European Banks CBCR June 2015 Final

8/20/2019 European Banks CBCR June 2015 Final

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European Banks’ Country-by-Country

Reporting

A review of CRD IV data

July !"#

Ri$%ard &urp%y 'CA

(a) Resear$% **+

'or t%e ,reensE'A &E+s in t%e

European +arlia.ent


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European Banks’Country-by-Country Reporting

"/ 0u..ary

This reporti is based on the country-by-country reporting of 26 European

Union based banks, 17 of which had published the full data now required

of banks by the tie the report was prepared and nine of who had still

only published the partial data peritted in 2!1"#

The country-by-country reporting fro these banks was used to test the

hypothesis that soe or all of these banks ay ha$e been systeatically

o$er-reporting their pro%ts in low ta& 'urisdictions or places identi%able as

ta& ha$ens whilst under-reporting the in those places where they are

either based or ha$e a'or centres of operation#

The report suggests that thus hypothesis has been found to be true(

o$erstateent of pro%ts in identi%able low ta& and o)shore 'urisdictions

appears to be occurring based on the data published by the banks

sur$eyed#

The report addresses the issue of pro%t relocation in two ways# *irstly,

using the principles of unitary ta& reporting, which would apportion pro%ts

to states where they could be ta&ed at local rates +a syste akin to the

European Unions oon onsolidated orporate Ta& .ase/ based on

e$idence of real econoic acti$ity taking place in that 'urisdiction as

represented by turno$er and people eployed it was estiated for the

se$enteen banks that reported full data, using their data in aggregate

total, that it was likely that there was systeic reallocation of pro%ts, or

base erosion and pro%ts shifting as the 0rganisation for Econoic

ooperation and e$elopent describe it#

This result was $ery clear( as section 11 of this report akes clear a

re$iew of 11 'urisdictions shows potential reallocation of pro%ts

e&ceeding 31!! illion into or out of the following 'urisdictions(

&ay !"# "


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ata in red in the right hand colun indicates o$er-reporting in the

'urisdiction whilst data in black indicates under-reporting#

&ay !"#


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There can be no doubt that soe of the reported di)erences are due to

underlying econoic circustances# The 4wiss data is, for e&aple,

distorted by a 32#5 billion loss reported by . aribas in that country# U8

data is also likely to be distorted by head o9ce functions recording losses

as a result of %nes for %nancial isdeeanours charged on any U8

banks# The 4panish econoy has also, undoubtedly, had a di9cult tie#

The lesson fro the etherlands and aybe the U8 and :erany is,

howe$er, that it does not appear to pay, at least in ters of reported pro%t

and so likely potential ta& yield, to host bank headquarters# This does not,

howe$er, appear to be true of *rance, which appears to en'oy o$er-

reporting of pro%t# ;t is also not true of the U4


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d# < ethod cobining three easures of o$erall ratio di)erences in

distribution of iplied, pro%t, ta& paid and turno$er allocation within

banks to identify the degree of di$ersity of beha$iour in the

sur$eyed banks#

Each of these rankings was then cobined to produce an o$erall rankingfor the sur$eyed banks, with a rating of 1 indicating the highest risk of

base erosion and pro%ts shifting taking place, although, it is stressed, not

pro$ing that it does(

.roadly speaking the four easures o$ed in line with each other with

none at this stage, and with this liited aount of data, pro$ing to be

conclusi$ely the ost useful# Equally, it is clear that reliance on one alone

ay be insu9cient( Doyal .ank of 4cotland ay coe top o$erall but does

not in any indi$idual ranking#

.roadly speaking larger banks appear ore likely to be pro%t shifting#


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• ountry-by-country reporting data is useful, and powerfulC

• ountry-by-country reporting data can be interpreted in ways

predicted to be useful before any data was a$ailable for analysis,

and the results generated generally support anticipated outcoesC• The risk that pro%t shifting is taking place is realC• The risk that soe countries are seriously losing out in ters of

re$enue and pro%t reporting as a result appears to be high# This is

particularly true of states that host bank head o9ce locations,

*rance e&ceptedC• 4oe EU countries appear to be gaining fro ta& copetition in

ways that appear inconsistent with the le$el playing %eld required

by the internal arketC• Ta& ha$en acti$ity is signi%cant#

;n addition(

• The liited aount of data required by D ;=


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i# ata ust be reported for e$ery 'urisdiction in which a bank trades,

without e&ceptionCii# That if the e&isting irecti$e is to reain in use then it ust be

consistently interpreted across all EU 'urisdictions or the full bene%t

of disclosure will be lostCiii# Turno$er should include intra-group sales in a 'urisdiction with a

reconciling ad'ustent to reported group turno$er being pro$idedCi$# ro%t should be reported including the consequence of intra-group

transactions and be reconciled to group reported pro%tC$# Ta& should be recorded on the basis of the liability arising for the

period split between current and deferred ta& pro$isions as a liited

nuber of banks do disclose#


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This data is required to be reported by


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4oe banks +e#g# @loyds/ ha$e ade it clear that they will not publish full

data for 2!1" before being legally required to do so e$en though their

accounts for that year are now a$ailable#


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‘Increased transparency regarding the activities of

institutions, and in particular regarding prots made , taxes

paid and subsidies received, is essential for regaining the

trust of citizens of the Union in the nancial sector.

