Coronavirus aid packages in many countries include restrictions designed to block multinationals from sending money to tax havens, but the language may ultimately be too narrow to capture most tax avoidance.
Over the last few months, several countries have put conditions on their coronavirus aid—including France, Denmark, Scotland, and Argentina, with the Netherlands recently announcing it intends to do the same. They say companies can’t get some of the benefits if they engage in tax avoidance.
“It is not appropriate to ask for tax money in dire times and avoid tax at the same time. That is why the cabinet explicitly sets conditions for supporting individual companies,” Hans Vijlbrief, State Secretary for Finance, Taxation and Tax Administration, for the Netherlands said June 19.
But critics were quick to point out that the measures only target a narrow list of so-called tax haven countries. Some will be effectively toothless at stopping relief money from flowing even to blacklisted countries, because governments only look at the corporate structure one step beyond their own jurisdiction. Even stronger measures are unlikely to change corporate behavior because in some cases existing rules already penalize companies for using tax havens.
“By and large, I’d say the packages are imperfect at best,” said Alex Cobham, chief executive at the Tax Justice Network. “They point the way and respond to a strong public feeling that public funds shouldn’t be used by tax-abusive companies, but don’t actually achieve that aim in full yet.”
Missing the Usual Suspects
As coronavirus shutdowns sparked widespread economic havoc, governments moved quickly to offer relief to businesses with measures like deferred tax deadlines and subsidies to help pay employees’ wages.
Some of the conditional aid packages define “tax havens” as states on the European Union’s list of non-cooperative jurisdictions for tax purposes. The 12 jurisdictions—including the Cayman Islands, the U.S. Virgin Islands, Panama, and Oman—landed on the list because they don’t have agreements to participate in global financial information sharing, or offer “harmful preferential tax regimes,” like special tax benefits for nonresidents or companies that don’t have real economic activity there.
The EU’s list is narrow, and excludes some European nations that act as conduits for tax avoidance, like the Netherlands, Cobham said. And it doesn’t include a number of jurisdictions that have low tax rates.
That list “clearly identifies a number of very tiny small tax havens, but not the ones most responsible for tax avoidance in the EU,” said Tommaso Faccio, head of secretariat at the Independent Commission for the Reform of International Corporate Taxation. “As a blunt measure, it does not target all the tax havens we’d generally consider to be tax havens and facilitating tax avoidance.”
Companies may move profits from entities in higher-tax jurisdictions to those in lower-tax areas, often using dividends or interest and royalty payments.
In 2018, nearly 37 billion euros ($41.6 billion) in those types of payments and dividends flowed through the Netherlands to low-tax jurisdictions, according to the Dutch government.
The Dutch government has adopted several anti-tax avoidance measures in recent years, including withholding tax on interest and royalties, and has proposed withholding taxes on dividend payments. Those measures will ensure profits being moved from or through the Netherlands to a no or low-tax jurisdiction are being taxed, a spokeswoman for the Dutch Finance Ministry said June 30.
“It’s now vital to make even better international agreements to prevent other countries being used for tax avoidance purposes,” she said.
Tax justice advocates say the biggest effect of the measures’ restrictions will likely be political, rather than driving companies to change how they’re structured.
“It’s a symbolic measure that enforces the normative idea that tax havens are harmful,” Faccio said.
The implication of being associated with tax havens could lead companies to avoid even asking for benefits in countries with conditional measures, said Jian-Cheng Ku, a partner at DLA Piper Netherlands.
“A big part of the deterrent effect of these measures is the possible damage to a company’s reputation,” he said.
‘Almost No Companies in Scope’
Some of the measures are too narrow to catch even multinationals with corporate entities in EU black listed countries.
Companies can’t access benefits of Denmark’s relief package if they’re tied to a tax haven. Under the Danish measure, tax authorities don’t look to the ultimate owner of the legal entity, but rather at a thin slice of the company’s structure beyond Denmark to determine whether it is structured through one of the blacklisted countries.
“It means that effectively there are almost no companies in scope,” said Rasmus Corlin Christensen, a political economist at Copenhagen Business School.
Companies were unlikely to be structured that way even before the coronavirus crisis, Ku said.
Double tax treaties allow for a low or zero rate of withholding tax on dividends or interest and royalty payments, so companies structure between countries that have treaties. For example, a company might make payments from Denmark to the Netherlands or Luxembourg, which have extensive treaty networks, then from there to a low-tax jurisdiction. Without a treaty, Denmark would impose a higher withholding tax on payments made to the parent company based in a tax haven.
“If there is a Danish entity with a direct shareholder in a black listed country, it would be very inefficient, tax-wise,” he said.
Blocking aid to Danish companies owned and controlled from the EU or European Economic area—even if they are ultimately owned by persons that are tax residents in an EU black list country— would violate the EU’s freedom of establishment, a spokesman for Denmark’s tax authority said in a June 29 email.
Denmark is committed to combating international tax evasion and aggressive tax planning, he said.
“As a result, Denmark is working to ensure that the EU blacklist’s criteria are sufficiently effective, and that these are strengthened where relevant. Denmark has actively pushed for the work currently being done to this end in the EU,” the spokesman said.
In some cases, existing rules already penalize companies for using tax haven countries, so a restriction on Covid-19 funds wouldn’t change much.
The French aid package denies tax deferrals to a company that fails on measures of social responsibility—including having an entity in a tax haven with no economic substance, like employees on the ground.
“France has used the EU black list as part of its anti-avoidance rules for some time and many businesses have structured away from these countries unless they have a market there,” said Sandra Hazan, a partner and head of Europe Tax Group and co-head of Global Tax Group at Dentons in Paris.
“This is because these markets tend to be small and the authorities have tended to be more suspicious of corporate org charts that feature an entity based in one of these countries,” she said in email.
Measures With ‘Bite’
Stronger measures look beyond immediate owners to determine whether any entity in a company’s structure uses a blacklisted country.
Scotland’s measure denies a company a pandemic grant if it’s based in a tax haven, has a subsidiary in a tax haven, is the subsidiary of a company based in a tax haven, or “is party to an arrangement under which any of its profits are subject to the tax regime of a tax haven.”
“Scotland’s measures, and others on similar lines, will be effective in the sense that they capture a significant number of companies,” Cobham said. “This means that even with the limited EU list of non-cooperative jurisdictions, the measure will still bite.”
The Scottish measure will more likely affect individuals based in tax havens than companies, because companies are more likely to have structured out of blacklisted jurisdictions already due to other tax avoidance rules, said John Cullinane, tax policy director at the Chartered Institute of Taxation.
Argentina said large companies could only receive virus subsidies to pay employees if, among other conditions, they don’t “make expenditures of any kind to subjects directly or indirectly related to the beneficiary whose residence, location or domicile is in a non-cooperative jurisdiction or with low or no taxation.”
The measure also included conditions regarding forbidding distribution of profits, repurchasing shares, and acquiring securities, then selling them in foreign currency.
“Most subsidiaries of multinational companies returned their supplementary wages because they do not want to suffer restrictions with respect to their freedom” to engage in those actions, Martin Barreiro, a lawyer at Baker & McKenzie in Buenos Aires, wrote in an email to Bloomberg Tax.
—With assistance from Jan Stojaspal