TAXATION PAPERS Aggressive tax WORKING …

1 TA X ATION PAPERST axation and Customs UnionWORKING PAPER No 71 2017 IHS (project leader)In consortium withCPBDONDENAA ggressive tax planning indicatorsFinal ReportISSN 1725-7565 (PDF) ISSN 1725-7557 (Printed) TAXATION PAPERS are written by the staff of the European Commission s Directorate-General for TAXATION and Customs Union, or by experts WORKING in association with them. TAXATION PAPERS are intended to increase awareness of the work being done by the staff and to seek comments and suggestions for further analyses. These PAPERS often represent preliminary work, circulated to encourage discussion and comment. Citation and use of such a paper should take into account of its provisional character. The views expressed in the TAXATION PAPERS are solely those of the authors and do not necessarily reflect the views of the European and inquiries should be addressed to:TAXUD photo made by Milan PeinDespite all our efforts, we have not yet succeeded in identifying the authors and rights holders for some of the images.

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3 TAXUD/2015/CC/131 Institute for Advanced Studies (Project leader) Institute for Advanced Studies (Consortium leader) In consortium with CPB DONDENA European Commission Aggressive tax planning indicators 2 Preface This report has been prepared for the project Aggressive tax planning indicators , Specific Contract TAXUD/2016/DE/319 implementing the Framework Service Contract No. TAXUD/2015/CC/131 for the provision of economic analysis in the area of TAXATION . The following institutions and persons contributed to this project: IHS (project leader) Simon Loretz Richard Sellner Bianca Brandl DONDENA Giampaolo Arachi Valeria Bucci CPB Maarten van't Riet Ali Aouragh The information and views set out in this report are those of the author(s) and do not necessarily reflect the official opinion of the Commission. The Commission does not guarantee the accuracy of the data included in this study.

4 Neither the Commission nor any person acting on the Commission s behalf may be held responsible for the use which may be made of the information contained therein. European Commission Aggressive tax planning indicators 3 Table of contents Preface .. 2 Table of contents .. 3 List of tables .. 5 List of figures .. 6 List of abbreviations .. 7 List of country acronyms .. 7 Executive Summary .. 8 Sommaire ..15 1 Introduction ..21 Background ..21 Objectives ..22 2 Characterising Aggressive tax planning ..23 Definition and boundaries of Aggressive tax planning ..23 Main channels and defining features of Aggressive tax planning ..24 Income shifting through interest payments ..27 Income shifting through royalty payments ..30 Strategic transfer pricing ..32 Use of Member States tax rules in Aggressive tax planning ..36 Use of third countries in Aggressive tax planning ..37 3 Economic indicators for Aggressive tax planning.

5 39 General indicators ..39 General indicators: country level ..39 General indicators: MNE group-level ..44 Specific indicators ..47 Specific indicators: firm-level ..47 Specific indicators: country-pair-level ..53 Combinations of indicators ..55 Relative tax situation of MNE entities ..55 Identifying roles in ATP channels ..56 Methodological considerations ..61 Aggregation of Data sources and limitations ..62 Sample period and time consistency of different data sets ..64 4 Results for EU 28 Member States .. 65 Distribution of indicators and data at country level .. 65 Tax rates and revenues .. 65 Foreign direct investment ..68 Geographical distribution of MNEs and relative tax situations ..73 Consolidated profitability and effective tax burden in MNE groups ..77 ATP-specific indicators at entity level ..87 Royalty flows, bilateral import price anomalies and treaty shopping indicators .. 101 Roles in ATP structures, by Member States.

6 111 Roles within ATP via interest payments .. 111 Roles within ATP via royalty payments .. 114 Roles within ATP via strategic transfer pricing .. 117 Overall assessment of exposure and tax base impact of ATP on Member States 119 5 Conclusions .. 128 131 Technical appendix .. 136 European Commission Aggressive tax planning indicators 4 A Detailed description of ATP structures .. 136 Offshore loan ATP structure .. 136 Hybrid loan ATP structures .. 136 Hybrid entity ATP structure .. 138 Interest free loan ATP structure .. 138 Patent box ATP structure .. 139 Further ATP structures using intangible assets .. 140 ATP structures and tax rules of Member States .. 141 B Overview combination of indicators .. 144 Combination of indicators to identify roles in main ATP channels .. 144 Combination of indicators to identify roles in all ATP structures .. 148 C Dealing with complex ownership structures .. 154 D Gravity equation estimates to control for economic factors.

