each country. They estimated the amount the banks would have to pay if the international tax reform currently being negotiated within the Organisation for Economic Co-operation and Development (OECD) were applied. With this reform, which provides for the introduction of a global minimum tax on corporations of 15%, “the 11 countries hosting the parent companies of these 36 banks would recover between €3bn and €5bn per year, €6bn to €9bn if the rate was increased to 21% and up to €10bn to €13bn with a rate of 25%,” explained Giulia Aliprandi and Paul-Emmanuel Chouc. The main countries which would benefit from this would be the UK and France. If the 15% minimum tax rate is to be retained, that would represent between €800m and €1500m additional taxes per year for the UK, i.e. between 23% and 36%, of the total corporate taxes paid to the UK by the banks in our panel nowadays. For France, that would represent between €350m and €500m additional taxes per year, i.e. between 4% and 9% of the total corporate taxes paid by the banks to France in our panel nowadays.
The study sheds light both on the merits of country-by-country reporting and on the limitations of the exercise. Indeed, although country-by-country reporting reveals the activity of banks, the degree of transparency required of banks today does not allow visibility on assets or deposits on a national basis, which weakens the identification of tax planning behaviour. We can only hope that the dynamic initiated by the various European legislators will be pursued. There is a need for more precise and complete studies in the future, capable of informing political decision-makers, researchers and journalists about the real state of the economy, in the context of the Covid crisis, which requires enlightened choices. The fact that European banks have not significantly reduced their use of tax havens since 2014, despite the growing importance of these issues in the public debate and in the political world, leads to plead for the implementation of more ambitious initiatives, such as a global minimum tax at a rate of 25%.