A new report from the European Union Tax Observatory suggests that European banks are reaping about 14 percent of their total profits — about 20 billion euros a year — from the Virgin Islands and 16 other jurisdictions the report identified as “tax havens.”
The report’s authors say the findings will further bolster the case for a global minimum corporate tax rate proposed by the G20 in August and set for final approval next month.
However, some of the banks pushed back against the report’s claims, and other experts have said the VI is likely to be minimally affected by the proposed tax policy.
Among the 36 large banks analysed by the observatory — an independent research laboratory hosted by the Paris School of Economics — Barclays and HSBC were among the ones identified as enjoying the lowest tax rates.
However, spokespeople for both banks told the Guardian that they have paid taxes in the jurisdictions in which they were due and did not employ tax avoidance strategies. The report analysed 36 banks required to report country-by-country data on their activities since 2015, according to its three authors.
“Our findings illustrate the usefulness of country-by-country reporting, a vital piece of information to track profit shifting and corporate tax avoidance,” the authors wrote.
“They also suggest that despite the growing salience of these issues in the public debate and in the policy world, European banks have not significantly curtailed their use of tax havens since 2014. More ambitious initiatives — such as a global minimum tax with a 25 percent rate — may be necessary to curb the use of tax havens by the banking sector.”
Jurisdictions
The authors explained that they combined two “indicators” to identify the 17 jurisdictions: “the effective tax rate on bank profit and the amount of bank profit per employee.”
Besides the VI, other jurisdictions on the list were the Bahamas, Bermuda, the Cayman Islands, Guernsey, Gibraltar, Hong Kong, Ireland, the Isle of Man, Jersey, Kuwait, Luxembourg, Macao, Malta, Mauritius, Panama and Qatar.
The VI had the highest calculated profit per employee of
any of the 17 jurisdictions, at over two million euros per employee, with Cayman second at 953,000 euros.
Furthermore, the report showed that the mean profit per employee in the 17 jurisdictions is about seven times higher than that of the entire sample: 382,700 euros compared to 51,400 euros.
Tax rate
The report touted the benefits of taxing the profits of multinationals at a higher 25 percent global minimum tax rate, suggesting that at that rate, the banks in the report would have to pay from 10 to 13 billion euros in additional taxes annually, and that the UK exchequer would be the
biggest beneficiary.
Under a 15 percent tax rate, according to the report, the UK would have collected an extra 940 million euros in 2020. The G20 tax proposal,
which the VI government has endorsed, has come as a response to suspected profit shifting by large multinational corporations to low-tax
jurisdictions.
The proposal — a two-pillar solution from the Organisation for Economic Cooperation and Development/G20 Inclusive Framework on Base Erosion and Profit Shifting — was endorsed in August by a majority
of OECD jurisdictions.
Under Pillar Two, multinational corporations, including tech behemoths like Amazon and Facebook, would have less incentive to shift to low-tax locations such as Ireland or the Netherlands, since their profits would be taxed at a minimum rate no matter where they choose to locate.
The tax proposals — including the global minimum rate — aren’t final, but they are expected to be decided at the G20 meeting in October.
Implications
However, last month a panel of experts convened by BVI Finance suggested that the VI, Cayman and other zero-tax financial centres are not the target of the plan and that they would be treated as “pass-through” jurisdictions. Panellists pointed out that the agreement doesn’t
force countries to impose a global minimum corporate tax rate and that the proposals are not all-encompassing. Companies with less than a threshold of 750 million euros’ worth of turnover would not be affected
under the current proposal. Premier Andrew Fahie, in his response to the plan, reaffirmed the territory’s commitment to international standards
and regulatory practices.
“Efforts by the OECD to develop a solution to the tax challenges posed by the digitalisation of the economy recognise the complexity of the challenge and the need to allow flexibility in its approach,” he stated.
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