A New Report Shows the Largest European Banks Declare Their Profits in Zero- or Low-Tax Jurisdictions

It is no secret that high-net-worth individuals commonly use tax havens to reduce their income or corporate tax rates, frequently going as far as owning offshore real estate. A recent report shows that in addition to the companies most people think of when they consider offshore tax planning, major European banks also take advantage of these lower tax rates.

The Report

The report came from Transparency International EU and was released in late October. The report looked at 39 of the European Union’s biggest banks and analyzed where they declare profits.

The Findings

Transparency International EU found that 31 of the banks declared their profits in jurisdictions with zero taxes or low taxes. Of those, 29 used “ghost operations.” This term refers to a situation where most of the earnings are declared in an area, yet the firm has no personnel working there. In other words, these banks declare earnings somewhere with low or zero taxes despite not having a single employee there with a passport.

Some Specific Figures

HSBC is Europe’s largest bank. The report found that it reported more than $1.77 billion in profits in Saudi Arabia in the past five years. But this is a ghost operation, as there are no HSBC employees in Saudi Arabia.

Deutsche Bank has a similar issue but to a lesser degree. Within the past five years, the bank reported $494.47 million in profits in Malta. While it previously had personnel in Malta, it has not since 2016.

The analysis also found that Malta was the most popular ghost operation location in the EU. Worldwide, the Cayman Islands was the most popular. The popularity of the Cayman Islands for tax residency that lets a company or entity avoid taxes is problematic to many. This is particularly true since the EU recently removed the Cayman Islands from its tax haven blacklist.

A New Tracker

Transparency International EU also created a Corporate Tax Tracker website for individuals and organizations to review. It can be used to choose which private equity funds to use or other investments to make.

Why the Report Was Possible

The banks are unlikely to want to share this type of foundation asset management information, as it reflects poorly on them. However, they are legally required to include reporting that goes country-by-country in their annual statements. This has been a requirement since 2015. The idea is that it allows for more transparency, letting people, experts, and shareholders scrutinize the most important financial data for the countries in which the banks operate.

More Details Are Likely Hidden

In a press release, Transparency International EU stated that the discovery is likely only the beginning of tax evasion techniques and other strategies that could reduce people’s fiduciary trust in the banks. Currently, there is no transparency in other areas. Directors and managers typically prefer to hide the information to avoid scrutiny and criticism.

Elena Gaita, Transparency International EU’s senior policy officer, discussed the need for more transparency. She pointed out that the organization wants similar rules requiring reporting to apply to other economic sectors. However, some EU Member States are blocking this legislation. Gaita called on them to prioritize the economic well-being and interests of citizens instead of those of large companies. She pointed out that this is particularly important given the current economic uncertainty.

What Critics Say

Critics like Dutch European Parliament Member Paul Tang tend to have similar arguments. They argue that when banks get public support, they should not be able to avoid taxes. Tang specifically brought this up in 2008 when various countries saved their banks.

Sources:

https://www.occrp.org/en/daily/13325-most-of-europe-s-largest-banks-declare-profits-in-tax-havens

https://www.transparency.org.nz/largest-banks-declare-profits-tax-havens/

https://transparency.eu/wp-content/uploads/2020/10/murky_havens_phantom_profits.pdf

https://transparency.eu/tax-affairs-of-europes-biggest-banks/