Researcher Martijn Nouwen: "Industry is creative, but finance ministers are often even more creative."

Researcher Martijn Nouwen: "Industry is creative, but finance ministers are often even more creative."

Foto: Andreas Chudowski / DER SPIEGEL

European Tax Havens The EU’s Decades of Tax Trick Tolerance

Many EU member states use low tax rates to attract large corporations, depriving countries like Germany of billions in revenues. A trove of hundreds of classified documents now reveals for the first time how Europe is failing in the fight against harmful tax competition.

Sun, sand and palm trees are things most people associate with a "wonderful holiday," Olaf Scholz said in a video clip posted in mid-May. But others, he said, were escaping their tax liabilities in those same places. And that, added the German finance minister, a member of the center-left Social Democratic Party (SPD), is "not OK."

In another promotional video, the man who is widely expected to become Germany’s next chancellor says that is why he has already taken steps to confront the problem. He has pushed through a minimum tax rate on corporations, he says in the video, campaigned for a levy on tech giants and launched a "tax haven defense bill."

Reality, though, isn’t quite that simple: In the past, when the European Union has sought to move toward plugging tax loopholes and preventing tax avoidance, Scholz and his team have often appeared to be pumping the brakes rather than energetically championing change.

This is shown in thousands of confidential documents that DER SPIEGEL has received and shared with its partners at the journalism consortium European Investigative Collaborations (EIC) and the Swedish newspaper Dagens Nyheter. The analysis reveals for the first time how a tight-lipped body, within which EU member states tries to monitor the devastating tax race in Europe in strict secrecy, has largely failed.

The Code of Conduct Group – a panel of the Council of the European Union that includes representatives from the European Commission and the member states – has frequently stood idly by in the face of activities by large corporations and the super rich. Because some member states lure such corporations with rock-bottom tax rates, other countries lose out on tens of billions of euros in tax revenues each year – at the expense of the citizens in those respective countries.

The damage is immense. A study by the Organization for Economic Cooperation and Development (OECD) found that the tax authorities of countries around the world lose out on revenues of between $100 billion and $240 billion each year owing to the tax tricks of corporations that operate internationally. In the EU, that figure is at least 160 billion euros. And it is rising, according to an as-yet-unpublished study by the European Tax Observatory, led by the economist Gabriel Zucman of the University of California at Berkeley. While companies are contributing less and less to EU tax revenues, the analysis finds, questionable deals with corporations have become "an established practice in many member states."

I. The Digger

Martijn Nouwen was still studying tax law at the University of Amsterdam when he first heard about the mysterious body with an even stranger name: the Code of Conduct Group. A confidential EU panel drafting criteria for highly controversial corporate taxation in Europe? One that is supposed to ensure fair competition between the EU member states? "I really wanted to know,” says Nouwen, "who sits on the group, how it works and what it does."

The researcher chose the topic for his doctoral dissertation, marking the start of years of detective work. He got in touch with the Dutch Finance Ministry, the Council of the European Union, and the European Commission, the EU’s executive. Initially, he was met with ironclad silence. But then, with the help of EU transparency laws, he managed to gather more than 2,500 internal documents from the panel.

Before that, many of the group’s documents had never been seen by outsiders. The European Parliament even had to set up a special committee in order to access some of its documents – in a bunker-like reading room that members of parliament were only allowed to enter without a mobile phone.

This makes Nouwen's treasure trove of data all the more explosive: It includes meeting minutes, reports and letters that make it possible to almost seamlessly trace the group’s work from its inception in the late 1990s up to 2021.

The documents show that EU-wide tax dumping is a problem the bloc has been aware of for years – and that for just as long, it has failed to do anything meaningful to stem this harmful race to the bottom.

Even as those countries that protect tax-dodging corporations – the Netherlands, Luxembourg, Cyprus and Malta, to name a few – torpedoed the body’s work wherever possible, larger EU member states like Germany, France and Italy often merely shrugged off such resistance, sometimes even encouraging it.

