updated 1:02 PM CEST, Jun 4, 2020

Tax Justice Network: U.S. companies' profit-shifting within Europe is costing EU more than US$27bn in corp taxes annually

EU member states are losing more than US$17bn in corporate tax a year as a result of U.S. companies "abusing the law to shift their profits into the UK, Switzerland and Luxembourg", where corporate tax rates are lower, the Tax Justice Network has said.

This US$17bn annual corporate tax loss is in addition to a US$10bn in corporate taxes that the EU has been reported to be losing to the Netherlands, the London-based advocacy organization added, with the result that the total U.S.-headquartered companies operating in Europe are saving – and EU countries are missing out on – as a result of profit-shifting is around US$27bn.

This four-nation "axis of tax avoidance", as the Tax Justice Network calls it, of the UK, Switzerland, Luxembourg and the Netherlands, is therefore costing the EU "twelve times the budget of the European Research Council, a pan-European science and technology funding body currently funding over 70,000 researchers and that has funded seven Nobel Prize winning projects", the TJN said, in a statement. 

Graph comparing the EU wide corp tax losses each of the four axis countries accounts for 2020Timing

As if the scale of the profit-shifting suggested by the report's findings with respect to the way U.S. companies in Europe are profit-shifting weren't enough, the TJN noted, the publication of the revealing data by the organization is coming at a time of "increasing urgency" across the European Union, as the bloc's member states face up to the economic fallout they are beginning to experience as a result of the Covid-19 pandemic.

Already, "Denmark, Poland and France have banned companies registered in tax havens from receiving bailouts, and Italian PM Giuseppe Conte lambasted the Netherlands last week for 'tax dumping' following [an earlier] Tax Justice Network report," the TJN continued.

It said its findings on the profit-shifting of the U.S. companies operating in Europe was based on an analysis of data published this year by the U.S. Internal Revenue Service that detailed exactly where U.S. companies were declaring their costs and profits in 2016 and 2017.

Instead of declaring the profits they'd realized in the EU countries in which they had been generated, the TJN said, many U.S. companies "were found to have shifted billions" of these profits – worth US $115bn in 2017 – "to the UK, Switzerland, Luxembourg and the Netherlands, where corporate tax rates in practice are far lower, in order to under-report their profits elsewhere in the EU, and consequently pay billions less in tax".

Commenting on the report's findings, a spokesperson for the Tax Justice Network noted that the purpose of the TJN's investigation into European cross-border profit-shifting wasn't to focus on the tax-avoidance of U.S.-based companies specifically but rather, ended up show-casing them because transparency, in the form of data, was there, even as it was lacking on the EU side of The Pond.

“The real obstacle" to having a clearer picture of which companies are avoiding tax by profit-shifting, the spokesperson added, is coming "from EU multinationals rather than their U.S. counterparts, since it’s EU multinationals that have lobbied to prevent their country-by-country-reporting data from becoming public.”

Recommendations

Tax Justice Network logo croppedThe Tax Justice Network recommended three "main measures" it said the EU could take to "end the abuses of its own corporate tax havens":

  • Introduce "unitary taxation" – "the Common Consolidated Corporate Tax Base, in its most ambitious form" – to make the practice of oportunistically shifting corporate profits between countries in order to reduce tax obligations elsewhere obsolete, "since corporations would be required to pay tax based on where the corporation employed workers to generate the profit instead of where the profit was ultimately declared"

  • Adopt an EU-wide minimum corporate tax rate of 25% or more, in order to remove most incentives for profit shifting, as well as an "excess profits tax" of 50% or 75% for the duration of the coronavirus pandemic, in order to ensure that companies making profits from the pandemic would be obliged to share them "fully with the states [in which] they derive them"

  • The introduction of public country-by-country reporting, to "ensure transparency for multinational companies and member states alike, ensuring accountability for any continuing profit-shifting"

In addition to these, the TJN said it had also published a five-step "bail or bailout" test that it said would help to clarify uncertainty in such a way as to enable governments to more easily determine "which companies are discreetly using tax havens to pay less tax", in case they wished to emulate those countries that have already begun banning  companies registered in tax havens from receiving Covid-19 bailouts, and thus "prevent taxpayers' money from ending up in corporate tax havens, and to ensure tax transparency from bailout recipients into the future".

To read and download the TJN's report, "The axis of tax avoidance: Time for the EU to close Europe’s tax havens",  click here.