Europe home to 6 of the globe’s top 10 tax havens, Ireland tops list

Over half of the world’s largest tax havens are based in Europe. The revelation comes from data presented in a new study titled ‘The Missing Profits of Nations’ wherein three economists have compiled a list of tax havens. According to the researchers, 92% of diverted profits for tax purposes ends up in just 11 tax havens, of which six are European. 

Despite the global outrage that both the Panama Papers and the Paradise Papers stirred up, and a subsequent ‘blacklist’ campaign by the EU to target corporate tax avoidance, it seems the practice of multinationals stashing their cash in tax havens is as strong as ever. The study shows that just 11 jurisdictions soak up some €532 billion in profits, as companies continue to leverage legal loopholes to move profits away from domestic tax regimes. 

For some, the definition of a tax haven is a ‘pure’ tax haven; a country or region where no tax is paid whatsoever, be it corporate finance, personal or otherwise e.g. the Cayman Islands. However, with a broader scope, that definition can include countries like Ireland, the Netherlands, Luxembourg, Switzerland and Belgium, which all have comparatively low effective corporate tax rates. 

The largest offender is Ireland, where a staggering €91 billion of international funds are directed, equivalent to over half of the country’s local, organically generated profits. Following a period of crisis, when Ireland was stung by punitive debt repayment requirements by the EU in a manner similar to Greece, the nation ramped up its effort to make itself attractive as a tax haven. As a result, Ireland receives the largest share of shifted profits, on a working tax rate of just 4%.

In response to the accusation, Ireland’s Department of Finance commented by saying that it is ‘overly simplistic’ to say Ireland is a tax haven. “Ireland is not a ‘tax haven’ and does not meet any of the international standards for being considered such,” the department stated before taking aim at the methodology of the study.

According to analysis by three economists, corporates globally made $11,515 billion in profit last year. Of that amount, 85% is made by local corporations, while the remainder (15% or $1,703 billion) is made by foreign-controlled corporations. Of that amount – the profit made by foreign companies – 35% or $616 billion was shifted to other tax jurisdictions outside the company’s home country. 92% of that amount went to just 11 countries/regions – with these locations subsequently earning the infamous title of tax havens.

However, to get the initial numbers, the economists had to analyse the dollar output and equate it with the number of workers nationally. The Irish found this an unacceptable methodology, arguing; “It is totally inaccurate to simply examine the number of employees in a country and assert what amounts of corporate tax should be paid in each country on that basis. The concept of value creation considers a much wider range of factors and looks at all types of activity and assets that create value in a business.” 

Netherlands, Belgium and Luxembourg

Switzerland has long been known as a tax haven, attracting foreign capital due to its friendly personal tax rates for foreigners and ironclad privacy laws. However, countries like the Netherlands, Belgium and Luxembourg appearing on the list may raise some eyebrows. The questions raised will depend on the asker’s definition of a tax haven and whether it includes a competitive fiscal environment.

Back in 2009, US President Obama branded the Netherlands as a tax haven. By last year, an article by Dutch news site The Correspondent contended that American companies have over half a billion dollars worth of profits stored in the Netherlands. The American Chamber of Commerce states that whilst there is ‘no concrete data are available’ for how much of US investments in Holland have been done to avoid paying tax, “based on AmCham members’ experience, it is likely that at least 80%”. 

Whether or not there is an ethical difference between creating a fiscally competitive environment that acts as an agent for multinational tax evasion or creating a pure tax haven has been an important discussion for the EU over the past few years. Since the accusation against the Dutch by the US just under a decade ago, the EU has attacked tax havens abroad by threatening to blacklist them (implement sanctions) unless they attempt to regulate the practice. On the blacklist are the Bahamas, US Virgin Islands, Dominica, Antigua, Barbuda and Trinidad and Tobago among others scattered around the globe. 

However, with such revelations that the majority of tax havens are not just in Europe, but are also members of the EU, questions about ethics are beginning to be raised by countries that are not tax havens. The report states that high-tax European countries are the ones being dealt the biggest blow by the international offshoring practice, as well as the civilian tax payers who are lumped with the financial burden of subsidising public infrastructure. 

The authors added that this form of tax evasion is unethical and not good for the European economy. European countries with higher taxes are also lowering their rates to become more competitive in this respect, effectively stealing income from one another, and the result is that the rate of corporate tax continues to drop. In this case, the beneficiaries are usually well-to-do shareholders and few others.