On the one hand, the Conduct Group has been left largely on its own to decide which of the more than 600 rules on the taxation of corporations within the EU should be permitted and which prohibited, how interest, fees or dividends should be taxed and what financial data should be exchanged between countries. The EU finance ministers, who were briefed twice a year on the decisions, for the most part rubber stamped them without any debate.

On the other hand, the group never succeeded in living up to its official claim of "eliminating any harmful measures as soon as possible," as stated in its founding charter. Another stated goal was that of preventing member states from poaching firms from other EU countries. In reality, though, that is exactly what some EU countries wanted to do – and they created one tax loophole after the other to make it possible. Rather than decreasing, the number of tax havens in the EU has grown.

"Industry is creative, but finance ministers are often even more creative when luring companies to their countries with new tax models," says Nouwen, who is now an assistant professor at Leiden University in the Netherlands. "Governments are in the driver’s seat," he says. "They could cooperate and ensure a functioning tax system, but they often do the opposite."

II. Tricks with Patents

The Dutch-American travel platform views itself as a progressive company, and its palette of offerings includes things like an app store for hoteliers and digital travel guides. The company provides "technology that takes the friction out of travel," according to its webpage.

What’s more, these technologies help in saving taxes. For years, the corporation has been channeling patent and licensing revenues through its headquarters in Amsterdam in order to benefit from Dutch tax breaks for intellectual property, to the detriment of other EU member states, whose revenues are diminished because of the lost levies.

Former German Finance Minister Wolfgang Schäuble of the center-right Christian Democratic Union, for example, was quick to rail against the clear-cut case of unfair competition. But the Code of Conduct Group, which had addressed the issue of the "patent boxes" in the Netherlands and other EU member states, never managed to get a handle on the practice. Worse yet, confidential documents obtained by DER SPIEGEL and its partners show how the panel ensured that the tax dodge soon spread across half the Continent as a kind of EU standard. In 2003, for example, it classified a similar regulation in France as "harmless."

It’s little wonder, then, that other member states understood the decision to be an invitation to follow suit. Hungary, Belgium, Luxembourg, Spain and the Netherlands took their cue to invite corporations, both foreign and domestic, to tax income from intellectual property rights in their countries at favorable rates. And as it turns out, there are quite a few things that can be defined as "intellectual property."

When the EU received anonymous complaints in 2007 about the enormous tax losses caused by the patent box schemes, the Dutch representative expressed outrage that the Code of Conduct Group even wanted to discuss the matter. He argued that taxing intellectual property at a lower rate was something the group had "repeatedly, recently and unanimously considered and approved as not harmful." As such, he said, additional debate was superfluous.

But the lost tax revenues were so considerable that the debates within the Code of Conduct Group grew increasingly heated. All you have to do is move "a few senior officers or accountants to shift half the profits" of a company, the Danish representative grumbled, according to internal meeting minutes from late March 2013. He said the group had to do something about it. But many of his counterparts felt that what was right yesterday couldn’t suddenly be wrong today.

In the end, the group was tasked with examining whether the tricks were compatible with the rules of the Organization for Economic Cooperation and Development (OECD), which represents countries of the industrialized world. The result: not a single one of the EU regulations was in compliance. The 2014 study determined that the schemes on the books in 13 member countries were primarily aimed at luring corporations to their country with the premise that they would be able to funnel vast sums of money past the tax authorities.

It was only then that the first EU governments showed a readiness to reform their systems – not because they were somehow motivated to do so on their own, but because they were no longer in line with the OECD.

III. A Downward Tax Spiral

The patent box tax structure is just one example of how countries are working against each other within the EU. The Code of Conduct Group has repeatedly sought in vain to combat other harmful regulations in the member states as well. Instead, though, various countries continued lowering their taxes and inventing new loopholes to undercut their EU partners and attract corporations.

Countries that had to abolish individual tax models under pressure from the Code of Conduct Group, for example, simply introduced generally low tax rates for corporations. Since 2015, the corporate tax rate in Hungary has fallen from 19 to 9 percent, from 34 to 25 percent in Belgium and from 38 to 28 percent in France.

