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18 • Fifty Shades of Tax Dodging Table 2: Number of listed companies that would report on a country by country basis using the OECD BEPS threshold and the proposed threshold of the European Parliament Country Source: Eurodad calculations 118 No. of listed companies, OECD BEPS threshold No. of listed companies, European Parliament proposed threshold Belgium 28 85 Czech Republic 3 6 Denmark 26 72 France 154 418 Germany 138 442 Hungary 3 14 Ireland 36 61 Italy 69 195 Luxembourg 26 54 Netherlands 61 110 Poland 29 237 Slovenia 6 27 Spain 48 108 Sweden 57 223 United Kingdom 262 778 EU 28 1,053 3,396 The OECD BEPS recommendations for country by country reporting has a further shortcoming in that it only applies to very large companies with an annual consolidated turnover of more than €750 million. A current proposal from the European Parliament 119 would extend country by country reporting to all ‘large undertakings’ as defined in an existing EU directive. 120 As Table 2 illustrates, the BEPS threshold would only apply to a relatively small number of companies while the threshold proposed by the European Parliament would apply to significantly more companies. As the figures in Table 2 only show listed companies they are merely illustrative as both thresholds would also apply to non-listed companies. They nonetheless show the large difference in coverage with almost four times more listed companies covered by the threshold suggested by the European Parliament compared to the OECD BEPS threshold. With the BEPS process jeopardising progress on country by country reporting for developing countries, it is now up to the EU and its Member States to push back, reaffirm that its decision to make country by country reporting public for banks was correct, and insist that public country by country reporting should apply for all economic sectors and for a wider group of companies than those under the high BEPS threshold, for the benefit of all countries in the world. 3.3 Letterbox companies Letterbox companies, or special purpose entities (SPEs), are legal entities constructed to fulfill a narrow and specific purpose. They usually have few or no employees and little economic substance but they are often able to handle large amounts of funds due to the favourable tax treatment granted them in many countries. While the corporate income tax rate is around 29 per cent in Luxembourg, for example, their popular letterbox companies are only subject to a tax of between 0.01 per cent and 0.05 per cent of the company’s assets. 121 As UNCTAD highlighted in 2013: “…international efforts … have focused mostly on [offshore financial centres], but SPEs are a far larger phenomenon.” 122 Letterbox companies can be managed by so-called trust and corporate service providers. Financial Action Task Force (FATF) defines such providers as “all those persons and entities that, on a professional basis, participate in the creation, administration and management of trusts and corporate vehicles.” 123 Research by authorities and journalists has shown that such corporate service providers help companies to avoid and evade taxes. 124 They can even be used for money laundering activities, 125 and at least in the Netherlands many have not collected sufficient information about the risks associated with their clients. 126
Fifty Shades of Tax Dodging • 19 Europe is a major centre for routing investments through letterbox companies. Luxembourg and the Netherlands are particularly important in this respect, accounting together for approximately a quarter of all the world’s FDI stocks. Luxembourg alone accounts for 54 per cent of all investments going out of Europe. 127 Other European countries such as Austria, Cyprus, Hungary and Spain also have attractive SPE regimes. 128 As Table 3 (Share of corporate investment stocks from SPEs) shows, 19 per cent of corporate investments globally pass through SPEs. Europe is the region of the world where most investments flow through SPEs. These letterbox companies are also an important part of the mix of investments to developing countries, although the share is lower for this group of countries, with 9 per cent of investments flowing through SPEs, than it is for developed countries. However, worryingly, the percentage of investments to developing countries that passes through SPEs has been rapidly increasing since year 2000 (see Figure 1). Since Europe is a world centre of SPE-related investments, and SPEs are frequently used to dodge taxes, 129 the European Union has a special responsibility in addressing the negative effects on developing countries’ tax base. Table 3: Share of corporate investment stocks from special purpose entities (SPEs) Share of corporate investment stocks from SPEs (%) Global 19 Developed economies 26 - Europe 32 Developing economies 9 - Africa 12 - Developing Asia 130 6 - Latin America & Caribbean 19 Transition economies 131 19 Source: UNCTAD (2015) World Investment Report 2015 132 Figure 1: Share of corporate investments in developing economies through special purpose entities (SPEs) (in per cent), 2000–2012 12 10 2010-2012 (average) 8 6 2005-2009 (average) 4 2000-2004 (average) 2 0 Source: UNCTAD (2015) World Investment Report 133
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