7 156 Using gravity equations for FDI estimates .. 156 Simulation of FDI stocks using a simple gravity approach .. 156 Results gravity equations for geographical distribution of MNE entities and for aggregate FDI stocks .. 157 E Appendix Tables .. 159 European Commission Aggressive tax planning indicators 5 List of tables Table 1: ATP, main mechanisms and corresponding ATP structures ..25 Table 2: Cost of Capital and Effective Tax Rate in ZEW study (2016) ..26 Table 3: Summary characteristics ATP via interest payments ..28 Table 4: Summary characteristics ATP via royalty payments .. 31 Table 5: Summary characteristics ATP via transfer pricing ..35 Table 6: Description of general indicators - country-level ..40 Table 7: Description of general indicators - MNE group-level .. 45 Table 8: Description of specific indicators - firm-level ..50 Table 9: Description of specific indicators - country-pair-level ..54 Table 10: Tax rates and decomposition of corporate tax revenues (2015).

8 66 Table 11: Foreign direct investment positions (2015) ..70 Table 12: Foreign-controlled corporate activities (2014) ..72 Table 13: MNE entities by relative statutory tax rates (2015) ..74 Table 14: Consolidated ETR (Tax/PLBT), by Member States (2010-2015) ..79 Table 15: Consolidated ETR (Tax/EBIT), by Member States (2010-2015) ..81 Table 16: Consolidated profitability (PLBT/Assets), by Member States (2010-2015) .. 84 Table 17: Consolidated profitability (EBIT/Assets), by Member States (2010-2015) .. 86 Table 18: Profitability (PLBT/ASSETS), by Member States (2010-2015) ..88 Table 19: Profitability (EBIT/ASSETS), by Member States (2010-2015) ..90 Table 20: Profitability (FIN_PL/ASSETS), by Member States (2010-2015) ..92 Table 21: Debt share (% of ASSETS), by Member States (2010-2015) ..94 Table 22: Interest payments (% of ASSETS), by Member States (2010-2015) ..96 Table 23: Intangible assets (% of ASSETS), by Member States (2010-2015) ..98 Table 24: Patents granted, by Member States (2010-2015).

9 100 Table 25: Royalty flows, by Member States (2010-2015) .. 102 Table 26: Bilateral import price anomalies, by Member States (2010-2015) .. 105 Table 27: Treaty shopping indicators (2013) .. 108 Table 28: Roles ATP structures using interest payments, by Member States .. 112 Table 29: Roles ATP structures using royalty payments, by Member States .. 115 Table 30: Roles ATP structures using strategic transfer pricing, by Member States .. 118 Table 31: Summary of results: Country-level 120 Table 32: Summary of results: Consolidated MNE indicators .. 122 Table 33: Summary of results: Specific indicators by firm types .. 123 Table 34: Summary of results: Bilateral indicators .. 123 Table 35: Summary of results: Combination of indicators roles within ATP channels .. 125 Table 36: Overview of indicators and broad assessment .. 127 Table 37: Legal indicators and roles of countries in ATP structures .. 142 Table 38: Combination of indicators: ATP via interest payments.

10 145 Table 39: Combination of indicators: ATP via royalty payments .. 146 Table 40: Combination of indicators: ATP via strategic transfer pricing .. 147 Table 41: Combination of indicators and ATP channels strict classification .. 151 Table 42: Combination of indicators and ATP channels standard classification .. 152 Table 43: Results gravity estimates .. 158 Table 44: Comparison FDI stock data .. 159 Table 45: Ownership structures MNE groups (by ultimate owner) .. 160 Table 46: Ownership structures MNE groups (by ultimate owner) continued .. 161 Table 47: Ownership structures MNE groups (by direct owner) .. 162 Table 48: Ownership structures MNE groups (by direct owner) continued .. 163 Table 49: Statutory corporate tax rates Europe and low tax countries .. 164 Table 50: Statutory corporate tax rates Africa, Americas, Caribbean countries .. 165 Table 51: Statutory corporate tax rates Asian, Australia and Oceania countries .. 166 Table 52: Tax rates in Patent boxes (2015).