The British territory Gibraltar had already reduced its corporate taxes from 22 to 10 percent back in 2011 and even made interest and royalty income completely tax free. It was only after Spain complained to the European Commission that the competition authorities put an end to the practice by way of proceedings for illegal state aid.

The Channel Islands of Jersey and the Isle of Man, both represented by Britain in the group, even lowered their corporate taxes to zero percent across the board, and then exempted certain industries from that zero percent rate. It would be interesting to find out which companies were provided with the zero-tax provision, the Spanish government noted to the Code of Conduct Group, before then speculating that it probably only applied to foreign companies seeking tax benefits.

Britain and some other member states argued that the Code of Conduct Group wasn’t responsible for this type of taxation, although the majority didn’t see it that way. The conflict dragged on for almost two and a half years until finance ministers met to stop the shady dealings in the Isle of Man and Jersey.

When the tax sinners get caught, though, they are often quick to invent new loopholes. And the fact that EU member states each have their own tax systems is helpful in this respect.

One popular instrument are tax rulings. They allow a country’s authorities to tell select companies how much tax they can expect to pay. Given the confidentiality of these agreements (also referred to as "tax rulings"), countries can, for example, give preferential treatment to international corporations without EU regulators ever catching a whiff of it. Companies like Ikea, Amazon and Google, for example, enjoyed extremely low tax rates for years.

But then came the "Luxembourg Leaks." In late 2014, hundreds of documents containing tens of thousands of pages focusing on tax rulings were leaked to the media, sparking a major scandal. However, internal meeting minutes show that the Code of Conduct Group had already been aware of the problem years before the revelations. There was nothing new about it at all.

As far back as 2003, the Code of Conduct Group criticized the practices of several EU countries and agreed that, in the future, member states would be obligated to automatically exchange information about cross-border tax rulings. That would make it more difficult for companies to play off the different tax systems within the EU against each other.

For years, though, that exchange of information was rudimentary at best. As recently as 2015, 10 countries, including Germany, hadn’t even begun to introduce the implementation model that had been adopted two years earlier.

Only at the end of 2015, in the face of public pressure following the "Luxembourg Leaks" scandal, did EU countries finally agree to codify the exchange of information. The adoption of the directive was "a top priority for the Luxembourg (EU) presidency," the country’s finance minister, Pierre Gramegna, announced at the time. "Europe is now sending a strong signal for greater equity in taxation of businesses worldwide."

Despite the lip service, Luxembourg then proved to be quite creative itself in coming up with a new trick: Companies could now write to Gramegna’s authorities so-called "information letters" about planned tax models. If the authorities didn't voice any concerns, then it was very difficult to punish the companies later. Once again, neither the EU nor other member states had any inkling about what was happening.

Meanwhile, German Finance Minister Olaf Scholz’s staff wasn’t doing much better. Last year, Brussels wanted to know if Germany was, in fact, actually disclosing tax agreements between its tax offices and corporations as other EU countries were doing. But Scholz’s emissary found even just the question to be in bad taste. "Generally, rulings are not made public," the official said. Furthermore, they are "subject to tax secrecy."

Participant Olaf Scholz at the G-20 summit in October in Rome

Participant Olaf Scholz at the G-20 summit in October in Rome


Oliver Weiken / dpa

Scholz may have sought to portray himself in recent months as a leader in the fight for greater tax transparency, but when it comes to his actual policies, he and the ministry he represents have been blocking exactly that kind of transparency in Europe, just as his predecessor Schäuble had done.

Apparently with the aim of making sure the gifts to large corporations wouldn’t be noticed by German voters or upset them, Scholz’s experts insisted on strict secrecy. They said that information about tax rulings should only be exchanged among the tax authorities of the member states and should not be made public. The German government even refused to have them published if they were anonymized. In justifying its position, the German Finance Ministry told its EU partners that it was the responsibility of the individual German states to draft such documentation.

