Grand Theft Tender? How €56bn went to tax havens

Tax haven-based companies win roughly five percent of value of public tenders throughout EU member states, according to a study by a consulting company Datlab together with researchers from University of Cambridge.

In this analysis they found about 10,000 government suppliers in the whole EU that are co-owned from countries like the Bermudas, Curacao or Cayman Islands. Countries officially blacklisted or greylisted as tax havens by the EU.

Lots of them are also based in highly-competitive (tax-wise) Switzerland and Lichtenstein.

These companies received public tenders worth about €56bn over past 12 years, almost doubling their share of the market over the last decade.

The countries with the largest portion of suppliers coming from tax havens are the United Kingdom, Spain, Poland, Estonia, Portugal and the Netherlands.

There are large discrepancies between countries.

On average, 5.5 percent of the value of government orders was won by companies located in tax havens. In Poland, out of each €1m, €62,000 was provided by a tax-haven company (6.2 percent).

More was only in the Czech Republic (6.8 percent), Spain (7.3 percent), Portugal (7.65 percent) and the UK (13.4 percent).

Central and eastern Europe is even worse off in terms of the proportion of tenders carried out by companies from tax havens in the total number of tenders. In EU countries the average was 4.7 percent, and in Poland – 9 percent. Only Lithuania had a higher rate, of almost 11 percent.

Are tenders from tax havens a bad thing?

Not necessarily. But awarding a public tender - say, from Spain to a Cayman Islands-based company generates two risks.

First, Spain might lose its money due to tax avoidance, as profits drift to the Cayman Islands instead of being taxed properly in a country where they were raised.

Second, because of the deliberate opacity of corporate formation in havens, there may be hidden beneficiaries or conflict of interest in the award of such contracts.

Picture a minister of infrastructure awarding tenders to a construction company in which he secretly has financial ties. This actually happened in the Czech Republic. Nobody wants such things to happen with public money anywhere.

How do tax havens actually work?

One of the primary methods is corporate profit-shifting.

This is where a multinational company registers its headquarters in a low-corporation tax jurisdiction and then books its profits there, rather than in the country in which it actually makes its sales.

This is what firms such as Google and Facebook have been doing in order to lower their global corporation tax bills.

A solution for governments is to unilaterally tax a multinational's revenues, while making allowance for its local costs, investments and exports.

Another option is to demand full and public transparency on the beneficiaries of offshore trusts. Acting in concert, the governments of the EU could bring serious pressure on many tax havens to comply.

Many tax havens, such as the Cayman Islands and Bermuda, are also British crown dependencies, giving the UK government itself considerable leverage if it chose to exert it.

On the one hand, the previous European Commission boasted that, since the beginning of its term, it has eliminated 123 trade barriers, which allowed for an increase in exports in 2018 by over €6bn.

On the other hand, Europe is still losing hundreds of billions of euros due to ineffective enforcement of international tax agreements.

Public procurement is the ideal ground, where governments can start pushing against the tax-haven abuse. Not only have they the additional motivation (risk of conflict of interest), but as buyer they also have a very strong leverage.

Maybe the new Commission under Ursula von der Leyen will push for this issue.

Governments are either unaware that they can forbid tax-haven registered companies taking part in their tenders, or turn a blind eye to this practice.

We can limit tax-optimising competition and this is a good first step in a true fight with tax havens and money-laundering as a whole.