On September 6, 2021 the EU Tax Observatory published a report titled: “Have European banks left tax havens? Evidence from country-by-country data”.  In the report the EU Tax Observatory made an analysis which covers 36 systemic European banks. In the report it is stated that bank profitability in tax havens is abnormally high: EUR 238 000 per employee, as opposed to around EUR 65 000 in non-haven countries. According to the report this suggests that the profits booked in tax havens are primarily shifted out of other countries where service production occurs. According to the authors of the report around 25% of the profits made by the European banks in their sample are booked in countries with an effective tax rate lower than 15%.

Now I am not going to say that these 36 systemic European banks do not shift profits to low-taxed jurisdictions. However, my criticism on the report is that seems to be an one dimensional analysis. And by that I mean that the whole analysis is based on one criterion and that is the bank profitability per employee, which is set off against the effective tax rates in different jurisdictions. And by doing so, the report comes to the conclusions that the 36 systemic European banks use tax havens for their own benefit (to shift profits to low-tax jurisdictions and reduce their tax liabilities). And I really question whether by doing so, the report does not cut some corners to come to the conclusion which was desired by the authors?


Tax havens - Bank profitability per employee

The report uses a system on how to define which tax havens are to be taken into account. It does so by using the effective tax rates of different jurisdictions as well as the bank profitability per employee. The whole analysis is based on the assumption that there is an abnormal high bank profitability per employee in the tax havens that were identified the authors. However, what the report doesn’t mention is that there are also non-low-tax jurisdictions in which the bank profitability per employee seems to be similar to the bank profitability per employee in the identified tax havens. Based on Figure 2.3.1 on page 8 of the report the bank profitability per employee in countries like for example Norway, Sweden, New Zealand, Australia and Japan seem to be similar to those in the identified tax havens. By not mentioning this I feel the report loses a lot of its credibility



What I furthermore miss in the report is an analysis of the activities that the banks perform in different jurisdictions. And I find this a big failure, since obviously different sort activities will lead to different profits per employee. Therefore I am of the opinion that by just taking the profit per jurisdiction and dividing them by the number of employees that are employed in said jurisdiction is cutting a corner in order to come to a desired outcome.


In my opinion the activities that a bank performs in a big financial center as Hong Kong will obviously differ from the activities that a consumer bank performs in Tanzania. And the granting of a big loan to a customer might lead to a higher profit per employee than the granting of a small loan does. And an investment department of a bank might realize a different profit per employee as the consumer branch of the same bank does. And the same might be said regarding the department of a bank that renders services to the very rich.


State of digitalization of a jurisdiction

Another criteria that I miss in the analysis is whether the differences in how digitalized different jurisdictions are and the percentage of people that have access to the internet influence the bank profitability per employee. And if so, how these differences in digitalization and internet access might influence the profitability per employee.


If I for example look at the Netherlands, the banking world this has changed massively over the last twenty years. Banks have massively laid off employees because so much bank work has been automated/digitalized. Almost no payments are made in cash anymore but take place via bank cards. Many other things can nowadays be done via filing requests and documents via the internet (think for example of requesting a mortgage). Many payments take place via the internet or via apps, where in the past these payments were often made via paper documents called acceptgiro's.

On the other hand banks have had to make additional costs for putting into place anti-money laundering measures. Even within Europe there are still differences existing in how banking services are rendered (face-to-face and on paper or via the internet or apps) within the different jurisdictions.



Above I have mentioned just a few examples of criteria that I feel should have also been taken into account if one wants to come to a well-founded conclusion on whether or not banks use tax havens for shifting profits to low-taxed jurisdictions. But obviously for a profound analysis even more criteria should be taken into account. Therefore by taking only the profitability per employee into account I get the feeling that corners were cut by the authors to come to the outcome they desired.


For those interested in the report, the full report as released by the EU Tax Observatory can be found here.



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