Aggressive tax planning indicators; Final Report

The aim of this study is to provide economic evidence of the relevance of aggressive tax planning (ATP) structures for all EU Member States. The study relies on economic indicators available at macro-level and on indicators derived from firm-level data. The objective is indeed to look at the relevance of ATP for all Member States through these two complementary angles. For each indicator, the study identifies outliers based on a consistent methodology. None of the indicators provides per se an irrefutable causality towards aggressive tax planning. However, considered together, the set of indicators shall be seen as a "body of evidence". While there are some data limitation, the study provides a broad picture of which Member States appear to be exposed to ATP structures, and how it impacts on their tax base (erosion or increase). The discussed ATP structures can be grouped into three main channels: i) ATP via interest payments, ii) ATP via royalty payments and iii) ATP via strategic transfer pricing. In addition to general indicators assessing the overall exposure to ATP, we also derive specific indicators for each of the ATP channels. In combination, these indicators allow to classify entities within multinational enterprises (MNEs) into three types: i) target entities, where the tax base is reduced ii) the lower tax entities where the tax base is increased but taxed at a lower rate, and iii) conduit entities which are in a group with ATP activities but no clear effect on the tax base is observable

Aggressive tax planning indicators ; Final Report

The aim of this study is to provide economic evidence of the relevance of aggressive tax planning (ATP) structures for all EU Member States. The study relies on economic indicators available at macro-level and on indicators derived from firm-level data. The objective is indeed to look at the relevance of ATP for all Member States through these two complementary angles. For each indicator, the study identifies outliers based on a consistent methodology. None of the indicators provides per se an irrefutable causality towards aggressive tax planning. However, considered together, the set of indicators shall be seen as a "body of evidence". While there are some data limitation, the study provides a broad picture of which Member States appear to be exposed to ATP structures, and how it impacts on their tax base (erosion or increase). The discussed ATP structures can be grouped into three main channels: i) ATP via interest payments, ii) ATP via royalty payments and iii) ATP via strategic transfer pricing. In addition to general indicators assessing the overall exposure to ATP, we also derive specific indicators for each of the ATP channels. In combination, these indicators allow to classify entities within multinational enterprises (MNEs) into three types: i) target entities, where the tax base is reduced ii) the lower tax entities where the tax base is increased but taxed at a lower rate, and iii) conduit entities which are in a group with ATP activities but no clear effect on the tax base is observable

Tax Avoidance by Redirecting Royalty Flows: Estimating the Global Revenue Loss

Redirecting royalty payments across jurisdictions is a well-known strategy of large multinationals to reduce corporate income taxation. However the impact of these taxes on the direction and size of the royalty payments are seldom investigated. We focus on this tax avoidance strategy on a global scale. Using OECD data we determine the impact of profit taxes on bilateral royalty payments. From a network analysis we know which payments could be tax motivated and which could only be business motivated. Next, we apply a gravity framework with PPML estimators to explain the variation in the latter payments. Using the regression outcomes to predict the business motivated content of the other royalty payments, we find that at least 18% is motivated by tax planning, which reduces tax revenues by 6.5 to 16 billion US dollar in 2018. We argue that both estimates are lower bounds due to missing observations. To the best of our knowledge these are the first estimates of worldwide tax avoidance by redirecting royalties

Tax Avoidance by Redirecting Royalty Flows: Estimating the Global Revenue Loss

Redirecting royalty payments across jurisdictions is a well-known strategy of large multinationals to reduce corporate income taxation. However the impact of these taxes on the direction and size of the royalty payments are seldom investigated. We focus on this tax avoidance strategy on a global scale. Using OECD data we determine the impact of profit taxes on bilateral royalty payments. From a network analysis we know which payments could be tax motivated and which could only be business motivated. Next, we apply a gravity framework with PPML estimators to explain the variation in the latter payments. Using the regression outcomes to predict the business motivated content of the other royalty payments, we find that at least 18% is motivated by tax planning, which reduces tax revenues by 6.5 to 16 billion US dollar in 2018. We argue that both estimates are lower bounds due to missing observations. To the best of our knowledge these are the first estimates of worldwide tax avoidance by redirecting royalties

A common withholding tax for the EU

Corporate tax avoidance is high on the policy agenda. Government tax revenues are reduced by a few hundred billion euros according to various estimates due to the avoidance strategies of multinational companies. Both the multinationals firms and the countries facilitating these tax planning strategies have been brought into the spotlight. Also, various EU Member States have been labelled as tax havens. The multinational firms make use of differences in national tax systems, including differences in withholding taxes on dividend, interest and royalties on outgoing intra-firm income flows. This is called treaty shopping. The Parent-Subsidiary Directive (PSD) and the Interest and Royalty Directive (IRD) are used by multinationals firms to steer their income flows to the Member States with the lowest or zero withholding taxes. Both directives have been successfully implemented to facilitate cross border income flows within the internal market. However, the conditions of these directives are also used to reduce withholding tax payments on outgoing income flows from the EU

A common withholding tax for the EU

Corporate tax avoidance is high on the policy agenda. Government tax revenues are reduced by a few hundred billion euros according to various estimates due to the avoidance strategies of multinational companies. Both the multinationals firms and the countries facilitating these tax planning strategies have been brought into the spotlight. Also, various EU Member States have been labelled as tax havens. The multinational firms make use of differences in national tax systems, including differences in withholding taxes on dividend, interest and royalties on outgoing intra-firm income flows. This is called treaty shopping. The Parent-Subsidiary Directive (PSD) and the Interest and Royalty Directive (IRD) are used by multinationals firms to steer their income flows to the Member States with the lowest or zero withholding taxes. Both directives have been successfully implemented to facilitate cross border income flows within the internal market. However, the conditions of these directives are also used to reduce withholding tax payments on outgoing income flows from the EU

Optimal tax routing:Network analysis of FDI diversion

The international corporate tax system is considered a network. Just like for transportation, “shortest” paths are computed, which minimize tax payments for multinational enterprises when they repatriate profits. We include corporate income tax rates, withholding taxes on dividends, double tax treaties, and double taxation relief methods. We find that treaty shopping leads to an average potential reduction of the tax burden on repatriated dividends of about 6% points. An indicator for centrality in the tax network identifies the UK, Luxembourg, and the Netherlands as the most important conduit countries. Low-tax havens do not have a crucial role in reducing dividend repatriation taxes. By contrast, tax haven financial centres do. In the regressions we find that the centrality measures are robustly significant explanatory variables for bilateral FDI stocks. This also holds for our treaty shopping indicator

Limitation of holding structures for intra-EU dividends:An end to tax avoidance?

This article analyses the recent rulings of the Court of Justice of the European Union in two Danish cases and examines their possible impact on international tax avoidance. These rulings regard limitations of tax benefits related to cross-border dividend payments resulting from the interposition of holding companies in the European Union. From a legal perspective, the authors conclude that the rulings demonstrate the alignment of international tax policies to combat tax avoidance between the European Union and the OECD. The concerted action between the two is implemented by the economic test to counter abusive legal holding structures. From a quantitative perspective, the rulings limit the potential for multinational enterprises to lower their tax burden considerably. The worldwide average potential gain from treaty shopping is reduced from 5.6% to 4.5% when the EU Member States cannot be used on treaty shopping routes. With more countries, the combat against tax avoidance is more effective. However, the fact that some countries have a standard withholding tax rate of zero per cent hampers the combat