The Bahamas, Bermuda, Cayman and British Virgin Islands have been listed as part of 17 “tax haven” jurisdictions, where the most profitable European banks are said to be booking close to US$24 million in profits.

A report prepared by the EU Tax Observatory listed 17 tax havens derived from these banks’ effective tax rates and profitability per employee in these jurisdictions. Among the other jurisdictions beside the four Caribbean territories  listed in the report are Guernsey, Gibraltar, Hong Kong, Ireland, Isle of Man, Jersey, Kuwait, Luxembourg, Macao, Malta, Mauritius, Panama and Qatar.

The report by EU Tax Observatory, an independent body funded in part by the European Union, highlighted that the vast majority of the profits by these European Banks are not located in zero-tax jurisdictions, which due to their small size, however, stand out in profitability and productivity metrics on a per employee basis.

The banks’ effective tax rate in the 17so called “tax haven”  jurisdictions is between 10% and 13%. Twenty five percent of the profits made by the European banks occur in countries with an effective tax rate below 15%.

Study tracks profits booked by 36 European Banks

The study tracked the level and evolution of the profits booked by 36 systemic European banks in tax havens over the 2014-2020 period and found that despite the introduction of mandatory information disclosure through country-by-country reporting, bank profitability in the 17 jurisdictions was abnormally high.

Methodologically, the identification of countries in the tax haven list relies on two parameters. Firstly, the research team calculate an indicator for low activities in proportion to profits, using country-specific profit per employee.

This captures jurisdictions with low substantial activities in proportion to their profits and secondly the researchers use country-specific effective tax rates, measuring the tax rate applied on profits.

The EU Tax Observatory study found that on average, bank profits in “tax haven” jurisdictions were around EUR 238,000 per employee, as opposed to around EUR 65,000 in non-haven countries, which  suggests that the profits booked in tax havens are primarily shifted out of other countries where service production occurs.

According to the report, “jurisdictions are categorized as tax havens based on the combination of the two parameters in an inversely proportional relationship. More specifically, the higher the profit per employee and the lower the effective tax rate, the higher the chance of a country being on the tax haven list. These countries exhibit a higher chance of being used by banks as a means of avoiding taxation, rather than having real production activities in the country.”.