Saturday, June 09, 2012

Stora-Enso's Dutch Tax Dodge: Profits Taxed at 1.5%

Stora-Enso, a Finnish forestry giant that produces fine paper for glossy magazines across Europe, operates a small office in Amsterdam that generated half of the Group's profit with less than two percent of the Group's turnover in years 2005-2010, according to today's Talouselämä (8 June) - a Finnish economic weekly (only in print edition). The annual report for 2011 has not yet been published.

The cellulose originates from Stora Enso's half-owned Brazilian joint-venture Veracel (other half owned by Brazilian partner Fibria), and it is then dried and pressed for shipping to Belgium, from where it gets transferred to paper mills in Finland, Germany and China.

According to customs statistics and earlier interviews of Stora Enso, some 60-70% of the pulp has been going to a paper factory in Oulu, Finland. The Oulu mill has received some 25 000 - 28 000 tonnes of this pulp each month, a substantial share of Europe's entire cellulose trade.

However, on paper, the most interesting stop along the way is in the accounts of a Dutch subsidiary called Stora Enso Amsterdam BV. For many years, two or three employees based in Amsterdam operated this trade that generated half of the Group's profits. In year 2009 a Dutch trading company was merged into Stora Enso Amsterdam, which made it more difficult to keep track with the pulp trade.

Dutch sales represented only some 1,3% of the turnover of the Stora Enso Amsteram in 2009-2010. The pulp trade remained the single most important source of profits for the Stora Enso Amsterdam.

Brazilian eucalyptus reach their full height only in seven years as compared to Nordic birch that takes decades to reach its full growth.  The venture is highly profitable, but little profits are actually reported in Brazil, while the company benefits from Brazil's infrastructure, skilled employment and climate.

According to the article in Talouselämä, Stora-Enso Amsterdam admits in its annual reports that Brazilian produced cellulose is bought at a discounted price and sold at world market prices.

Most of the profits on the cellulose remain in the Netherlands, where the average effective tax rate for 2005-2010  was 1.5%.  According to the accounts of the Dutch registered company, during the years 2005-2010 reported profits reached €299 million, while tax paid was only €4.5 million, which is well below the general corporate tax rate in the Netherlands which stands at 34.5%.

The reason lies in an Advanced Pricing Agreement (APA) between Stora-Enso Amsterdam and the Dutch tax authorities. The ruling is not on public record, but the current agreement runs up to 2014.  Had the cellulose been shipped directly from Brazil to the factory in Oulu, it would have had to pay taxes on any profits at the standard Finnish rate of 26%, before possible exemptions from losses that Stora Enso has made in some years.

Another aspect in the tax dodging scheme is EU's 1990 directive on taxing parent-subsidiary company dividends, removing taxes on dividends earned within the EU. Under the current EU-rules, profits can be transferred directly to the Finnish parent company without an additional tax liability.

EU tax laws are more or less toothless when it comes to preventing such complex tax dodging schemes since laws regarding Controlled Financial Companies (CFCs) are inadequately applied only to so-called 'artificial' schemes. The proposed Common Corporate Corporate Tax Base (CCCTB) for reforming taxation of EU-based companies on a unitary basis has not advanced.  The result is a wide diversity of national practices that are open to abuse.

To remedy this, TJN promotes country-by-country reporting in all sectors.  The European Union is currently in the final stage of the negotiations aiming to amend the accounting and transparency directives, where partial country-by-country reporting is planned for extractive industries.  One big question is whether forest industry companies should be included as an extractive industry, and increase transparency of the country and project level reporting of these operations.

Wider country-by-country reporting requirements would also enable the Brazilian Federal Tax Authority to spot irregularities.  Currently the BFTA considers Netherlands holding companies "that do not exercise substantial economic activities" on its list of 'priviligied tax regimes' where punitive withholding taxes can be levied.  To date the BFTA has not investigated the Stora-Enso situation.


Blogger Physiocrat said...

Yes but where exactly should the tax be owed? It sounds to me as if the main debt is to Brazil.

3:21 pm  
Blogger Tom Gruchy said...

George Burrow v Standard Chartered Bank and the Jersey finance regulation/protection system is discussed in his interview on
10 June 2012 "Jersey a 'well regulated'off-shore finance centre."

3:01 pm  
Anonymous Anonymous said...

Stora Enso is investing well over a billion in Urugauy now and their intention is to negotiate yet another of these sordid tax deals with the NL authorities so that the pulp leaving that country is priced at cost+ and is then rebilled by this non-legitimate NL middle man at market value, thereby ensuring that the profits from this trade is again taxed at only 1%. Meanwhile the Finnish taxpayer finances all this as Stora Enso gets a tax deduction for the cost of the interest, yet when the income comes in, Stora Enso diverts it into the NL to ensure that no income is taxed in Finland.
Remember that Stora Enso has been ranked as one of the world's most transparent and socially aware companies. This is a wake up call.

6:48 am  

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