European banks’ tax haven use persists but varies widely, study finds

By Doug Connolly, MNE Tax

Large European banks report an average of 20% of their profits in tax havens, but the percentages vary significantly, with some reporting more than half of their profits in such jurisdictions while others report none, according to a September 6 report from the EU Tax Observatory.

The study reviewed country-by-country reporting data for 36 large European banks to evaluate their use of tax havens from 2014 to 2020. It found that the overall percentage of profits of the main European banks reported in tax havens during this period was 14%. This level remained steady throughout the seven years that the study reviewed, despite increased scrutiny of such practices in recent years.

A quarter of the banks studied (nine of the 36) reported 0% of their profits in tax havens. On the other end of the spectrum, the highest percentage of profits reported in tax havens among the banks studied was 58%. The mean effective tax rate among the banks was 20%, but effective tax rates ranged from less than 5% to more than 30%. Seven of the banks had an overall effective tax rate less than or equal to 15%.

Tax havens were defined based on a low effective tax rate and relatively high rates of bank profit per employee. Bank profits per employee in tax havens was about EUR 238,000 (USD 281,000), compared to just EUR 65,000 (USD 77,000) in jurisdictions with higher effective tax rates.

The study identified 17 “tax haven” jurisdictions used by the banks under review. These included seven jurisdictions within Europe: Guernsey, Gibraltar, Ireland, Isle of Man, Jersey, Luxembourg, and Malta. Non-European tax havens included: Bahamas, Bermuda, British Virgin Islands, Cayman Islands, Hong Kong, Kuwait, Macao, Mauritius, Panama, and Qatar.

Given the ongoing disproportionate reporting of profits in countries with low effective tax rates – despite recent efforts to address such practices – the report suggests that a global minimum tax with a relatively robust rate may be necessary to curb the practice.

The EU Tax Observatory, launched this June, is an independent, EU-funded research organization based in France. Previous studies by the group have looked at the impact of a global minimum tax on EU tax revenue and the effect of a minimum tax substance carve-out on tax competition.