Have European Banks left tax haven? Evidence from country-by-country data

Giulia Aliprandi (1, 2, 3) , Mona Baraké (1) , Paul-Emmanuel Chouc (1)

1 EU Tax - EU Tax Observatory
2 PSE - Paris School of Economics
3 PJSE - Paris Jourdan Sciences Economiques

This study documents the activity of European banks in tax havens and how this activity has evolved since 2014. The analysis covers 36 systemic European banks that have been required to publicly report country-by-country data on their activities since 2015. We study the level and evolution of the profits booked by these banks in tax havens over the 2014-2020 period. We also compute their effective tax rates and their tax deficit—defined as the difference between what these banks currently pay in taxes and what they would pay if they were subject to a minimum effective tax rate in each country. We start by creating a list of tax haven jurisdictions used by the banking sector. We combine two indicators to identify tax havens: the effective tax rate on bank profit and the amount of bank profit per employee. Overall, 17 jurisdictions feature in our list: Bahamas, Bermuda, the British Virgin Islands, Cayman Islands, Guernsey, Gibraltar, Hong Kong, Ireland, Isle of Man, Jersey, Kuwait, Luxembourg, Macao, Malta, Mauritius, Panama, and Qatar. Using this list, we show that European banks use tax havens significantly, with no trend during the 2014–2020 period. The main European banks book EUR 20 billion (or 14% of their total profits) in tax havens each year. This percentage has been stable since 2014 despite the introduction of mandatory information disclosure. Bank profitability in tax havens is abnormally high: EUR 238 000 per employee, as opposed to around EUR 65 000 in non-haven countries. This suggests that the profits booked in tax havens are primarily shifted out of other countries where service production occurs. Around 25% of the profits made by the European banks in our sample are booked in countries with an effective tax rate lower than 15%. The use of tax havens varies considerably from bank to bank. The mean percentage of profits booked in tax havens is about 20% and ranges from 0% for nine banks to a maximum of 58%. The mean effective tax rate paid by the banks in our sample is 20%, with a minimum of 10% and a maximum of 30%. Seven banks exhibit a particularly low effective tax rate, below or equal to 15%. To better understand this heterogeneity, we analyse the use of tax havens by three banks with a relatively high presence in tax havens: HSBC, Deutsche Bank, and Société Générale. We observe a diversity of situations: for HSBC, the bulk of haven profits come from just one haven (Hong Kong), while in other cases multiple tax havens are involved. We estimate the amount of revenues that could be collected by applying a minimum tax rate on the profits of banks. We simulate a tax similar to the G20/OECD minimum tax proposal ,which the majority of the Inclusive Framework jurisdictions supported in July 2021. In this proposal each parent country would collect the tax deficit of its own banks. For instance, if the internationally agreed minimum tax rate is 15% and a German multinational bank has an effective tax rate of 10% on the profits it books in Singapore, Germany would impose an additional tax of 5% on these profits to arrive at an effective rate of 15%. We consider three minimum tax rates—15%, 21%, and 25%—and in each case compute the extra tax owed per bank and tabulate results by headquarter country. Our findings show that a minimum tax has significant revenue potential. With a 25% minimum tax rate, our sample of European banks would have to pay EUR 10-13 billion in additional taxes annually. Lower tax rates reduce the gains to EUR 6-9 billion for the 21% tax rate and EUR 3-5 billion for the 15% tax rate. Banks with low effective tax rates—which tend to make use of tax havens to shift profits and lower their tax liability—would be particularly affected. Our findings illustrate the usefulness of country-by-country reporting, a vital piece of information to track profit shifting and corporate tax avoidance. 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% rate—may be necessary to curb the use of tax havens by the banking sector.

Domaines: Economies et finances

Giulia Aliprandi, Mona Baraké, Paul-Emmanuel Chouc. Have European Banks left tax haven? Evidence from country-by-country data. [Research Report] Rapport n°2, Eu-Tax. 2021. ⟨halshs-03350725⟩