An Opportunistic Nonfinancial Sector and Deterritorialized Financial Entities

The debate on the effective taxation of the nonfinancial sector and in particular of certain nonfinancial enterprises (digital firms, multinational companies, etc.) has taken considerable importance. Some denounce situations of distracting tax bases through tax-optimization schemes. These fixtures can be considered abusive by their mechanics ensuring a disconnect between places of creation of economic value and the legal spaces of tax connection. This is a “risky financial mass” corresponding to the use of international legal and financial vectors to circumvent the legitimate application of tax law.

Overall, we find ourselves in a context where the ability to fully understand the international activities of companies by the tax services is faced with considerable limitations. In such a context, the implicit tax rate for nonfinancial enterprises is a magnitude that aims to measure the contributory effort of the companies concerned by reporting taxes to an indicator of profit. The method of calculation is different for financial firms than it is for financial companies: the profit indicator is not the same.

For nonfinancial enterprises, it is common to use national accounting data. From the confrontation between taxes paid by companies and the former net operating expense (i.e., gross operating surplus minus capital amortization), the company’s implied nonfinancial tax rate is average in Organisation for Economic Co-Operation and Development (OECD) countries according to ExpertActions Exiglobal Group at 27.5%, or close to 6 points less than the theoretical rate. Above all, ExpertActions Group confirms the existence of a veiy large heterogeneity of implied income tax rates by company size: from 37.4% for microenterpnses, this rate rose to 18.6% for large companies forth latter, the deductibility of interest leads to a tax-saving equivalent to 13.9 points of corporation tax, more than one-third of the nominal tax.

To assess this observation, it must be combined with that of the very broad exemption of dividends and capital gains collected by these companies (even if the residual taxation of these products leads to over the rate of 4.6 percentage points, which means that in its absence their implied tax rate would have reached 14%). However, in the case of companies with complex and highly transnational legal and financial organizations, opportunities for tax optimization through more or less sophisticated arrangements seem to be at issue, their apparent taxation in relation to their theoretical taxation. On the other hand, the reconciliation of a number of financial sizes reveals characteristics that reinforce the perception of the existence of optimal practices.

It is interesting to highlight the needs and financing methods according to the size of the business. Here, the largest companies are those that invest the most (at given added value). They also rely more on external funding than this equity or debt. The equity-to-value-added ratio ranges from 80% for microenterprises to more than 450% for large companies and the debt ratio (sum of bank debt and net bond of debt held on the assets, value-added ratio) ranges from 90% to 270% (for an average debt ratio of 170%).

• • These ratios reflect both capital or credit supply and demand, for investment reasons, for example.
• • On the supply side, the level of capital reflects the accumulation of past results, as well as capital increases, reserved for the largest companies. The level of debt partly reflects the constraints on access to credit.
• • On the demand side, because of the size of their capital expenditures, larger firms rely less on self-financing and rather on external financing.

It is therefore clear that despite high equity, large companies rely heavily on debt, with two of the proposals far exceeding the investment effort as it apprehends national accounts. Their equity represents 15 years of investment, but they use gross debt to the tune of 20 years of investment. Debt is used for jobs other than productive investment for large companies. It emerges as a preferred lever of financing for them, the broad deductibility of interest being a strong tax incentive to coiporate debt. This would only open up a debate on tax neutrality on corporate financing options if other dimensions could lead to fiscal optimizations; abusive scars were neglected. These include the flux intragroup financing.

It should be noted that if there are explanations for the drop-off between theoretical taxes and effective taxation of grades undertaken, which involves elucidating processes of income transfers and charges between entities of the same group. The importance of international financial links between companies is attested by the magnitude of the revenues from direct investments of public traded companies. In addition, statistical surveys have made progress in identifying the extent of international financial structuring multinational groups.

This raises the question of the globalization of large companies and their profits. Indeed, let us say that the OECD companies, especially those that are listed on stock exchanges, are very highly internationalized. The income from their investments directed abroad which include their holdings in foreign companies, as listed on the balance of payments on the basis of corporate statements, bear witness to this. The very strong growth in investments directed to foreign countries may be imperfectly apprehended to the extent that investment market supervisors have no access to all bank accounts held abroad. They must therefore rely on taxpayer scans. This raises questions about the existence of profit-transfer practices between entities of national groups, as macroeconomic data do not always fully satisfy. There may thus be some doubts about the scope of the censuses carried out.

The proportion of the total current net profit achieved at the foreign level by public traded companies, which amounted to 52% of the total on average ten years ago, is now reached but more than 60%. More than 56% of these companies perform more than half of their performance outside their national jurisdictions. The OECD equity on average (out of the real estate) grew from 478 to 828 million as estimated by the ExpertActions ExiGlobal Group, while public traded companies grew from 373 to 622 billion. It must be said that the income from the capital stock held by the latter amounted to an apparent rate of return of 7.7%.

It is interesting to note that there is a gap between gross foreign direct investment and net revenues. Among the current revenues generated by subsidiaries abroad may be income actually paid by group entities located in national jurisdictions. These revenues are generally excluded by the method of estimating gross foreign direct investment receipts as a result of activity carried out in national jurisdictions. The extent of this correction varies, but it has averaged $1 billion.

