Bailout? Tax experts publish 5-step test for Covid19 business bailouts

By Mark Bou Mansour: Following bans from Denmark, Poland and Argentina on companies registered in tax havens from receiving Covid19 bailouts, the Tax Justice Network has published a “bail or bailout” test to clarify uncertainty on how governments can determine which companies are discreetly using tax havens to pay less tax. The test is designed to prevent tax payer’s money from ending up in corporate tax havens and to ensure tax transparency from bailout recipients into the future.

The “bail or bailout” test consists of five checks:

1. Does the corporate group have one or more subsidiaries in one of the top 10 ranking jurisdictions on the Financial Secrecy Index or the Corporate Tax Haven Index?If so, the corporate group must publish full country by country reporting by the end of 2020 in line with the Global Reporting Initiative’s standard to demonstrate presence in the jurisdiction is for legitimate business activity and not for the purpose of reducing tax obligations elsewhere. Otherwise, the corporate group should be disqualified from receiving a bailout. If not, policymakers can proceed to the second check.

   The Tax Justice Network has urged governments to rely on the Financial Secrecy Index and the Corporate Tax Haven Index instead of national or regional tax haven lists like the EU’s non-cooperative blacklist as the latter have repeatedly proven to be too political and weak to be effective in tackling tax abuse. All iterations of the EU’s blacklist since the first list in 2017 have never covered as much as 10 per cent of the world’s financial secrecy services.

2. Has the corporate group participated in any financial scandals or tax scandals such as the LuxLeaks, Cum-ex or been judged to have received illegal state aid? 

   If so, the corporate group should be disqualified from receiving a bailout.

3. Has the corporate group published online its most recent accounts for all legal entities in the group, including full country by country reporting in line with the Global Reporting Initiative’s standard? 

   If not, governments must make it a condition for bailout recipients to do so by the end of 2020. If the condition is unmet by the deadline, the bailout money should be returned.

4. Has the corporate group published information on who the beneficial owners and legal owners are of all its legal vehicles and the complete corporate structure of the group? 

   If not, governments must make it a condition for bailout recipients to do so by the end of 2020. If the condition is unmet by the deadline, the bailout money should be returned.

5. Has the corporate group committed to employee protection and to no shareholder extraction until rescue loans have been paid back in full and corporate group has returned to profitability or become insolvent? 

   If not, the corporate group should be disqualified from receiving a bailout. Bailed out companies, at the very least, must commit to not firing employees that need to be self-quarantined or hospitalised and to pay all staff a living wage at minimum until full repayment of bailout funds or insolvency of the company. Bailed out companies must not distribute any dividends, buying back their own share capital and converting other shareholder equity reserves, such as share premiums, into bonuses for shareholders until the company has paid back in full its rescue loans and returned to profitability.

 

Pressure on the government to tackle the risks corporate tax havens pose to efforts to tackle the Covid-19 pandemic has been growing following recent revelations that the Netherlands has cost EU countries $10 billion in lost corporate tax from US firms. The revelations were published in a report by the Tax Justice Network analysing profits shifted by US firms into the Dutch tax haven, where corporate tax rates in practice can be under 5 per cent, in order to underreport profits elsewhere in the EU and consequently pay billions less in tax. The report found corporate tax losses to be biggest among EU countries with the highest reported cases of coronavirus: France lost over $2.7 billion in corporate tax to the Netherlands, Italy and Germany both lost over $1.5 billion each and Spain lost nearly $1 billion to the Dutch tax haven.

Alex Cobham, chief executive of the Tax Justice Network, said:

“The coronavirus pandemic has exposed the grave costs of an international tax system programmed to prioritise the interest of corporate giants over the needs of people. For years, the corporate tax havens like the British Virgin Islands, the Netherlands and Luxembourg have fuelled a race to the bottom, handing over wealth and power to the biggest corporations and taking it away from the nurses and public service workers risking their lives today to protect ours.”

“Now more than ever, countries must reprogramme their tax systems to prioritise people’s wellbeing over the interests of the wealthiest corporations. That means making sure we don’t rebuild our economies on top of a tax haven trap door. We’ve put together the “bail or bailout” test to help governments make sure taxes go towards protecting people’s jobs and wellbeing instead of rewarding tax abusers with retreats to luxury resorts.”

 

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