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What are tax havens for corporations? Five of them are in Europe

2024-10-28 09:16:56Biznes SHKRUAR NGA REDAKSIA VOX

What are tax havens for corporations? Five of them are in Europe

Switzerland, the Netherlands, the Isle of Jersey, Ireland and Luxembourg are among the world's leading jurisdictions that encourage corporate tax abuse. Five of the ten tax havens most used by multinational companies to pay less tax are precisely in Europe. These countries are among the best jurisdictions in the world to facilitate tax abuse by large corporations. Compared to 2021, the situation in Europe has worsened with Ireland entering the top ten tax havens globally.

At the top of the ranking are again three territories outside the United Kingdom: the British Virgin Islands in first place, the Cayman Islands in second place and Bermuda in third place. Followed by Switzerland in fourth place and Singapore in fifth. Next come Hong Kong, the Netherlands, Jersey, Ireland and Luxembourg.

There are many tax havens that are confirmed, but also some new ones in the corporate tax haven index compiled by the non-governmental organization Tax Justice Network, which for years has been scanning tax havens around the world and monitoring their effects. in economics. According to the organization's experts, 2/3 of the tax abuses that occur every year around the world are committed by multinational corporations that transfer their profits abroad. The rest of the violations are caused by individuals hiding their finances in so-called "offshore" havens.

A surprising fact in the study of the Tax Justice Network is that 44.6% of foreign direct investments made by multinational companies were made in the first 10 countries of the list, out of the 70 countries monitored in total. A very high percentage. because almost half of the investments of large companies go through the top ten tax havens on earth.

Tax Justice Network analysts estimate that almost half of the foreign direct investments made each year are "phantom investments". These are funds that do not actually enter the state economy. A tactic to move financing and pay less tax.

Tax Justice Network calculates that the 70 jurisdictions included in the Corporate Tax Haven Index represent 86.67% of all global foreign direct investment. The United States has the largest share with 13.5%, followed by the Netherlands with 9.6% and Luxembourg with 7.6%.

The British Virgin Islands, the Cayman Islands and Bermuda, which is the British network of tax havens, remain the biggest threat to the public coffers of other countries. The three UK tax havens in the Corporate Tax Haven Index achieved the worst possible scores (100 out of 100) on all 18 indicators used to assess countries' laws.

The British Virgin Islands and Cayman currently do not impose corporate taxes while Bermuda has a light version of income tax that only applies to companies that are part of a multinational group with at least €750 million in consolidated turnover. All three jurisdictions also impose no withholding tax on outgoing dividends, have no rules against tax abuse and do not require the filing and publication of company accounts. These are just some of the practices that contribute to the extreme scores of these three jurisdictions on the index indicators.

The British network of tax havens is responsible for 1/3 of the risks of corporate tax abuse, but - despite this - is classified as "not harmful" by the OECD.

Tax Justice Network experts estimate that countries globally lose $84 billion a year in corporate taxes due to multinational companies using the UK and its tax havens to pay less tax. This annual loss rises to $169 billion if tax avoidance by wealthy individuals using the UK and its havens is also included.

European Union countries are also responsible for 1/3 of corporate tax abuse, while for African countries the percentage stops at 4% and for Latin American countries at 3%.

Many European Union countries have made improvements to the rules on royalties and commissions for services between companies, making it more difficult for multinationals to use these payments to pay less tax. Among the most significant improvements, the Tax Justice Network search highlights countries such as Belgium, Denmark, Italy and Portugal. In contrast, countries that have climbed the rankings tend to weaken their laws against particular corporate tax abuse techniques. Some of the sharpest deteriorations were seen in Brazil, Poland and Mexico.

Royalties and service charges are the main types of income used by multinational groups to plan their tax expenses. Profits from the sale of goods and services to third parties or from the extraction of natural resources are usually difficult to transfer: they appear in the accounts of the group company carrying out the activity.

By forcing these companies to pay and deduct large sums in the form of royalties and service charges to other subsidiaries in low-tax jurisdictions, multinational corporations shift high-tax profits to low-tax profits. This practice can only be limited by imposing restrictions on the use of intra-group discounts for royalties and services. But few countries enforce them effectively, network experts point out.

However, the improvements recorded in Belgium, Denmark, Italy and Portugal were undermined by the large loopholes found in the rules of the EU directive against tax avoidance by foreign companies. The most obvious is a loophole that requires states to exempt a multinational company from the rules if it can demonstrate that its trade agreements are not "totally artificial" arrangements designed to pay less tax. But the directive gives no guidance on how to assess what is artificial and what is not, allowing multinational companies to use the same methods they have used for decades.

In general, EU countries with more exceptions to the rules for foreign companies tend to rank higher in the index than countries with fewer exceptions.

It is no coincidence that Ireland was ranked 9th in the index, breaking into the top 10 for the first time. Ireland's rise is largely due to the lack of change in its anti-tax abuse laws, which has made it to lag behind other countries in the index. In early September, the Court of Justice of the European Union ordered Apple to pay Ireland €13 billion plus interest in unpaid taxes from 2003 to 2013, years in which it had benefited from a preferential tax regime. .

Thus, while Ireland continues to have some of the worst results across all index indicators among EU countries, along with Cyprus, most other members have seen improved results.

According to a 2023 Tax Justice Network report, states will lose $4.8 trillion globally to tax havens over the next 10 years, which remain a threat despite all efforts to weaken them.


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