…and how EU Member States help

923 million euro – that is the amount of tax which German chemical company BASF avoided paying between 2010 and 2014. A new report by the European Green Party has recently shed light on this practice.

BASF is best known for its chemical products – while its tax dodges, on the other hand, are less well known. We lift the lid for the first time on how megacorporation BASF is secreting millions through loopholes in European tax systems.

What BASF actually does

The chemicals giant generates over 70.4 billion euro in sales revenues, employs 112,000 people, runs production sites in over 80 countries and has more than 570 business units. BASF makes products for all conceivable sectors of industry, from pharmaceutical products, building materials, plastics, oil and automotive technology right through to food products. The “Crop Protection” division of BASF, which makes pesticides, earned sales revenue of 5.8 billion euro in 2016, making the corporation one of the “Big 6” in the world agribusiness rankings. BASF is also a major player in the oil and gas industry and has production facilities all over the world.

The large multinational also knows how to bring its international structures to bear when it comes to tax avoidance. BASF transfers profits through its various subsidiaries to countries which offer tax breaks to corporate groups and which make special tax exemption arrangements for them. This is how it works:
The complicated group structure of BASF

Every BASF company belongs to “BASF SE”, the largest operating company in the group. It is based in Germany and is an enormous administrative construct. BASF SE is the (direct or indirect) owner of BASF shareholdings in 251 fully consolidated and 32 partly consolidated subsidiaries, seven joint ventures and more than 200 affiliated enterprises.

We have taken a closer look at BASF tax structures in Belgium, Malta, the Netherlands and Switzerland:

The company employs a series of tax dodges in the Netherlands. For example, BASF has set up a dense network of holding companies which get dividends from subsidiaries all over the world and enjoy 100% tax exemption in the Netherlands. The taxes avoided in this way amount to 73.3 million euro.

BASF uses its subsidiaries in low-tax countries to move profits around. Profits are moved through Dutch subsidiaries to Puerto Rico (at a tax rate of 2.4 per cent) and to Switzerland. Estimated tax avoidance: 375.6 million euro.
In Belgium BASF employs the “deduction of fictitious interest” arrangement in order to avoid taxes. This regulation allows companies to deduct purely hypothetical interest payments which a company would theoretically have to make if liabilities accrued. A company can therefore make large deductions even if no interest accrues in reality. BASF has saved 202 million euro in taxes in the last five years through these fictitious discounts.

How tax shifting works

International corporations like BASF are increasingly decentralising and basing their organisation on the strategy of “transfer pricing” whereby the subsidiaries of a large corporation set their internal prices themselves as if they were completely autonomous. Multinationals can take advantage of these transfer pricing arrangements to treat their subsidiaries as independent market players, leaving them entirely free to decide in which countries they want to pay tax on their profits – if at all.

In practice there is no projection of real costs – the corporations simply let the highest amounts accrue where the taxes are lowest. Multinationals then set up subsidiaries in high-tax countries and assign them only minor functions so that they only turn in modest profits. At the same time they transfer large income streams (often in the form of licence fees or loan interest) to subsidiaries in low-tax countries.

Lobbying against fair corporation taxes

BASF also exerts its influence in the political arena, where the group is outspoken in its opposition of reforms calling for greater public transparency of multinationals, and active in its lobbying against the changes. This year BASF voiced its opposition in the German Bundestag to the proposal put forward by the European Commission to disclose the tax figures of international concerns. The intention behind the disclosure is to show clearly how high the profits were in the various countries and how these were taxed (country-by-country reporting). BASF promptly maintained that the publication of these tax figures would not be in the public interest. Not content with this objection, BASF also baulked at the idea of tax decisions and price agreements having to be exchanged between national tax authorities. The agreement of the tax authorities is seen as a major milestone in curbing tax competition within Europe.

Conclusions

Multinationals need to disclose information in all the countries in which they operate so that they also pay taxes in the actual places where they make a profit. Otherwise corporations can continue to siphon off profits into remaining tax havens through contrived constructs.
Subsidiaries of multinationals are not an incoherent collection of independent units – they are closely associated organisations and must be treated as such.
We have a common market in Europe but we do not share a single European fiscal policy and, as long as this system prevails, multinationals will take advantage of different tax systems. At the end of the day, only root-and-branch reforms in conjunction with a single minimum tax rate for corporations in the EU can put a stop to the aggressive tax competition.

Ireland and Apple, Fiat and Luxembourg, IKEA and the Netherlands – all these Member States have benefited from the fact that large corporations are located there, and have even launched offensives to advertise their advantages. This is the backdrop against which they then block decisions in the European Council which could put paid to such tax evasion practices. This is why a proposal for a single EU business tax has been stuck in the Council for the last five years – but the most recent tax scandals have prompted the Commission to reopen the debate. This report is intended as a contribution to the debate.

Read the full report here

Posted by Michel Reimon