European banks report $24 billion in offshore profits

The report singled out HSBC for its 'tax haven' profits even though most were generated in Hong Kong where the bank still employs 30,000 people.

Europe’s largest banks are booking 14% of their profits, about US$24 billion, in low-tax centres every year, according to a report by EU Tax Observatory.

The independent research lab hosted at the Paris School of Economics said based on country-by-country data reported by 36 systemic banks themselves, their presence in “tax havens” had remained stable since 2014.

The group’s report “Have European banks left tax havens? Evidence from country-by-country data” concluded that on average, annual profits in 17 “tax havens” were around EUR238,000 per employee, compared to around EUR65,000 in other European countries, “suggesting that much of the profits booked in tax havens are transferred out of other countries where services are produced”.

However, the researchers acknowledge that the data does not allow visibility on assets or deposits on a national basis, “which weakens the identification of tax planning behaviour”.

The data itself shows a vast disparity in the use of offshore financial centres by banks, ranging from 0% to 58% in terms of the share of total profits. The number of banking subsidiaries located offshore has also declined considerably since 2014.

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While eight banks increased their presence offshore, 16 had decreased their use of “tax havens” the data showed.

The report used a list of 17 tax havens derived from the banks’ effective tax rates and profitability per employee in these jurisdictions. The list includes The Bahamas, Bermuda, British Virgin Islands, the Cayman Islands, Guernsey, Gibraltar, Hong Kong, Ireland, Isle of Man, Jersey, Kuwait, Luxembourg, Macau, Malta, Mauritius, Panama and Qatar.

The vast majority of “tax haven” profits highlighted in the report are not located in zero-tax jurisdictions, which due to their small size, however, stand out in profitability- and productivity-metrics on a per employee basis.

The banks’ effective tax rate in the 17 jurisdictions is between 10% and 13%.

The report singled out seven banks that according to the researchers had an effective tax rate of less than 15%. But it found, for instance, that most of HSBC’s “tax haven profits” came from Hong Kong, where the bank still employs 30,000 people.

In response to the report, HSBC denied using tax avoidance strategies that artificially divert profits to low-tax jurisdictions.

Deutsche Bank, which was equally highlighted by the report, told CNBC that the levels of profit per employee will differ depending on the type of business activity and that its effective tax rate across the group in 2020 was 39%.

A 2021 Australian academic paper, which analysed the same data noted that the main “tax havens” used by European banks were in Europe, including Luxembourg, Ireland, Switzerland, the Netherlands and the Channel Islands, as well as Asia, in particular Hong Kong and Singapore.

Another analysis of the same data by Transparency International

shows that the presence of large European banks in Cayman has continuously declined from 12 in 2016 to only eight in 2019.

In 2019, these eight banks overall made a loss of almost EUR47 million, compared with a combined profit of EUR166 million in 2015. In total, the banks reported they employed 15 staff at two banks that year, 10 at Intesa Sanpaolo and five at Deutsche Bank. Most of the losses were reported by DZ Bank, a German bank that maintained mainly aircraft financing and leasing entities in Cayman.

In the past two decades, the number of banks in Cayman has declined from close to 400 to 110 today.

The EU Tax Observatory researchers, who receive funding from the European Union, tied their findings to calls for the implementation of a global corporate minimum tax rate. Current discussions at the OECD aim for a global minimum tax rate of 15%.

If this rate was set, the report’s authors noted, “the 11 countries hosting the parent companies of these 36 banks would recover between €3 billion and €5 billion per year, €6 billion to €9 billion if the rate was increased to 21% and up to €10 billion to €13 billion with a rate of 25%”.

The main countries that would stand to benefit are the UK and France.

The researchers argued, “The fact that European banks have not significantly reduced their use of tax havens since 2014, despite the growing importance of [tax avoidance] in the public debate and in the political world, leads to plead for the implementation of more ambitious initiatives, such as a global minimum tax at a rate of 25%.”

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