Mandatory reporting in that area can therefore be seen as an

important element of the corporate responsibility of

institutions towards stakeholders and society iii. !ighlight

added"

Unfortunately this note has resulted in soe countries, such as the

U8, requiring that the reported ta& %gure be corporation ta& paid

whilst in soe other 'urisdictions it appears that accounting data for

the reporting period is disclosed e#g# . aribas reporting under

*rench regulation disclosed current and deferred ta& pro$isions#

This, again, creates confusion( the only rele$ant requireent is the

current ta& pro$ision but soe other banks ay ha$e reported a fullpro$ision included deferred ta& liabilities# ;t is therefore stressed

that there ay be inconsistencies in the ta& data used in this report

that cannot be resol$ed# This is particularly iportant in the case of

U8 banks, at least, where the ta& data disclosed ay ha$e only little

relationship to the reported pro%t for a year#c. ;t is unclear in all cases whether the data disclosed solely reJects

third party transactions and so reconciles directly with the reported

turno$er in the %nancial stateents to which the disclosure relates

+although this does appear to be the case for any banks/ or

whether the disclosure is of local data before intra-grouptransactions are eliinated, as is, for e&aple, the case with

.arclays plc# This abiguity does, again, produce uncertainty and

reduces the $alue of the data a$ailable especially if as a result of

only third party data being reported the consequence of intra-group

transactions in which uch of the likely base erosion and pro%ts

shifting takes place is suppressed for reporting purposes#d. 4oe banks e#g# .arclays and soe 4panish banks ha$e not

disclosed data for all the 'urisdictions in which it appears that they

trade, o)ering Hunallocated data in its place#

The following suaries ust be read in the light of these data

liitations# Beans of addressing the are noted in the section of this

report aking recoendations for ipro$eent in data reporting#

3/ Approa$%es used to data analysis

Three key approaches to the data ha$e been used to seek support for the

hypothesis that base erosion and pro%ts shifting has taken place# ;t is not

suggested that these ethods are coplete or the only ones a$ailable(

they are the ore ob$ious ethods and those that were possible in the

tie a$ailable for preparation of this report#

&ay !"# 6


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These approaches are to(

a# opare the reported basis of pro%t allocation for the saple of

banks reporting coprehensi$e data with the pro%t allocation that

would ha$e arisen if pro%t had been recorded in line with theweighted a$erage of the turno$er and nuber of eployees

reported by the banks in question for the 'urisdictions in which they

operate# This approach is based on the risk assessent ethods

that the 0E suggests ta& authorities ight use to assess this

issue# .y stating the total potential reallocated pro%t as a proportion

of declared pro%ts a ranking can be produced# The ethod is based

on the principles of unitary ta&ation#

b# To %nd the 'urisdictions in which each bank reports its highest

turno$er and pro%t per eployee and to copare this with thea$erage for each for the bank in question# The ob'ect is to identify

by location where potential is-stateent ight be arising and the

potential scale of that is-stateent and to then e&press this as a

ratio and so produce a ranking#

c# To calculate the weighting of turno$er, pro%t, corporation ta& paid

and nuber of eployees reported for a 'urisdiction in proportion to

the nuber for each for the bank as a whole where$er data perits#

These weightings ha$e then been copared, as follows(

i# The di)erence between the pro%t and corporation ta&

weighting# This di)erence would show when ore or less ta&

than e&pected ight be paid in a 'urisdiction in proportion to

pro%t declared# This ight indicate success, or otherwise, in

seeking low ta& ratesC

ii# The di)erence between the turno$er and people weighting#

This ight indicate if turno$er was being arti%cially relocated

since it is assued that a/ sta) are required to anage

turno$er and b/ that in a global corporation there ight be

soe consistency in this ratio between 'urisdictions eaning

that a discrepancy in sta9ng ratios ight suggest aberrant

reporting of turno$erC

iii# The di)erence between pro%t and a cobined and equally

weighted turno$er and people eployed ratio# This ight

indicate the degree to which pro%t has been shifted fro

'urisdictions where real econoic acti$ity appears to be

occurring towards those where little such actual acti$ity

appears to be arising#

&ay !"# "!


