Andrés Gil, 1 July 2021
G7 leaders meeting in Cornwall (southwest England). EFE/EPA/HOLLIE ADAMS/POOL
- A report on corporate profit shifting to avoid taxation finds that some 287 billion euros in corporate profits are shifted out of the EU each year, generating tax losses of 50 billion euros.
- Document – The report ‘Profit Shifting of Multinational Corporations in the European Union: Evidence and Policy Reforms’, written by Professor of Economics Petr Janský and published by The Left in the European Parliament, is the first in a new report by the European Parliament.
- The world’s leading countries agree on a global minimum corporate tax of 15%.
The countries debating within the Organisation for Economic Cooperation and Development (OECD) reached an agreement on Thursday to reform the international tax system, including, as planned, a global minimum corporate tax rate of 15%. This is a necessary tax measure considering that a study on European taxation by Petr Janský, from the University of Prague and a participant in the CORPTAX research project of the Tax Justice network, shows the fiscal damage caused by the current profit shifting of large companies to pay less tax in Europe.
The report, Profit Shifting of Multinational Corporations in the European Union: Evidence and Policy Reforms, published by The Left in the European Parliament, finds that some ¤287 billion in corporate profits are shifted out of the EU each year, generating tax losses of ¤50 billion.
One third of these profits come from Germany alone and almost another third from France. After the US, these EU states are the second and third biggest victims of corporate profit shifting in the world, losing a quarter of corporate tax revenues every year.
“The health emergency has led to a dramatic economic downturn,” says The Left’s co-chair of the European Parliament, Martin Schirdewan, a member of the Tax Affairs Committee and the driving force behind the report: “EU governments had no choice but to spend billions on temporary social safety nets and economic stimulus. Yet today, after a year of crisis management, conservatives are once again speaking out. Alarmed by high levels of public debt, they are calling for fiscal discipline. If we want to avoid a return to another decade of austerity, we must seize the moment and call for a redistribution of wealth”.
Among EU member states there are also tax havens of sorts, as the report recounts. The Netherlands is the number one destination for shifting corporate profits, to the tune of 134 billion euros ($140.896 billion), representing more than 10 per cent of the country’s GDP. It collects five times more profits than Ireland and eight times more than Luxembourg, the most representative tax havens in the EU.
These figures show that EU governments have failed to tackle harmful tax practices within the EU.
EU countries to which corporate profits are shifted for lower taxation.
“The extremely unequal concentration of wealth has been exacerbated by the pandemic. The number of billionaires is increasing. For super-rich corporate owners like Jeff Bezos, Bill Gates, Elon Musk and Mark Zuckerberg, the COVID-19 crisis has generated huge windfall profits. Many multinational corporations, especially technology companies, have made super profits month after month. Microsoft and Facebook are a good example. During 2020, their profits increased by 44% and 53%, respectively. Unlike Amazon, however, they look like small fish. Amazon’s profits soared by 84% with revenues reaching $386 billion, which is about the size of Ireland’s total GDP,” explains Schirdewan: “In the 1970s, corporate tax rates among OECD countries averaged 45%. After half a century of tax abuse, the average tax rate has plummeted to 25%. Any proposal below this rate will not stop the tax race”.
The escape clause that avoids debt and deficit controls in the EU is scheduled to be deactivated in 2023, by which time Brussels will start demanding to tighten the accounts, something that can be done by means of cuts or increased revenues. In this sense, the agreement on a minimum tax on large companies may represent a significant change compared to the management of the 2008 crisis.
Janský’s study shows that “at least two thirds (18 out of 27) of EU member states lose out due to profit shifting from multinational companies. The largest EU economies see most of their profits transferred to tax havens in absolute values, including Germany ($102 billion or €97 billion in 2016) and France ($91 billion or €86 billion). In relation to their corporate tax revenues, in addition to Germany and France, Lithuania, Poland, Romania and Italy are estimated to lose more than 15% of their current corporate tax revenues due to profit shifting.”
Countries suffering from corporate profit shifting to other jurisdictions for tax avoidance.
At the same time, some EU member states, notably the Netherlands ($141 billion or €134 billion of profits shifted), Ireland ($28 billion or €27 billion) and Luxembourg ($18 billion or €17 billion), serve as tax havens and allow this tax avoidance.
“The EU as a whole loses out due to profit shifting,” the report states: “A total of $302 billion (€287 billion) is shifted out of the EU annually, while $215 billion (€204 billion) is shifted in. The imbalance is even more marked when expressed in estimated tax revenues: the EU is losing $53 billion (50 billion euros) while gaining $12 billion (11 billion euros)”.
According to Janský, “all the proposals on the table for global minimum effective taxation of multinationals would turn the tables: tax havens would lose while other countries would benefit. However, there are important differences between the proposals. Most importantly, which other countries would benefit. The US and G7 proposals would benefit countries where multinational corporations are headquartered over all other countries. And the OECD’s Pillar Two proposal [the one agreed in principle on Thursday by 130 OECD countries] is only slightly better, by providing the possibility that the rest of the countries could also have some additional tax revenues. In contrast, the Minimum Effective Tax Rate (METR) proposal would benefit all countries in which multinational corporations are economically active, whether they have sales, assets or employees there, regardless of the country in which they are based”.
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