Tax havens in Europe: multinationals exploit five states in the top ten

Tax Justice Network calculated that the 70 jurisdictions considered in the Corporate Tax Haven Index account for 86.67% of all global foreign direct investment. The United States has the largest share with 13.5%, followed by the Netherlands with 9.6% and Luxembourg with 7.6%.

The British Virgin Islands, Cayman Islands and Bermuda remain the biggest threat to the public coffers of other states. The three British tax havens at the top of the Corporate Tax Haven Index received the worst possible scores (100 out of 100) in all 18 indicators used to assess the laws of individual countries.

The British Virgin Islands and the Cayman Islands currently do not impose corporate taxes while Bermuda has a light version of income tax that only applies to companies that are part of a multinational group with at least EUR 750 million in consolidated turnover. The three jurisdictions also do not impose withholding tax on outbound dividends, have no anti-abuse tax rules and do not require the filing and publication of company accounts. These are just some of the practices that contribute to the extreme scores of these three jurisdictions on the index indicators.

The UK's network of tax havens is responsible for one third of the risks of corporate tax abuse, but - despite this - has been classified as 'not harmful' by the OECD.

Experts at Tax Justice Network estimate that states globally lose $84 billion a year in corporate taxes due to multinationals using the UK and its tax havens to pay less tax. This annual loss rises to $169 billion if the shortfall from wealthy individuals using the UK and its havens is included.

EU countries are also responsible for one third of corporate tax abuses, while for African countries the figure is only 4% and for Latin American countries 3%.

Many EU states have made improvements to the rules on royalties and commissions for intercompany services, making it more difficult for multinationals to exploit these payments to pay less tax. Among the most significant improvements, the Tax Justice Network research reports those of Belgium, Denmark, Italy and Portugal. In contrast, the countries that have risen in the rankings have tended to weaken their laws against these particular corporate tax abuse techniques. Some of the sharpest deteriorations were observed in Brazil, Poland and Mexico.

Royalties and service fees are key types of income used by multinational groups to plan their tax expenditures. Profits from the sale of goods and services to third parties or from the extraction of natural resources are usually difficult to pass on: they appear in the books of the group company performing the activity. By making these companies pay (and deduct from tax) large amounts of royalties and service fees to other subsidiaries in low-tax jurisdictions, the multinational transforms high-tax profits into low-tax profits. This practice can only be limited by imposing limits on the use of intra-group deductions for royalties and service fees. But few countries impose them effectively, note the experts at Tax Justice Network.

However, improvements in Belgium, Denmark, Italy and Portugal have been undermined by important loopholes found in the rules of the EU's anti-avoidance directive on foreign subsidiaries. The most important is a loophole that requires states to exempt a multinational company from the rules if it can prove that its business arrangements are not 'totally artificial' arrangements created to pay less tax. But the directive gives no guidance on how to assess what is artificial and what is not, allowing multinationals to use the same methods they have been using for decades.

In general, EU countries with more exceptions in the implementation of the rules on foreign subsidiaries tend to rank higher in the index than countries with fewer exceptions.

It is no coincidence that Ireland ranked 9th in the index, entering the top 10 for the first time. Ireland's rise is largely due to the lack of change in its anti-tax abuse laws, which has caused it to lag behind the other countries in the index. Earlier in September, the Court of Justice of the European Union, ordered Apple to pay €13 billion (plus interest) in unpaid taxes to Ireland from 2003 to 2013, years in which it had benefited from a favourable tax regime.

Thus, while Ireland continues to have some of the worst scores in the different indicators of the index among the EU countries (tied with Cyprus), most other EU members have seen their scores improve.

According to a 2023 report by the Tax Justice Network, states will lose USD 4.8 trillion to tax havens globally over the next 10 years. Which remain a threat, despite all attempts to de-emphasise them.