Large companies good at avoiding taxes

Top Finance ministry official says corporate taxes will be harder to collect in future

Lasse Arvela

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Finland’s nine largest listed companies paid a combined EUR 448 million in corporate taxes in 2010. In the same year, the same companies posted pre-tax profits of EUR 8.3 billion.
      Tax revenue ending up in Finland constituted 4.5 per cent of the results of these companies.
      Taxes paid by large export companies were especially small.
     
For instance, Nokia paid just EUR 1.6 million in Finnish taxes out of its result of EUR 1.8 billion.
      Metso reported profits of EUR 548 million and Nokian Tyres reported a EUR 209 million result. Neither of the two paid any taxes at all to Finland.
      The low tax yield was partly attributed to deductions for past losses, and partly to skilful tax planning.
     
The figures are from an investigation by Helsingin Sanomat comparing the taxes paid by Finnish listed companies with a market value of more than EUR 4 billion to their financial results in 2010.
      These companies paid a total of EUR EUR 1.6 billion around the world – more than 19 per cent of their results. This means that most of the profits of large Finnish companies are paid abroad.
     
This is partly the result of international tax planning. Global companies seek to post their profits in countries where the tax rates are low.
      For instance, the forest industry company Stora Enso has made a deal with The Netherlands under which it pays The Netherlands a 1.5 per cent tax on sales profit of wood pulp that it takes from Brazil to Finland. In Finland the tax would be 24.5 per cent.
      Profit figures and the amounts of tax paid are not directly comparable, because companies file different financial statements to their investors than what they submit to tax authorities. They are nevertheless an indication of the scale of how taxes are targeted.
     
It has long been thought in Finland that corporate tax rates need to be brought down to a level that would make Finland more competitive . On Thursday Sweden said that it planned to lower its corporate tax rate to 22 per cent.
      In spite of lower tax rates, it is harder than before to collect corporate taxes from genuinely international Finnish companies, because certain EU countries, especially The Netherlands, have started to aggressively hoard tax revenue.
     
There are two ways in which a country can do this – either through secret tax agreement made directly with companies, or with certain "precision weapons".
      The most controversial precision weapon is the Dutch "innovation box". The Netherlands has promised a five per cent tax rate for corporate income that is based on the company’s own innovation, patent, or other non-material rights.
      For instance, a significant proportion of the income of Nokia, or some other information technology company, could be classified as being based on its own product development, and when control of these rights passes to The Netherlands, the tax income goes there as well.
     
"The Dutch are masters at concentrating these kinds of regulations and practices", says Lasse Arvela, head of the tax department of the Ministry of Finance. "This [innovation box] is the most dangerous recent development. Reducing the tax rate will not help it any more."
      Companies in Finland have already threatened politicians that they will move their non-material rights to The Netherlands if Finland does not adopt a similar system. The Research Institute of the Finnish Economy (ETLA) is also promoting the same thing.
      If Finland were to follow the example of the Dutch, the flow of tax income to The Netherlands would slow down, but the move would also erode the corporate tax base.
     
Lasse Arvela, is it really the case that large global companies will pay taxes to Finland only out of reasons of public image?
      "This is the case to a certain degree. The trend is in that direction. This form of taxation really is declining. I seriously fear that corporate taxation will not be a key form of levying taxes for very long."
     
The EU and OECD countries have tried to bring more uniformity to the taxation systems of different countries, but they have not managed to curb the use of precision attacks.
      However, Arvela points out that EU countries struggling with their economic difficulties have focused on their own interests, and the capacity of the EU to enact reforms does not look good for the next 5-10 years, which are expected to be a period of slow growth.
      The trend in the EU is to focus taxation on consumption. Indirect taxes, such as property taxes are also likely to go up.


See also:
  Efforts to plug tax haven loophole could lead to higher rents in municipal housing (10.9.2012)
  Loan interest paid to foreign creditor helps Finnish company avoid taxes on large profits (15.8.2012)

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