Take action to stop corporate tax dodging

The international system of company taxation is extremely outdated. Large international corporations take advantage of this: they open subsidiaries in countries that levy hardly any corporate taxes – and shift their profits there. This way, they pay much less tax than they would in the countries where they actually generated their profits.

The principle is simple: the subsidiary in the country with the low taxes, which is independent from a tax point of view, makes a contract with the subsidiary in the country with the normal taxes. This contract regulates the prices of intra-group services – loans, patents, licences – in such a way that high costs are incurred in the country with normal taxes and high profits are generated in the low-tax country.

Intra-group loans are the most popular trick to avoid taxes. A subsidiary in the country with normal tax rates gets a loan from a sister company or the parent company in a low-tax country. The interest payments on the loan can be deducted from profits in the country with normal taxes and end up as profits in the low-tax country, where less or no tax is payable on them. Because this is so often abused, there is a limit to the amount of interest that can be charged at market rates and, for some years now, there has even been a limit on interest. Nevertheless, corporations manage to circumvent this barrier.

Even with patent or licence fees, corporations shift profits to low-tax countries. For example, a corporation like Ikea or Starbucks collects a fee from subsidiaries or franchisees for the use of their name or concept. The subsidiary then deducts the fees from tax as a business expense. The money now flows to countries where only minimal taxes are due on income from royalties. Ireland, for example, attracts with a tax rate of only 6.25 per cent on patent or licence fees.

There are huge sums at stake. Apple, for example, has for years transferred profits from all over Europe to Ireland via its subsidiaries and paid only 0.005 percent tax there - that is 50 euros tax on one million profits. Thus, the EU states lose up to 70 billion euros every year through legal tricks of individuals and corporations. Germany alone loses up to 30 billion euros. By way of comparison, Germany currently lacks over 300,000 day-care places. These could be created with three billion euros.

Corporations with their headquarters in Germany are no better than Google and Co. In 2016, it was discovered that the chemical company BASF had used tricks to avoid 923 million euros in taxes. On behalf of Campact, the citizens' movement Finanzwende, the Munich Environmental Institute, and the Netzwerk Steuergerechtigkeit investigated Lufthansa's tax tricks. Almost all Dax companies are involved in the tax tricks – this is shown in a study commissioned by Die Linke in the Bundestag. There are medium-sized companies undertaking this practice too, for example, Vorwerk.

There is a legislative initiative at the EU level against tax avoidance and evasion by large corporations: public country by country reporting (pCBCR) would force them to publish turnover, personnel, profits, and tax payments for each country in which they are active. When corporations shift profits on a large scale and avoid taxes, this would become visible to everyone.

Public country-specific reporting by companies would create transparency about which company pays what level of tax in which countries. This would make it possible to assess whether these tax payments are in line with their economic activities. This would increase the pressure on corporations to pay taxes in the countries where they actually generate their profits.

Such public reporting requirements have been in place for banks in the EU since 2013. Commodity companies from the EU and the US are also required to publish country-specific information. Even though there is still much room for improvement, first effects are visible and tax payments by the banks concerned have increased. Check out Transparency International’s updated Corporate Tax Tracker to find out more.

Due to a recent change of position by the Austrian Government, the votes in the Council of the EU have now shifted. Even with a renewed abstention by Germany, pCBCR now enjoys majority support. The corresponding draft law already exists, it is just waiting for the vote. Justice Minister Christine Lambrecht (from the centre-left SPD) has publicly spoken in favour of the law. The German Presidency of the Council (which will end at the end of December 2020) has given her the power to put the initiative on the agenda of the EU Competition Council on 19 November and thus to put it to the vote. We now need Minister Lambrecht to deliver.

Since the 1970s, civil society has been campaigning to establish an effective pCBCR. Influential companies and lobbyists have been able to prevent this, most notably the auditing firms Deloitte, Ernst & Young, KPMG, and PwC. Meanwhile, German corporate interests have been lobbying against the proposal. The Stiftung Familienunternehmen represents around 500 companies, nearly all of them big multinationals (including Haribo, Schwarz, and Henkel) and has called the EU proposal an “attack on the German economy”. Another big business lobby group Die Familienunternehmer has called the proposal “damaging” and “unspeakable”. This is ridiculous corporate hyperbole!

At the EU level, the last attempt to implement pCBCR was in 2019. However, there was no majority in favour – partly because the German Ministry of Economics blocked the approval.

Tainted love: corporate lobbying and the upcoming German EU Presidency. Corporate Europe Observatory and LobbyControl. June 2020.

State of play briefing on public Country by Country Reporting. Eurodad. January 2020.

Corporate Tax Tracker. Transparency International EU. October 2020.

Accounting for influence: how the Big Four are embedded in EU policy-making on tax avoidance. Corporate Europe Observatory. July 2018.