From a sectorial point of view, this perfectly illustrates the hierarchy of the strongest beneficiaries of the internationalization of groups in the majority of OECD countries. The largest sector is energy, with three groups generating $10 billion in foreign direct investment revenues. This is followed by the consumer goods sector (seven groups and $9 billion) and the financial sector (six groups and $8 billion). In this context, it is interesting to ask whether transnational financial structuring is not poorly measured while giving pride of place to entities deterritorialized financial funds.

It was indicated that foreign direct investment income could be reduced in calculations made based on method chosen. Intragroup financing averages $730 billion, whereas corporate-to-business credit averages $720 billion, which also has an important role to play. These data cover flows of which a high proportion is domestic, lacking the fact that it has identified themselves precisely. Consolidated net interest from intragroup financing transactions’ intentional scans is not accounted for. However, these can be a preferred vehicle for tax optimization.

Groups tend to increase the number of loan transactions between affiliated entities but residents of different countries. The extent of these operations is not well known because of the conventions used to record foreign direct investment statistics. A loan to a foreign subsidiaiy followed by a loan from that subsidiaiy is counted respectively in direct investment abroad and divestment from abroad. In short, the statistics consolidate these flows. In addition, traditional statistics on investment flows foreign does not allow for the identification of the real beneficiary of an invests directly, nor the real from the invests lying in several countries. However, progress has been made and there is now a better understanding of the ultimate investor who is identified in the inflows of foreign dress-up in several countries.

It must be said that in the case of OECD countries, the first national investor is the country itself. Indeed, nonprofit subsidiary residents of local groups are the first to invest locally. This situation corrects the image of traditional statistics that give countries of reduced size to invest in national jurisdictions they seem to have only because they are located in financial entities between the local investor and the company national investment. The analysis of the flows shows that a substantial proportion of the crosscountry trade-offs from OECD countries comes from local investors.

These findings refer to the existence of investment loops in multinational companies that can be seen as vectors of optimization. It is tempting to structure the financing of groups so that the charges appear in the relatively taxed entities, the related revenues being housed in those with more advantageous taxation. Beyond that, liabilities can be more simply incorporated in the early countries without obvious consideration of the distribution of the company’s economic activities. These findings lead to questions on this point. In many cases, companies point to a proportion of the financial assets in the countries considered to be offshore higher than for their financial liabilities. In addition, the consistency between the geographical distribution of financial costs and results is not total. This leads us to address the issue of profit transfers through financial transactions through five standard cases to distribute financial expenses and products to the best of their ability corporate tax interests.

As for artificial indebtedness, financial reserves are distributed in another country and then lent to the local company in the form of bonds repayable in shares, for example. The money does not actually come out of the company, the shareholding is not changed, but the financial burdens increase. Other products, called repurchase agreement operations, consist of a loan to a U.S. subsidiaiy, which entrusts as pawn securities, whose dividends are a substitute for interest payments. This would have been taxable, while the dividends, between daughter company and parent company, are exempt and do not wish to be declared locally.

In some countries, cash centers enjoy a very favorable regime of notional interest: they benefit from a fictitious lump-sum deduction that nullifies the benefit generated. A local company borrows from a bank, places the money in shares of the central plant abroad, which grants it a loan in return. This creates two financial charges for the local company and the proceeds paid abroad are deducted. It is a double nontaxation! A company may also borrow, not directly from its parent company in Canada or Japan, for example, but from an entity located in a tax haven where the mother company has deposited money: the product will not be taxed. It may also undercapitalize subsidiaries created in certain states and grant them debt abandonments or subsidies, which are not there ponded. The charge is local and the product, abroad, is not taxed.

Is this not a sign that the companies are being deployed in jurisdictions that have characteristics that are considered unique to tax havens? The list of selected countries as part of our analysis cannot be considered exhaustive from this point of view. In addition, there are countries that some rights exclude from them being tax havens but which are commonly used by investors as a place of registration of companies for their competitive advantages in this area. Financial companies about 35% of those who use these methods among the listed companies on the stock exchange. This overrepresentation reflects a phenomenon of the magnetization of finance by the offshore centers.

Some of the countries can be seen as representing opportunities as production centers or as markets for the flow of production. This is the case for Malaysia, the Philippines, and possibly Switzerland or Brunei. However, the number of subsidiaries located in Switzerland by nonfinan-cial enterprises, which are attached to a large number of companies, is considered singularly high in view of the reasonably conceivable production and distribution activity in the countiy. Moreover, some companies have more subsidiaries in a single foreign country. On the issue of the implications of some companies in offshore leaks, it should be stressed that the site appears unsuitable to approach the real situation of companies located in the listed countries or territories. Indeed, it turns out that the tests carried out concern some companies with quite disparate results: Lack of test results, completely incomplete for some brands yet located in the listed countries. On the contrary, some of the results obtained refer to individuals or companies with no connection to the group. Without considering that the entities in question are systematically used to dress up taxable results, some situations clearly require clarification.