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;n each case and for each bank data on the high and low $alue for

each of these weightings was e&tracted# These high and low $alues

were then copared to indicate the range of di$ersity within the

bank on these issues# ?here three weightings were prepared these

were thesel$es also a$eraged to gi$e an o$erall indication +and it

is stressed it is no ore/ of the likelihood that econoic substanceand the for in which transactions are reported do not coincide#

?here there was only one weighting to use that was used for

o$erall assessent purposes instead# The resulting a$eraged ratios

were then used to produce a ranking#

4/ Results "7 unitary ta)ation risk assess.ent

Using the %rst ethod noted in section 6 produced the following table

when data was ordered on the basis of the total $alue of pro%t that the risk

assessent suggested had been o$ed between locations for reporting

purposes(

ata in red suggests that there is o$er-reporting and data in black under-

reporting# >urisdictions were sorted for the purposes of this e&ercise

between ebers states and non EU eber states with the latter split

between those not on the Ta& >ustice etwork *inancial 4ecrecy ;nde& and

those which are +which includes any of the well known ta& ha$ens as

well as 4ingapore and 4witKerland/#

?hat is apparent is that there appears to be $ery consistent relocation of

pro%t fro EU states to ta& ha$ens according to this ethodology# The

e&ception is . aribas where the result is distorted by the recording of a32#5 billion loss in 4witKerland#

&ay !"# ""


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There also appears to be regular re-allocation of pro%t out of the EU to

non-ta& ha$en states according to this data#


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The country featuring ost coonly as ha$ing the a&iu incoe per

head is ;reland +7 banks, 27L of the saple/ followed by @u&ebourg +/,

the etherlands +2/, orway +2/,


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;t will be noted that soe banks had a&iu turno$er per person

eployed in a 'urisdiction little di)erent to their a$erage across the bank

as a whole# The scale of disparity at the top of the rankings is $ery high

indeed, whilst the pro%t rankings suggest that in a great any cases the

reallocated incoe has $ery little coercial substance to it# The known

ta& ha$ens of @u&ebourg and ;reland doinate the top of the list with

Balta also being known to be a signi%cant ta& ha$en for :eran

copanies# uracao and *inland are ore surprising entries#

6/ Results 17 Ratio analysis

Using the third ethod noted in section 6 produced the following table

when data was ranked in accordance with the a$erage of the data(

&ay !"# "2


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< better inde& of pro%t shifting potential ight be found by cobining

these results, which produces the following outcoe(

This is considered the o$erall ranking based on potential risk of base

erosion and pro%t shifting indicated by the a$ailable data#

""/ Country data

;n addition to yielding data on bank perforance the a$ailable data also

pro$ides inforation on those countries where it is ost likely that pro%ts

ha$e been reallocated to, and fro# This data is based solely on the

se$enteen banks for which coplete reported data is a$ailable# The data

for all countries where a reallocation of ore than 31!! illion was

suggested to arise for the saple as a whole on a unitary basis in the

basis of this data was as follows(

&ay !"# "3


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0$er the saple as a whole of soe 11 countries and 'urisdictions the

di)erence between reported and weighted pro%ts does, of course, net toKero#

&ay !"# "4


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;n this table red data in the reallocation colun suggests that there is net

o$er-reporting of incoe and black under-reporting of incoe#

There can be no doubt that soe of the reported di)erences are due to

underlying econoic circustances# The 4wiss data is distorted by a 32#5billion loss reported by . aribas in that country# U8 data is likely to be

distorted by head o9ce functions recording losses for %nancial

isdeeanours charged on any U8 banks# The 4panish econoy has,

undoubtedly, had a di9cult tie#

The lesson fro the etherlands, and aybe the U8 and :erany, is that

it does not appear to pay, at least in ters of reported pro%t and so likely

potential ta& yield, to host bank headquarters# This does not appear to be

true of *rance, which appears to en'oy o$er-reporting of pro%t# ;t is also not

true of the U4


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i By thanks go to :race .lakely for her work in the research stage of producing this reportii http(FFeur-leeuropa#euF@e&Uri4er$F@e&Uri4er$#doMuriN0>(@(2!1(176(!(!"6(E(* iii Ouoted in http(FFwww#pwc#co#ukFenPU8FukFta&FassetsFa-practical-guide-to-the-uk-regulations-cbcr-under-crd-i$#pdf
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2013:176:0338:0436:EN:PDFhttp://www.pwc.co.uk/en_UK/uk/tax/assets/a-practical-guide-to-the-uk-regulations-cbcr-under-crd-iv.pdfhttp://www.pwc.co.uk/en_UK/uk/tax/assets/a-practical-guide-to-the-uk-regulations-cbcr-under-crd-iv.pdfhttp://www.pwc.co.uk/en_UK/uk/tax/assets/a-practical-guide-to-the-uk-regulations-cbcr-under-crd-iv.pdfhttp://www.pwc.co.uk/en_UK/uk/tax/assets/a-practical-guide-to-the-uk-regulations-cbcr-under-crd-iv.pdfhttp://www.pwc.co.uk/en_UK/uk/tax/assets/a-practical-guide-to-the-uk-regulations-cbcr-under-crd-iv.pdfhttp://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2013:176:0338:0436:EN:PDF

European Banks CBCR June 2015 Final

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