The disparity of tax legislation between the States of the European Union, with a gap of up to twenty points in their corporate taxes, opens the door to unfair competition that reduces the collection of some countries and seeks to limit the new global minimum rate of 15% for large companies.
The decision of Ferrovial (BME:FER) of moving its headquarters from Spain to the Netherlands has put under the spotlight the difference in tax treatment received by multinationals between one country and another, something that, although it is not among the reasons given by the Spanish construction company for moving, is an essential factor for companies when choosing where to locate their business.
The Twenty-seven are free to set their fiscal policy and, although the nominal rate of corporate tax is 21.4% on average in the EU, the effective rates paid by companies range from 9% in Bulgaria to 29% in Spain through 14.1% in Ireland and 21.5% in the Netherlands, according to data from the European Commission for 2021.
In the case of multinationals, the effective rate is even below 5% in countries such as Luxembourg, the Netherlands and Cyprus, according to a study by the organization Justice Tax Network.
To reduce the bill with the treasury contribute schemes such as tax incentives for the transfer of patents, tax exemptions for intellectual property or superdeductions to R + D, practices considered very harmful by organizations such as Oxfam, which has denounced that these allow, for example, that pharmaceutical companies pay only between 5 and 6% tax in Belgium.
Also the “tax rulings”, tailor-made tax agreements that allowed giants like Amazon (NASDAQ:AMZN) and Fiat in Luxembourg or Starbucks (NASDAQ:SBUX) in the Netherlands paid taxes on a tiny fraction of their profits, as the European Commission’s investigations showed.
If some countries have used their tax systems to attract companies, large multinationals have also been able to take advantage of the loopholes in the mosaic of national laws to exploit the tax advantages of different jurisdictions, shifting profits from one to another with complex structures.
The result is that some States of the European Union end up losing part of the revenue that would correspond to them for the profits generated in their territory to the detriment of more fiscally attractive countries thanks to legal practices, but questionable in a single market.
Luxembourg and the Netherlands are the ones that subtract the most income from the rest of the community partners, which lost 12,000 million euros and 10,000 million a year, respectively, only due to the transfer of profits from US multinationals to these two countries, according to calculations by Justice Tax Network, which includes them among the ten main tax havens in the world.
The hardest hit are France, Germany, Italy and Spain, which raised between $2 billion and $000 billion less annually.
“For years the Netherlands has caused a race to the bottom within the EU,” said the organization’s executive director, Alex Cobham (LON:COB), criticising the “serious cost” of this “tax competition”.
Spain, in particular, lost 2,711 million dollars, 11% of the collection by companies, in favor of “tax havens in the EU”, especially the Netherlands (1,089 million), Luxembourg (811 million), and Ireland (604 million), according to a study by the universities of Berkeley (LON:BKGH), California and Copenhagen of 2021.
The European Commission maintains that there are no tax havens in the EU, but in 2018 it acknowledged that seven members – the Netherlands, Luxembourg, Ireland, Belgium, Cyprus, Malta and Hungary – were carrying out “aggressive tax planning” and has since repeatedly asked them to tackle these practices, most recently when negotiating their post-covid recovery plans.
Pressured by the financial crisis and scandals such as LuxLeaks or the Panama Papers, Brussels tried in the last decade to approve a common basis for corporate tax in the EU that would guarantee payment where profits are generated, but the legislation never went ahead since a single country can veto any proposal in tax matters, which blocks any attempt at harmonization.
The Commission then decided to focus on initiatives to combat tax evasion, with several anti-money laundering directives, and on strengthening transparency and cooperation between countries, with measures such as country reports on taxes paid by large companies.
However, the biggest step forward to end the tax gap for multinationals could come from the agreement sealed by more than 140 countries in the OECD to set a minimum effective rate of 15% globally for companies that invoice more than 750 million euros a year.
The pact, promoted by France, Spain and Germany, seeks to end incentives to transfer profits to tax havens and was signed by all EU partners, including Ireland, Hungary and Estonia, which had initially shown reluctance.
The measure will be applied in the Twenty-seven with a directive that, after months of negotiations to convince the most jealous countries of their tax autonomy and circumvent the last-minute vetoes of Hungary and Poland, was approved in December and will enter into force in 2025.
This would raise 50,000 million more in the EU, 700 million in Spain, according to EU Tax Observatory.