The Bahamas has been listed as one of 17 “tax haven” jurisdictions where the most profitable European banks are booking close to $24 million in profits.
The Bahamas, Cayman Islands and the British Virgin Islands were the only Caribbean jurisdictions highlighted by the report released yesterday by the EU Tax Observatory – an independent body funded in part by the European Union – along with Bermuda, Guernsey, Gibraltar, Hong Kong, Ireland, Isle of Man, Jersey, Kuwait, Luxembourg, Macao, Malta, Mauritius, Panama, and Qatar.
The study tracked the level and evolution of the profits booked by 36 systemic European banks in tax havens over the 2014-2020 period and found that despite the introduction of mandatory information disclosure through country-by-country reporting, bank profitability in the 17 jurisdictions was abnormally high.
“Methodologically, the identification of countries in the tax haven list relies on two parameters. Firstly, we calculate an indicator for low activities in proportion to profits, using country-specific profit per employee. This captures jurisdictions with low substantial activities in proportion to their profits. Secondly, we use country-specific effective tax rates, measuring the tax rate applied on profits,” the EU Tax Observatory report stated.
“Jurisdictions are categorized as tax havens based on the combination of the two parameters in an inversely proportional relationship. More specifically, the higher the profit per employee and the lower the effective tax rate, the higher the chance of a country being on the tax haven list. These countries exhibit a higher chance of being used by banks as a means of avoiding taxation, rather than having real production activities in the country.”
The study found that on average, bank profits in “tax haven” jurisdictions were around EUR 238,000 per employee, as opposed to around EUR 65,000 in non-haven countries.
“This suggests that the profits booked in tax havens are primarily shifted out of other countries where service production occurs,” the report read.
“Around 25 percent of the profits made by the European banks in our sample are booked in countries with an effective tax rate lower than 15 percent.”
The report comes as The Bahamas works toward implementing a global minimum corporate income tax.
In July, the government agreed in principle to adopt the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (IF) two-pillar solution to address the tax challenges arising from the digitalization of the economy.
It is anticipated that jurisdictions would have adopted pillar two within their legislative frameworks by the end of 2023.
Although the agreed tax rate is a minimum of 15 percent, the EU Tax Observatory suggested at least a rate of 25 percent.
“Our findings show that a minimum tax has significant revenue potential. With a 25 percent minimum tax rate, our sample of European banks would have to pay EUR 10-13 billion in additional taxes annually. Lower tax rates reduce the gains to EUR 6-9 billion for the 21 percent tax rate and EUR 3-5 billion for the 15 percent tax rate. Banks with low effective tax rates—which tend to make use of tax havens to shift profits and lower their tax liability—would be particularly affected,” the report read.
“Our findings illustrate the usefulness of country-by-country reporting, a vital piece of information to track profit shifting and corporate tax avoidance. They also suggest that despite the growing salience of these issues in the public debate and in the policy world, European banks have not significantly curtailed their use of tax havens since 2014. More ambitious initiatives—such as a global minimum tax with a 25 percent rate— may be necessary to curb the use of tax havens by the banking sector.”