Tax evasion deprives the EU of 20% of corporate taxes

A view of the beach at Pompano Beach Club in Southampton, Bermuda, 14 June 2017 [EPA-EFE/CJ GUNTHER]

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.

‘Secret’ tax deals with multinationals soar despite scandals

Despite the uproar following the publication of ‘sweetheart’ deals signed between member states and corporations, countries signed 2053 ‘secret’ unilateral tax agreements with companies in 2016, an increase of 64% compared to the previous year.

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%.

A table from The Missing Profits of Nations article.

 

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.

EU now better prepared to tackle tax evasion

Two years after the Panama Papers scandal revealed the scope of tax haven activities, the EU has adopted new legislation and is now better prepared to tackle tax evasion and fraud. EURACTIV’s partner Euroefe reports.

Subscribe to our newsletters

Subscribe