Economists consider, based on statistics of tax havens such as Bermuda or Ireland, that 40% of multinational companies’ profits avoid taxation. The EU would thus be deprived of a fifth of the revenue it is supposed to collect from companies. EURACTIV.fr reports.
The increased competition between countries since the 1980s, when free-trade became widespread, caused an unprecedented drop in corporate tax rates, from 49% on average to 24% in 2018.
In an article published last week titled ‘The Missing Profits of Nations’, several economists including the French Gabriel Zucman, an expert on tax evasion, discuss the reasons for this drop.
In contradiction with the theory of “perfect competition”, which states that economic actors develop their activity in countries where investments are more beneficial for them thanks to a business-friendly global environment, Zucman considers that 40% of corporate profits are artificially transferred to tax havens.
This is done through paper companies, as is the case with Alphabet, Google’s parent company, which posted a €19.2 billion turnover in Bermuda in 2017, where it has no activity. The reason for this is not the island’s attractiveness, but its 0% tax rate on corporate earnings.
Who’s the cheat: companies’ profitability index
The profitability of foreign companies is the main criterion used by experts when looking into recent statistics: in countries that are not tax havens, foreign companies show a lower level of profitability than local companies.
On the contrary, foreign companies in tax havens wish to optimise their profitability. In Ireland, the rates on companies’ profits are unrealistic. They represent 800% of total payroll on average, whereas as logically they should account for 30 to 40%.
According to the study, 40% of multinationals’ profits ended up in tax havens in 2015.
The EU in first line
Even more concerning, EU member states and developing countries are the main victims of this method: Europe loses 20% of its corporate taxes.
The conclusions of this study are alarming regarding the current efforts undertaken by the OECD to counter corporate tax erosion – efforts that might end up being vain. According to the authors of the study, imposing economic sanctions on countries with low taxation rate would be more effective than to try and retrieve a flowing capital which skews the statistics.
Another consequence of this analysis is that the extent of tax optimisation by companies is such that ut distorts global statistics for all OECD countries regarding GDP, corporate profits, trade balances etc. The capital share of companies in Europe would therefore be twice as high as reported in national accounts.