Recently leaked documents have shown that companies in Denmark are just as adept as their counterparts abroad when it comes to the use of creative schemes to circumvent the tax system.
Independently of the ‘Paradise Papers’, researchers at the economic institute at the University of Copenhagen and the University of California, Berkeley, have concluded that at least 5 billion kroner in potential corporation tax ends up offshore, DR Nyheder reports.
“We estimate that Denmark loses 10 percent of its corporation tax, which is a lot. For that amount, you could finance half the costs of the police force or triple the size of the fire service,” said researcher Ludvig Wier, a PhD student.
“The ‘Paradise Papers’ confirm the tendencies we’ve seen in our extensive data and our research points to the fact that we’ve only identified a small fraction of the tax avoidance that is taking place.”
An antiquated system in a modern world
Globally, multinational companies move 5,000 billion kroner in profits to tax havens – and that generates a loss of 1,400 billion kroner for the taxman – and by extension the welfare state.
“The main problem with the present system is that it is 100 years old and totally unfit for purpose when it comes to handling modern multinationals. When it was designed, multinationals didn’t really exist,” explained Wier.
The tendency is expected to continue because the worldwide market share of multinationals and the use of tax havens has expanded exponentially over the last three decades.
Keep it simple
A new problem for countries such as Denmark where taxes are high is the fact that the money consumers pay for products and services goes directly to tax havens. This means that the authorities are powerless to collect corporation tax because the money paid leaves the country.
The consequence is that a number of countries are involved in a ‘race to the bottom’ to see who can lower corporation taxes the most in the hope that multinationals won’t send all their profits abroad.
Wier believes the only solution is to simplify the system so that companies are taxed on where their customers are.
“If 5 percent of your sales are in Denmark, then we should tax 5 percent of your income. That makes sense and could be implemented tomorrow. Denmark is perfectly free to do this and it would put a stop to the use of tax havens because you can’t move your customers into a tax haven,” concluded Wier.