Bailout funds and global tax avoidance chains

Tolerance of tax loopholes is decreasing in corona-hit EU states


Faran Mahmood May 11, 2020
Representional image. PHOTO: REUTERS

ISLAMABAD: As governments seek billions, if not trillions, to counter the impact of the coronavirus crisis, they are also looking into potential tax loopholes in international tax systems engineered to prioritise interests of corporate giants over people’s wellbeing.

In the European Union alone, profit shifting to tax havens such as Luxembourg, Switzerland, Ireland and the Netherlands costs France almost $7 billion while Germany and Italy lose around $4 billion of potential revenues every year.

So, as Covid-19 bailout measures are being formulated, world leaders are determined to combat fiscal paradises with a head-on approach to the tax haven problem.

In an interesting development, Poland premier Mateusz Morawiecki made it categorically clear that the bailout fund of over 25 billion Polish zloty will only go to those multinational corporations that pay tax in Poland and not in tax havens.

French Finance Minister Bruno Le Maire also announced that corporations or those with controlling subsidiaries registered in tax havens are ineligible for France’s €110-billion package.

Denmark has also barred companies registered in tax havens, in accordance with EU guidelines, from receiving bailout funds.

Italy may follow suit and Italy’s Foreign Minister Luigi Di Maio raised concern over the coronavirus aid from going to corporations working in tax havens.

Though as per freedom of capital rules outlined in the EU treaty, EU states cannot exclude companies from bailout schemes on the basis of their tax residencies but a strong sentiment exists among EU leaders that public money doesn’t have to go to tax havens.

We could soon see a unanimous policy statement from most euro-zone states to bar corporations with subsidiaries in jurisdictions, which come on top in the Financial Secrecy Index or in the Corporate Tax Haven Index, from accessing corona bailout funds. Furthermore, the bailout recipients may be asked to make full country-by-country reporting against all corporate entities and legal vehicles including those in tax havens.

This tax avoidance problem is so grave that it is now leaving obvious traces in the GDP data of countries such as Ireland and the US.

For decades, corporations have employed a technique called the double Irish, where two Irish companies were established with one being Irish tax resident while the other was legally an Irish company but not an Irish company from the tax point of view.

Under pressure from the EU, Ireland committed to phase out all infamous double Irish tax avoidance structures by 2020. However, now it has come up with a new tax avoidance technique called “green jersey”.

It allows an Irish tax resident to buy offshore assets of another subsidiary and then deduct the inflated purchase price over the next 15 years from their Irish tax bill.

So, all of a sudden we see a set of companies suddenly becoming tax residents of Ireland, resulting in a modern Irish economy, driven by profits made on US sales in Ireland. We see Ireland’s phoney services imports from the US jumping tremendously as US multinational companies borrow from themselves to buy their own intellectual property and report a large depreciation allowance to cut their taxes. In fact, the United States runs a surplus in high-end services trade – ie exports of intellectual property – and its software exports to Ireland are far larger than software exports to Denmark, France, Germany, Italy and Spain combined.

Similarly, Ireland is the number one US export market in the category of R&D services and data of big corporations such as Apple and Microsoft, which have Irish subsidiaries, is reflected here.

Thanks to these modern tax avoidance strategies, part of the US GDP is now being reported in Irish data, which in turn is distorting the euro area’s GDP data.

This makes a case as to why tolerance of international tax avoidance and evasion in corona-hit EU countries is decreasing. The EU and the US need common taxation and common policies to fight evasion as free circulation of capital to avoid corporate taxes could bring macroeconomic instability otherwise.

It is imperative to enforce country-by-country reporting, which will ensure accountability for multinational companies and member states alike in case of continuing profit shifting for tax evasion purposes.

The writer is a Cambridge graduate and is working as a strategy consultant

 

Published in The Express Tribune, May 11th, 2020.

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