It is unlikely that the race for ever-lower corporate tax rates in Europe and the world will end anytime soon. Although leaders of the G-20 countries gave the green light for a global minimum corporate tax of 15 percent at the summit in Rome at the end of October, the race for lower taxes will almost certainly continue down to that level.

Between 1990 and 2018, corporate tax rates in rich countries fell from an average of 38 percent to less than 23 percent, according to figures from the International Monetary Fund. The minimum tax rate of 15 percent now planned leaves plenty of room for further reductions, especially given that it is extremely unlikely that the spiral will stop there.

Various exceptions will make it possible to reduce the rate even lower, criticizes Tove Ryding of Eurodad, a network of 60 civil society organizations. "Corporate taxes are now unlikely to go to zero globally, as we had previously feared," Ryding says. "But we will likely get a race to the minimum, which will end up somewhere between zero and 15 percent."

IV. Blockading Policies

Once each year, the Frankfurt based consultancy PricewaterhouseCoopers (PwC), together with the World Bank, publishes a study called "Paying Taxes" that is widely read in the finance departments of large corporations. It might be more accurate to call it "Don’t Pay Taxes,” though, because the countries that fare best in the report are those with low tax rates and lots of loopholes – places like the Netherlands.

The country has an "excellent fiscal climate," PwC swoons in a country report. The Netherlands only moderately taxes profits compared to other EU countries. More importantly, corporations are able to agree on "the treatment of certain operations or transactions in advance" with the authorities. In that way, the consulting firm writes, many disputes can be resolved in a "cooperative manner."

The country fought hard to earn such accolades, often working together with Belgium, as confidential Code of Conduct Group documents show. Working arm in arm, the governments of the Netherlands and Belgium have defended their model of "informal capital taxation" within Europe for almost two decades.

The model gives Dutch or Belgian subsidiaries of multinational corporations the right to include in their tax returns deductions for cross-border payments that do not appear in their official annual reports.

Using this ploy, corporations can sometimes cut their tax bill in the country in which they are headquartered by up to 90 percent. Indeed, the model transformed the Netherlands into one of the world’s most popular holding locations. More than one-third of global foreign investments flow through the accounts of the country's estimated 15,000 shell companies.

It’s hardly a surprise, then, that other EU member states began targeting Dutch tax-dumping practices back in the late 1990s. The Code of Conduct Group was tasked with developing proposals for doing so, but the two tax havens on the North Sea managed to put the brakes on the committee through a mixture of defiance and stalling tactics that persist to this day.

Classified documents from the Conduct Group in Brussels: Most EU finance ministers are enthusiastic about the body's work.

Classified documents from the Conduct Group in Brussels: Most EU finance ministers are enthusiastic about the body's work.

The dispute went on for four years. Then the pressure became so great that the two countries started to give in, but only a little. Although, they still refused to budge on the crucial issue: Would they also be willing to report the tax benefits to the corporations’ home countries so that the tax authorities there could claim more taxes? They promised to do so, but didn't really mean it.

Belgium and the Netherlands made it clear that they would not be prepared to release the requested information until all other countries did the same. But because EU member states were unable to agree on an effective procedure for the exchange of information, the loophole remained.

As the two countries bickered with the EU over their special tax savings model, they also began developing other offerings to attract corporations to their countries.

The Netherlands lowered the rate for a large share of companies, and Belgium introduced a system that allows multinationals to artificially reduce profits. To promote the new model, the country’s economic development agencies touted that "only in Belgium" could you find such a benefit.

This time, the European Commission moved quickly to open infringement proceedings against Belgium for violating state aid regulations. But the EU is still litigating against Belgium in the European courts, with no end in sight.

Belgium and the Netherlands also offer other tax avoidance tricks in the form of shell companies, dividend payments and subsidiaries. In the end, multibillion-euro corporations hardly pay any taxes at all – and the EU does virtually nothing to stop that.

Interestingly, when it comes to non-member states, the EU is less squeamish. One of its most effective means of exerting pressure is the blacklist of tax havens. The secretive panel is responsible for deciding which countries should be included.

