Survival of the Richest

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Europe's role in upholding an unjust tax system Figure 1: Number of aggressive tax planning structures Netherlands Belgium Cyprus Malta Latvia Luxembourg Hungary Croatia Finland Slovenia Romania Poland Lithuania EU Average Portugal Ireland Estonia Bulgaria Slovakia Italy Greece Czech Republic Austria United Kingdom Sweden France Germany Spain Denmark 0 2 4 6 8 10 12 14 16 18 Number of structures in place in EU Member States that can be used by multinational corporations for aggressive tax planning and tax avoidance. The graph includes all indicators. Source: Ramboll Management Consulting and Corit Advisory. 65 16 • Survival of the Richest
Europe's role in upholding an unjust tax system Letterbox companies The setting up of letterbox companies is one of the practices used by multinational corporations to avoid paying taxes in countries where their economic activity takes place. 66 Other phrases used to describe the same type of companies are ‘shell companies’ or ‘special purpose entities’. These structures are companies with few employees, if any, and no real economic activity. Multinational corporations can establish letterbox companies in jurisdictions where they can get favourable tax treatment, and then start collecting payments from other subsidiaries of the same corporation (for example by charging for services that are hard to value, such as ‘management fees’ or the right to use the corporation’s logo). Thereby, multinational corporations can transfer their profits from the subsidiaries in countries where real economic activity takes place and end up with much lower profits (and thus lower tax payments), while the profits get registered in the low-tax jurisdiction where the letterbox is located. Looking at global investment flows, it is clear that several European countries are major centres providing attractive tax regimes for letterbox companies and thus functioning as conduits for multinationals’ investments. By comparing the statistics of foreign direct investments (FDI), Dutch organisation SOMO shows that the Netherlands is by far the largest exporter of FDI in the world, ahead of much bigger economies such as the United States and China. 67 The small European country of Luxembourg is third on the list of global FDI exporters. 68 This may seem strange, but the reason these countries rank so high up the list is that large parts of the investments attributed to the Netherlands and Luxembourg are in fact made by investors residing in other countries. This is because these investment flows are passed through Dutch or Luxembourg letterbox companies. The original investment decision (or research and development) was done in another country, but by routing investments through a mailbox company, multinational corporations are able to avoid paying taxes. Between 80-90 per cent of the investments originating from both countries flow through letterbox companies, indicating a massive rerouting of international investments through these jurisdictions for tax optimisation or other investment benefits (such as those granted under bilateral investment treaties). 69 Developing countries are among those that lose out in this system, as has been shown by cases like that of the Australian mining company Paladin, which routed its profits made in Malawi through a Dutch letterbox company. According to a report by ActionAid, this led Malawi – one of the poorest countries in the world – to lose approximately US$27.5 million in tax revenue over six years. 70 The findings have been rejected by Paladin. 71 About 9 per cent of investments into developing countries are routed through special purpose entities (SPEs). The figure is lower than the global average of 19 per cent, but the trend is worrying as the numbers have been increasing rapidly since 2000. 72 While the European Parliament has called for the abolition of letterbox companies, 73 the European Commission has deemed that the problem will be solved by so-called general anti-abuse rules. 74 However, this is not likely to solve the full extent of the problem of letterboxes (see ‘Anti-tax avoidance measures’). Patent boxes Intellectual property such as patents, trademarks and copyrights do not have a strong connection to geographical places in the same way as, for example, production has. Furthermore, the real value of a brand or certain know-how is difficult to determine. This makes intellectual property easily transferable from one jurisdiction to another, which is what multinationals can do in order to minimise their taxes. Research shows that patent applications are responsive to corporate income tax levels and that European companies’ intellectual property is more likely to be held by subsidiaries in low-tax jurisdictions. 75 In recent years, several EU governments have chosen to introduce so-called patent boxes, a type of tax incentive that grants corporations preferential tax treatment for income from intellectual property. Twelve EU countries currently have patent boxes (see Box 2 on ‘EU countries with patent Boxes’), with tax rates varying between 0 per cent (Malta) and 15 per cent (France). 76 Countries that have introduced patent boxes often do so with the stated aim of attracting research and development activities. In effect, however, these special tax regimes undermine the tax base of other countries and are very much a part of ongoing ‘tax competition’ between countries. The negative impact is felt also by developing countries, which risk becoming manufacturing platforms with profits diverted into European patent boxes. 77 In addition, there is very little evidence that patent boxes do anything to boost research and development or national innovation. They help boost the number of patents being filed at national intellectual property offices. However, this might very well be due to tax planning by multinational corporations rather than any increase in scientists conducting research in those countries. Survival of the Richest • 17
Page 1 and 2: Survival of the Richest Europe’s
Page 3 and 4: Contents Acronyms 4 Glossary 5 Exec
Page 5 and 6: Glossary Advance Pricing Agreement
Page 7 and 8: Glossary Tax treaty A legal agreeme
Page 9 and 10: Executive summary Global solutions
Page 11 and 12: Global developments 2016 Developing
Page 13 and 14: Global developments 2016 Box 1 Conc
Page 15: Europe’s role in upholding an unj
Page 19 and 20: Europe's role in upholding an unjus
Page 35 and 36: Report findings Financial and corpo
Page 37 and 38: Specific findings Survival of the R
Page 39 and 40: Methodology for country rating syst
Page 41 and 42: AUSTRIA TRANSPARENCY REPORTING TAX
Page 43 and 44: FINLAND TRANSPARENCY REPORTING TAX
Page 45 and 46: ITALY TRANSPARENCY REPORTING TAX TR
Page 47 and 48: NORWAY TRANSPARENCY REPORTING TAX T
Page 49 and 50: SWEDEN TRANSPARENCY REPORTING TAX T
Page 51 and 52: Recommendations 7. All EU countries
Page 53 and 54: Austria Taxation Tax treaties Austr
Page 55 and 56: Belgium Taxation Tax treaties In to
Page 57 and 58: Belgium Global solutions Belgium di
Page 59 and 60: Czech Republic According to the 201
Page 61 and 62: Denmark Taxation Tax treaties Tax t
Page 63 and 64: Finland Ownership transparency Finl
Page 65 and 66: France “Of course, the fight agai
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France Taxation Tax treaties In tot
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Germany In July 2016, the European
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Ireland Furthermore, it should be n
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Italy “After our meeting in Milan
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Latvia “We still have a high inco
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Latvia Global solutions The Latvian
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Luxembourg One Luxembourg newspaper
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Netherlands One of the most crucial
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Norway Overview Once the Panama Pap
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Poland “It seems to us that those
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Slovenia In May 2016, the Financial
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Slovenia Global solutions Despite p
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Spain Taxation Tax treaties The Spa
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Sweden Taxation Global solutions Ta
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United Kingdom Anti-Corruption Summ
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United Kingdom There are broadly tw
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References 34. Government of the Un
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References 87. European Parliament.
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References for the screening of thi
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References legal-content/EN/TXT/?ur
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References 255. Rekenhof (2011), In
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References 321. Response to questio
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References da-savu-solidaritati 511
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References 583. Tweede Kamer. (2016
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References http://www.ft.com/cms/s/
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References 720. Questionnaire answe
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References Rules. Article published
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