European banks storing €20bn a year in tax havens

Barclays and HSBC among banks booking money equivalent to 14% of annual profits in offshore entities

Leading European banks are booking around €20bn (£17bn) a year – equivalent to 14% of their total profits – in tax havens, with Barclays, HSBC and NatWest Group among those enjoying the lowest tax rates, according to a new report.

The figures emerge from an analysis, conducted by the EU Tax Observatory, of 36 big banks required to publicly report country-by-country data on their activities.

Banks said to enjoy a particularly low effective tax rate on their profits, of less than 15%, include Barclays, HSBC and NatWest – which changed its name from Royal Bank of Scotland last year. The effective tax rate is calculated as the ratio between aggregated tax paid and profit posted, across all jurisdictions.

A spokesperson for HSBC said the bank did “not employ tax avoidance strategies, including those designed to artificially divert profits to low-tax jurisdictions”.

A spokesperson for Barclays said the bank was the fifth-largest UK taxpayer and paid taxes across the jurisdictions in which it operated.

NatWest did not respond to a request for comment.

The claims will nevertheless further fuel those arguing that leading countries must be more ambitious in cracking down on aggressive tax avoidance and profit shifting to low-tax jurisdictions by multinationals.

The use of tax havens by banks is seen by many activists as particularly egregious since more than €1.5tn in taxpayer money was used to rescue ailing banks in Europe after the 2008 financial crisis.

After talks organised by the Paris-based Organisation for Economic Co-operation and Development (OECD), 130 countries, representing more than 90% of global GDP, backed a global minimum tax rate on multinationals of 15% last July, after an initial attempt by US president Joe Biden to secure agreement on a 21% rate.

Parallel measures to limit the shifting of profits into tax havens by the world’s 100 largest companies were proposed by Biden and are now under discussion at the OECD.

The proposed treaty would give governments in the countries where multinationals are headquartered the right to apply a top-up levy to ensure the full global minimum rate is paid on all income.

However, reports suggest the list of 100 companies is likely to exclude banks after lobbying by the City of London and other international finance centres.

The EU Tax Observatory, an independent research group, has highlighted the benefits of taxing the profits of multinationals at a higher 25% global minimum tax rate – the lowest current rate within the seven largest world economies.

The organisation’s report suggests that with such a tax rate, the sample of European banks chosen in the report would have to pay €10bn to €13bn in additional taxes annually. Lower tax rates reduce the gains to €6bn to €9bn at a 21% tax rate and between €3bn and €5bn at the 15% rate.

Reflecting their size, the report suggests HSBC, Barclays, the French multinationals BNP Paribas and Société Générale, and Standard Chartered, have the largest collectible tax deficits – the difference between tax paid today and that which would be collectible.

The EU Tax Observatory’s research further suggests the UK exchequer would be the biggest beneficiary if any global minimum tax rate were enforced on Europe’s banks, in part due to the size of the banks headquartered in that country.

Under a 15% tax rate, the UK would have collected an extra €940m a year in 2020 and €1.47bn in 2019.

“We find that most tax revenues with a minimum tax will originate from British banks,” write the authors of the report, Have European Banks Left Tax Havens? Evidence from Country by Country Data.

Tax systems around the world have been increasingly left behind in recent years by the shifting of profits by large multinationals. Tax abuse by multinationals and avoidance by rich individuals is said by the Tax Justice Network campaign group to cost nations $427bn a year in lost revenues.

According to the EU Tax Observatory’s report, the profits booked by banks in tax havens are abnormally high. About €238,000 profit per employee is posted by the banks in havens, as opposed to €65,000 in non-haven countries.

Even though the banks book 14% of their profits in tax havens, the percentage of staff employed in them is only 4%.

To the disappointment of policymakers and activists, the percentage of profits booked in tax havens has not changed over the last seven years despite hopes that country-by-country reporting introduced in 2014 would lead to a shift in practice.

Eight banks have even increased the percentage of their profits booked in tax havens during this period: ​​Monte dei Paschi di Siena (up 19.4%), Intesa Sanpaolo (up 12.2%), HSBC (up 7.9%), Barclays (up 4.3%), Nordea (up 2.1%), BBVA, (up 1%), Banco Santander (up 0.8%) and Rabobank (up 0.7%). In the case of NatWest and Intesa Sanpaolo, losses in non-haven markets are said to have driven the change.

The behaviour of the banks studied varies, however. The mean percentage of profits booked in tax havens is about 20% but the figure ranges from 0% in the case of nine of the banks to 58% by HSBC.

The figure is high because of HSBC’s strong ties to Hong Kong, which for the purposes of the study was counted as a tax haven.

As one of the largest banks in the world, HSBC accounts for 10% of turnover, profits, and employees within the 36 banks studied. The report claims that its profits attract the lowest mean effective tax rates (13%).

HSBC books almost 60% of its overall profits in Hong Kong, with an effective tax rate of 11%. This is despite the percentage of staff in Hong Kong (15% of the total) being strikingly lower than the profits recorded.

In contrast, China accounts for an average of 13% of the total number of HSBC employees but just 6% of total profits while India accounts for 19% of employees and 5% of total profits.

“One of the possible explanations is that Hong Kong is characterised by a favourable tax system and is often used as an investment hub to route investments in Asia, especially from China,” the report’s authors write.

The bank’s spokesperson said: “Given HSBC’s history, size of operations and strategy, a significant proportion of the group’s profits continue to arise in Hong Kong, where we are the biggest bank and have [circa] 30,000 employees.”

The research names 17 countries and territories as havens for the purposes of the study: Bahamas, Bermuda, the British Virgin Islands, Cayman Islands, Guernsey, Gibraltar, Hong Kong, Ireland, Isle of Man, Jersey, Kuwait, Luxembourg, Macao, Malta, Mauritius, Panama, and Qatar.

Of those territories, the highest tax rate is found in Luxembourg (15%), while Bermuda, Panama, the British Virgin Islands and the Cayman Islands have a zero rate.

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