Corporate Tricks: EU Faces Tough Battle to Close Tax Loopholes

May 23rd, 2013

Published on Spiegel Online International, by Christoph Pauly and Christoph Schult, May 21, 2013 (Translated from the German by Christopher Sultan).

Wealthy businesspeople shift millions of euros abroad while profitable companies use accounting tricks to minimize their taxable earnings and assets. The EU finally wants to create effective policies to curb these practices, but faces strong opposition from member states.   

BASF, the world’s largest chemical group, is primarily known for its paints, state-of-the-art plastics and perhaps its natural gas dealings with Russia. The down-to-earth managers at the company’s headquarters in Germany’s Palatinate region have occasionally criticized the greedy banking sector, but otherwise have quietly gone about their business of generating billions in profits. But innovation isn’t the only source of BASF’s profitability.

The chemical group, based in Ludwigshafen in southwestern Germany, has a large tax department, whose work consists partly in moving money around between continents. But now the company has discovered a tax haven right at home in Europe … //

… Profitable Tax Carousel: … //

… 1 Trillion Euros Lost Through Tax Evasion and Avoidance: … //

… German Firms Dive Into Belgian Loophole:

Companies are predictably keen to exploit that loophole. In 2011, pharmaceutical company Bayer, based in Leverkusen near Cologne, doubled the equity capital of its Belgian subsidiary, bringing it to more than €8 billion. The effort paid off. According to a figure released by the Belgian central bank, the Bayer subsidiary paid only €10.8 million in taxes on pre-tax profit of €254.8 million.

The pharmaceutical giant managed to bring down its tax rate to 4.25 percent. Even the company admits: “Bayer, like other companies, takes advantage of the favorable macroeconomic climate in Belgium created by the withdrawal of risk capital.”

Other flagship German companies, like Henkel, Südzucker and fertilizer manufacturer K+S use different options to cash in their profits in Belgium while paying minimal taxes.

But BASF remains the champion among German companies using Belgium to save on taxes. The chemical group furnished its coordination center in Antwerp with €14 billion in capital so that it could fund international corporate activities in the United States, for example. The purpose of the detour through Belgium is that the country allows companies to declare high, fictitious interest payments.

In 2011, the coordination center was able to transfer a large dividend of €116 million to the BASF Antwerp subsidiary. Under Belgian law, 94% of that dividend is now tax-free. And the €488 million in profits earned by the Belgian BASF subsidiary through the sale of a subsidiary remain completely tax-free.

Although the company confirms all of these figures, it also cites its own calculation, stating: “If we eliminate the tax-free dividend and the capital gain, the €455 million in remaining profits on BASF Antwerpen’s operational business in 2011 are taxed at more than 30 percent.” What this really means is that once all possible deductions are taken into account, the tax rate is perfectly normal.

“Big companies are engaging in international tax-hopping,” says Belgian author Marco van Hees, who has written several books on the subject.

The Netherlands is also especially popular among German companies. The system there works like this: A company’s main office establishes a Dutch offshore company. The main office then pays the Dutch company license fees, which are tax-exempt in the Netherlands. In this manner, the parent company reduces its profits in its home country and pays fewer taxes.

The Netherlands’ attractions for foreign capital are reflected in the level of direct investment. In late 2012, the kingdom posted, according to Organization for Economic Cooperation and Development (OECD) figures, $3.5 trillion in foreign investments, of which only $573 billion flowed into the real economy, while the rest went to shell companies. There are an estimated 23,000 of these firms in the Netherlands.

BASF has five production facilities, with more than 1,000 employees, and 21 holding companies in the Netherlands, many of which have no staff. According to BASF, the holding companies manage its international holdings. Volkswagen, too, isn’t just in the Netherlands to sell cars.

Resistance to Tax Harmonization: … //

… (full text).

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