On July 15th 2020, Apple successfully overturned a €14bn fine imposed on them by the European Commission, after appealing to the General Court of the European Union. The court found that the EU Commission had failed to prove that Apple had been granted illegal tax benefits by the Irish government. This was a major blow for Margrethe Vestager of the European Commission, who’s initial finding had resulted in the largest corporate tax fine in history – signalling early hope to the world that corporate tax havens may slowly be on the way out, and that more was being done to prevent global corporations exploiting them.
Now that Vestager’s progress has been knocked back to square one (assuming this new ruling isn’t successfully appealed in a higher court), it seems a sensible time to explore what corporate tax havens are, how they operate, and why we should care about reclaiming the trillions of dollars stored within them. Corporate Tax havens are countries or regions that charge low rates of corporate taxation (with ten countries currently even charging 0%). They often have regulations allowing foreign companies to easily move their business there, and provide high levels of discretion for companies information. However, legally benefiting from a corporate tax haven is no small feat, and there is good reason that top law firms in the tax sector, such as Baker McKenzie, can charge sizeable fees for facilitating the process. When referring to this US Legal giant, the Irish Times stated that the firm’s ‘role in setting up offshore structures for multinationals, and then defending them when challenged by tax regulators, is legendary’. (1)
Exactly how these companies (or the law firms working on their behalf) find clever ways of moving their profits over shore is complicated, with many different routes used to get to similar conclusions. Nevertheless, I’ll provide a simplified explanation for one common way in which it’s done. Let’s use an example of a fictional tech company – ‘Fruitbowl electronics’. Fruitbowl was started in California, and their pioneering technology is developed by engineers and designers working there. Once they have been awarded patents for various components needed in their products, lawyers for Fruitbowl sell the rights for these patents to a subsidiary company owned by Fruitbowl.
This subsidiary is based in a tax haven, and it charges its parent company an extortionately large licensing fee to use technology within the patent it developed. This fee is designed to wipe out the profits made by Fruitbowl in the US (meaning they cannot be taxed on them) and makes substantial profits for the subsidiary in the tax haven. Therefore, Fruitbowl has finished the process with the same amount of money in a foreign tax haven (within a subsidiary it controls) as it had pre-tax in the US.
A study from Charles University, Prague, found that 40% of profits from multinational companies are directed into tax havens, adding up to an estimated $600bn per year. Naturally, losing billions of dollars in potential tax revenue for many large countries results in less money available to be spent on their public services. This is not ideal at any time, but during crisis’ like the Coronavirus pandemic – where government intervention is necessary in providing additional equipment to health services and economic stimulus packages to minimise the economy’s contraction – it can be highly detrimental. Over $2.6tn is held offshore by US companies alone, partly explaining why President Trump felt the need to slash the US corporate tax rate from 35% to 21% back in 2017 (3) – a move that was met with both praise and criticism. Many from both sides of the political divide now observe that even this precipitous drop doesn’t seem to be significant enough to incentivise large US companies to move their money back home.
Unfortunately for citizens on this side of the Atlantic, complaining of money lost from our government spending pot won’t garner any sympathy from onlookers abroad. Articles on the Tax Justice Network don’t mince their words when describing the damage that Britain has done to the global economy by playing a significant role in enabling tax havens. It describes a ‘corrosive corporate tax war waged by the UK against the ordinary citizens of rich and poor countries’, as well as stating that our country is ‘by far the world’s greatest enabler of corporate tax avoidance and has single-handedly done the most to break down the global corporate tax system’ (4).
Of the top 10 countries that have most ‘proliferated corporate tax avoidance’ (with these 10 being responsible for a collective 52% of the world’s total), the Tax Justice Network notes British overseas territories or dependencies come in at 1st, 2nd, 3rd and 7th on the list, with the UK itself ranking 13th (5). As a further embarrassment, the UK ranks 2nd on the list of countries who most aggressively drive down other countries’ withholding tax rates, through the use of treaties. The UK has been grouped in the so-called ‘Axis of Avoidance’, who ‘line their own pockets at the expense of a crucial funding stream for sustainable human progress’ (6).
Unfortunately, it’s low-income countries suffer the most from these bullish tax treaty negotiations. Whilst negotiating favourable tax treaties with MEDCs does have some noticeable benefits for LEDCs – mostly through promoting cash flow into the country, it is clear that many European Countries are greedily exploiting their need for foreign investment… as if we haven’t exploited them enough for the last half millennium! The International Monetary Fund reports that low-income countries suffer an estimated hit of $200bn per year from lost corporate tax revenue (7), making up roughly a third of total losses, despite having disproportionately smaller economies.
Astonishingly this is greater than the total foreign development aid they receive per year (roughly $150bn) (8). If this section of the article is of specific interest to you, and you’d like to learn more about what can be done to combat tax havens (with a particular focus on reducing their impact on LEDCs), then I highly recommend the comprehensive article ‘Tackling Tax Havens’ from September 2019 on the IMF’s free website. This article has been entirely focused on corporate tax avoidance. However, there are plenty more resources online which can inform on the even more secretive world of income tax avoidance – through standard tax havens, and other avenues such as the notorious Swiss banking industry.
Economist James Henry estimates that as much as $36tn in ‘anonymous private financial wealth’ is held in ‘financial secrecy jurisdictions’, his article ‘Taxing Tax Havens’ on the ‘Foreign Affairs’ website is also a good read if this is something of interest to you (9). I hope this article had proved insightful in explaining corporate tax havens and briefly showing how they deprive governments all around the world from vital tax income, as well as exposing that more needs to be done from the UK to stop corporate tax havens being allowed to continue as they are.
On July 15th 2020, Apple successfully overturned a €14bn fine imposed on them by the European Commission, after appealing to the General Court of the European Union.
By Joseph Spiby – Nottingham University
All BeComAware content is reviewed and approved by a professional in industry.