Spanish investments in tax havens skyrocketed in the year of the covid

What do paradisiacal beaches in the middle of the Atlantic, medieval castles and intense green meadows have in common? More than meets the eye: they represent some of the low-tax territories where investment from Spain skyrocketed in 2020, the year of the pandemic. Gross flows directed towards tax havens proper, such as the British Virgin Islands or Bermuda, doubled. The rebound was 131%. Movements towards neighboring Luxembourg, the Netherlands or Ireland also grew strongly, considered – for practical purposes and not political or legal – tax havens in the heart of the EU and among the largest usual recipients of Spanish gross investment.

These operations are included in the database of the Ministry of Industry, Commerce and Tourism regarding gross foreign investment with destination or origin in Spain. Despite the strong percentage increase, the amounts that end up in official tax havens are meager: 221 million in 2020 compared to a total of 28,592 million. The territory where they grew the most were the British Virgin Islands, which accounted for more than 70% of the flows to these jurisdictions in the pandemic year, quintupling their amount. Still in the Atlantic, in an even more remote location, Bermuda saw injections from Spain triple in the same period.

Despite the bad reputation of tax havens, recurring epicenters of major money laundering scandals and tax evasion by companies and individuals, the movements included in the ministry’s statistics are entirely legal. Investing or moving to any of these places does not imply fraud, although the regulations do establish some precautions, some ad hoc rules to guarantee greater control over the nature of the operations that involve these jurisdictions considered risky. For example, Spanish companies must demonstrate that any purchase or sale constitutes a real operation made at market price, explains the inspector of the Treasury José María Peláez. Likewise, the taxpayer who moves his tax residence there must continue paying personal income tax in Spain for five years.

In fact, most of the Ibex 35 companies have subsidiaries in tax havens and lax tax territories, such as Luxembourg: there were 744 in 2020, according to the data compiled each year by Oxfam Intermón. Banco Santander, ACS, Ferrovial, ArcelorMittal and Repsol are the companies that had the greatest presence in these jurisdictions, although year after year they are reducing it.

“In these cases [las inversiones reflejadas por el ministerio] We are not talking about fraud, but about investments that are channeled through those territories”, explains Peláez. And there are reasons for it. For example, the purchase of Spanish public debt from tax havens is exempt from paying taxes on the returns. “Other times, these territories are used to lose track of the real investors,” he adds. He suspects that part of the growth in flows to Luxembourg may be linked to the tightening, introduced with the new law against tax fraud, for sicavs (collective investment companies) to access tax advantages. “But it is very difficult to know what is behind it. Money is always very scary. In times of crisis, of uncertainty, look for safe places”.

Josefa Vega, a professor at the University of Valladolid, points out that the strong rise in gross flows to the British Virgin Islands or Bermuda in 2020 is probably associated with one-off operations. “A concrete investment through an ETVE [entidad de tenencia de valores extranjeros, una herramienta fiscalmente ventajosa para atraer a multinacionales a España, que se quedó en desuso con la aparición de esquemas más favorables en el extranjero]. Also, you may end up in another country. In any case, it is not a productive investment, and supposes a small part of the total. Much more important is what happens with investments in Luxembourg or the Netherlands, which often do not stay there, but rather go to other places”.

European refuges

Luxembourg was the country that received the most Spanish investment in 2020: 5,000 million gross flows, a 400% rise that the ministry attributes, in its annual report, to two large operations by energy companies. This figure does not include ETVE operations, which together increased by 92% in the year of the pandemic and which, in the case of the Grand Duchy, raise the amount to 6,300 million. The figure in 2021 fell, in line with the general drop in investment (37%). It is followed by the United States, the United Kingdom and Panama. The Netherlands is in sixth place; Ireland, while not in the top ten, has seen a 121% increase in 2020.

These amounts refer to the country where the investment disembarks, and it is not possible to know if the money later continues its journey to another place. This exercise can be done in reverse, with the flows that arrive from abroad: Luxembourg, in contrast to its tiny size, was the country that invested the most in Spain in 2020. If the countries of ultimate origin of the investment are analyzed , however, falls to 19th place; The United States, headquarters of the main multinationals in the world, jumps instead to the first position. “There are countries used as intermediaries, which serve as a bridge,” explains Rafael Myro, professor of Applied Economics at the Complutense University of Madrid.

In other words: almost all of the gross investment that came to Spain from the Grand Duchy in the year of the covid came from a third place. Something similar happened with the Netherlands. “These magnitudes clearly show the attractiveness and importance of these jurisdictions in multinational investment chains when it comes to channeling direct investment to its final destinations,” says an article by the Bank of Spain on foreign direct investment in 2019.

It is no coincidence that both countries, together with Ireland, are the architects of some of the most advantageous tax schemes in Europe and the world to attract large corporations. And all this without being officially considered tax havens. One of the most famous scams is the double Irish —now supposedly banned—: a Dublin company invoices the income generated in all the markets where it operates and then transfers the bulk of the profits to the company that owns the intellectual property rights, coincidentally located in a tax haven with which Ireland has an agreement. Other famous tricks used by multinationals are the Dutch sandwich, tax ruling and the tax regimes of Cyprus and Malta. In any case, ploys that the international community is trying to close with new tax rules that are not based only on physical presence in the territory.

According to The Missing Profits study, multinationals divert 40% of their profits each year to territories with low or no taxation, especially to EU member countries. “Luxembourg and the Netherlands are among the first investors in Spain most of the years [entre 2018 y el tercer semestre de 2022 fueron el quinto y el tercero, respectivamente], and at the same time recipients of Spanish investment. But the investment does not always have its ultimate origin in those countries. In the case of the flows sent, it is even more difficult to know what their final destination is”, concludes Vega.

new blacklist

There is no single list of tax havens. Each organization and country has its own. And the European one is one of the most criticized for being too small —there are only 12 jurisdictions— and for not including community members that use aggressive tax regimes —something that seems complicated, since unanimity is needed among the bloc’s partners— . Spain, for its part, has drawn up a new list, which it has now released to public information, after the approval of the new anti-fraud law. This includes 24 countries, compared to 31 in the previous one, which are now called non-cooperative jurisdictions: Anguilla, Bahrain, Barbados, Bermuda, Dominica, Fiji, Gibraltar, Guam, Guernsey, Isle of Man, Cayman Islands, Falkland Islands, American Samoa, British Virgin Islands, Jersey, Mariana Islands, Palau, Samoa, Seychelles, Solomon Islands, Trinidad and Tobago, and Vanuatu. The requirements to end up in this bag are also expanded, in line with the OECD criteria.

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