Economists estimate that about 40% of multinational companies’ profits avoid taxation through tax havens. This would mean that the EU is losing 20% of its income from companies. Economists have previously considered the “theory of perfect competition” which states that economic players do their business activities in countries where investments are more profitable for them thanks to a better business climate. However, in an article entitled “The Missing Profits of Nations”, several economists claimed that companies’ profits are actually transferred in tax havens.
For example, Alphabet, Google’s parent company, generated a €19.2 billion turnover in Bermuda last year, although it has no activity on the island whatsoever. The tiny country has 0% tax rate on companies’ profits. Thus, the profitability of foreign businesses is the main criteria used by specialists when looking into recent statistics: in countries that are not tax havens, foreign companies are less profitable than their domestic counterparts. In contrast, foreign firms in tax havens typically have higher profitability.
In Ireland, for example, foreign firms have exceptionally high profitability. They account for 800% of total payroll on average, whereas a 30% to 40% rate would be more realistic. Overall, EU member states and developing countries are the main victims of the profitability equation: Europe is deprived of 20% of its corporate taxes. The article was published in light of the current efforts of the OECD to fight companies’ tax evasion. Experts argue that it would be more effective to put sanctions on the tax haven countries than to try to retrieve a flowing capital.