The list had long been used as a threat, even before its official introduction in 2017 in response to "Luxembourg Leaks." Memories are still fresh today of how then-German Finance Minister Peer Steinbrück threatened in 2009 to "unleash the cavalry" on Switzerland – in other words, to blacklist the country as a tax haven.

The Swiss were apoplectic, but they ultimately caved in, relaxing their banking secrecy regulations and agreeing to follow OECD standards.

In another example, Liechtenstein, where investors enjoyed generous tax allowances on dividends, was also targeted. The Code of Conduct Group issued the principality an ultimatum: Either abolish the scheme or wind up on the blacklist, as Fabrizia Lapecorella, the then head of the Code of Conduct Group, made clear in a letter to the Liechtenstein tax authority in October 2017.

The same threatening letter from Lapecorella was sent verbatim to more than 60 other countries around the world. Most implemented the group’s demands or were able to successfully justify their models. As a result, only 17 countries or territories appeared on the first blacklist, which was agreed to in December 2017. The current version lists nine entities, all of them small countries like Palau (18,000 inhabitants) or Panama (4.3 million inhabitants).

No countries that are important to the EU are on the list. Turkey, for example, has been asked by the EU on several occasions to make its tax practices more transparent. So far, though, Ankara has allowed every deadline to pass without action, most recently at the end of 2020. Nevertheless, Turkey has never been included on the list, in part because the German government has reportedly exerted pressure on Brussels not to do so. It is said that Turkey’s role in keeping migrants out of the EU is more important to Berlin than Ankara’s correct behavior on tax issues.

The situation is similar with the United States, which, according to internal EU documents, should be placed on the blacklist because of tax havens like the state of Delaware. But this autumn, the EU quietly gave up. Lyudmila Petkova of Bulgaria, the current head of the Code of Conduct Group, agreed with the U.S. Treasury Department that an exchange of tax data that has existed since 1988 is sufficient, according to an internal memo.

The real reason, though, is more likely to be that the EU narrowly avoided a trade war with the U.S. in summer 2018. Had Europe gone after the U.S. for tax havens right afterward, then-President Donald Trump probably would have seen it as a declaration of war.

V. Mutually Assured Destruction

Those close to the Code of Conduct Group generally consider its work to have been successful. Most EU finance ministers are enthusiastic, with some noting that the OECD is even envious of the body.

Even just the moral pressure the group exerts on the countries it represents, they say, has achieved a lot. They also insist that its secrecy is paramount. If the positions of the individual member states were made public, "they would no longer negotiate with each other at all," says one insider.

But Sven Giegold, a member of the European Parliament with the Green Party, has a rather different view. "The Code of Conduct Group hasn’t had an impact on anything of relevance in almost 20 years," he says.

And yet the European Commission does have a weapon in its arsenal that it could use to put a quick stop to all the undercutting: Article 116 of the Treaty on the Functioning of the EU is also known as the "nuclear bomb" around Brussels. In the event of distortions of competition, the article allows the Commission to have the necessary directives issued to force member states into making concessions.

But much like real nuclear weapons, collateral damage would be massive. The countries against whom those directives were issued could then retaliate in other areas where unanimity is required – areas like foreign and security policy – and paralyze the EU.

Against that backdrop, the situation among the EU member states resembles the balance of power and nuclear deterrence back in the Cold War days. The fact that the use of nuclear weapons would have resulted in mutual annihilation meant that nuclear missiles never left their silos.

European MP Giegold says he doesn’t believe there is majority support among the member states for invoking Article 116, anyway. "Not a single one of the finance ministers has ever said: This is no longer acceptable." Nor has Olaf Scholz, who has served as Germany’s finance minister since March 2018.

"I would like to have seen him take a tougher stance on money laundering and tax competition," says Giegold, who is one of the representatives of the Green Party negotiating what is expected to become Germany’s next coalition government. "But taxing mobile capital apparently isn’t important enough to him or others in the EU to enter into a serious conflict."

The result, argues Giegold, is that within the Code of Conduct Group, problems "go unsolved as soon as they become economically relevant."

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