Four Caribbean islands; The Bahamas, Bermuda, Cayman and British Virgin Islands, have been designated as tax havens, where the most profitable European banks are placing their profits.

These four Caribbean territories are among 17 jurisdictions designated as tax havens in a new report released by the European Union (EU) Tax Observatory, which is a recently established research laboratory created to assist in the EU’s fight against tax abuse. Among the other jurisdictions designated as tax havens are Guernsey, Gibraltar, Hong Kong, Ireland, Isle of Man, Jersey, Kuwait, Luxembourg, Macao, Malta, Mauritius, Panama, and Qatar.

The report cited that the most profitable European banks have stashed close to US$24 billion in profits in these tax havens. This sum accounts for 14 per cent of their total profits, the analysis by the EU Tax Observatory found.

The report by the EU Tax Observatory, which is an independent organisation, 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. The effective tax rate in the 17 so-called “tax haven” jurisdictions is between 10 per cent and 13 per cent, while the report highlights that 25 per cent of the profits made by the European banks occur in countries with an effective tax rate below 15 per cent.

The study, tracked the activities of 36 systemic European banks, headquartered in 11 countries across Europe that have been subject to mandatory country-by-country reporting on their actions since 2015. It 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 calculated an indicator for low activities in proportion to profits, using country-specific profit per employee.

Secondly, it 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 categorised 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.”