Wednesday, January 08, 2014

New report: how Finnish multinationals use tax havens

Our partners at Finnwatch have just published an important new report looking at the activity of Finnish multinational corporations in tax havens. The report is in Finnish, but they have provided an abstract in English, below. It conforms to the pattern, seen elsewhere, of large numbers of subsidiaries in tax havens  - particularly the Netherlands, Belgium and Luxembourg - as well as some good evidence on round-tripping, and on the limits of voluntary company reporting.

Holding companies or shell companies are established by multinational companies to govern their other companies and financing. Motive for this is often tax planning, and shell companies have rarely any substantial business activities.

The Netherlands is a country that offers several possibilities for big companies to avoid taxes and return thus acquired profits back to their home countries. One of the OECD’s four criteria for a tax haven is the absence of a require- ment that the activity be substantial, and in the Netherlands there are more foreign-owned holding companies than anywhere in Europe.

We found that the twenty biggest Finnish companies, measured by turnover, have 225 subsidiaries in the Netherlands, Belgium, Luxembourg, and in other tax havens that offer services for foreign companies. Of those, 124 companies are not situated in Belgium or the Netherlands.

In this report, we used the tax haven list prepared by NBER research institute into which we added Belgium and the Netherlands that are important places for Finnish companies’ holding companies operations. This same list is used by the US authorities.

Furthermore, we traced subsidiary companies in tax havens through Orbis financial database. From there, we listed 438 Finnish companies that had a subsidiary in a tax haven. Nearly half of those, 205 companies, were situated in the Netherlands or Belgium.

According to the companies’ accounts and Orbis database, Finnish companies have also many subsidiaries in the small tax haven islands, like the Cayman Islands, Cyprus and British Virgin Islands. There is hardly any public information available from subsidiaries situated in those mini states.

International and Finnish investment statistics support the picture given by the account analysis. We will present the Bank of Finland’s statistics from 2008 to 2012 concerning the use of holding companies. In addition, we ordered from the National Bank of the Netherlands (DNB) previously unpublished records of holding company investments in the years 2008–2012.

Statistics reveal that almost 90 percent of the direct investments from Finland to the Netherlands are done into holding companies. In practice, these investments are just bypassing the holding companies on their way to the final investment targets. Same phenomenon is repeated in the direct investments from the Netherlands to Finland - out of which more than 70 percent comes from holding companies. This is a major issue for Finnish national economy because the Netherlands is one of our biggest trading partners.

According to the Bank of Finland, by 2012 there were done into various holding companies in different countries 5.8 billion euros worth of such investments that were routed back to Finland. There is little research on this kind of ”round tripping” but international examples suggest that part of this involves tax evasion.

We will furthermore examine the tax reports from Fortum and Terveystalo, the two com- panies that published their own voluntary tax reports. Even though the voluntary tax reporting is a welcome opening, the reports by these two companies show the limits of voluntary reporting. Fortum does not include in its report the holding companies in the Netherlands, Luxembourg and Belgium that have tens of millions of euros of business activities.

In Terveystalo’s tax report, there is no mention of what the company did to its tax schemes that gained large publicity in 2012. In any case, these voluntary reports offered narrow basis to asses how responsible these two companies were in their tax planning.

The European Union is reforming the Parent-Subsidiary directive in 2014. Finland should press in the negotiations effective interference into aggressive tax planning. Furthermore, we need a legally binding country-by-country reporting on companies’ central financial data, and before that a broad voluntary tax reporting by the state-owned companies. This must be done more thoroughly than in the present models.

(Update April 2014: for information on corporate tax see here.)


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