Taxes on personal and corporate incomes remain the most important source of revenues used to finance public spending. It's thought that the total sum hidden away in low-tax, low-regulation jurisdictions around the world could be $21tn (£13.5tn) - as much as the total annual economic output of the United States and Japan combined. In particular, the countries of the Global South depend heavily on corporate taxes, especially on those paid by few multinational companies.
In the United States, according to a report published by the groups Citizens for Tax Justice, profitable corporations are supposed to pay a 35 percent federal income tax rate on their U.S. profits. But many corporations pay far less, or nothing at all, because of the many tax loopholes and special breaks they enjoy. The result? Cuts for essential public programs, from education, to health care, and to clean air and drinking water.
The practise of so-called Base Erosion and Profit Shifting (BEPS) has allowed companies to move profits out of the countries where money is earned into jurisdictions that do not tax them, and in doing so reduce tax revenue. The report is broader, in that it includes companies, such as Facebook, Apple, Starbucks, Google and Amazon, and global finance corporations like Goldman Sachs and Citigroup. For example, Apple avoided tens of billions in taxes by manipulating the location of its profits.
The study also found that in five of the commonly used tax haven countries, Bermuda, the Cayman Islands, British Virgin Island, Bahamas and Luxembourg, the reported profits of subsidiaries of U.S. companies were more than GDPs of the countries in which the firms were registered. As a result, the United States government would be owed around $620 billion worth of federal taxes if its biggest 500 corporations were not keeping a further $2.1 trillion of wealth overseas. Money that could be used to finance the entire U.S. federal education expenditure for more than five years.
Another recent analysis by the OECD found that the revenues from corporations were equivalent to just 2.8% of GDP 2014, compared with 3.6% in 2007. Meanwhile, over the same period, personal income tax was up from 8.8% to 8.9%. In practice, while corporate taxpayers continue finding ways to hide billions in offshore accounts and exploit other tax loopholes, governments have been forced to raise sales taxes and taxes on workers’ pay.
The first serious global effort to combat widespread corporate tax cheating was made in 2013. The OECD was commissioned by the G20 group of leading industrial nations to develop new rules to fight tax avoidance by multinationals. A comprehensive package of measures has been agreed upon. The resulting “Base Erosion and Profit Shifting” (BEPS) proposals were released on October 2015. They are designed to provide governments with a series of solutions to be implemented through domestic law changes for closing the gaps in existing international rules that allow corporate profits to « disappear » or be artificially shifted to low/no tax environments, where little or no economic activity takes place.
It represents a significant step in addressing tax cooperation between member States. Some countries, like Italy, have adopted the Patent Box: a tax regime which aims to discourage multinationals from using offshore holding companies by offering a lower tax rate. Although, there is still much work to be done to fight tax avoidance by multinationals. According to the Tax Justice network, a coalition of researchers and activists that focus on the harmful impacts of tax avoidance, tax competition and tax havens, however, although there have been some improvements in certain areas, the process has been continually undermined by the army of paid corporate tax advisers and lobbyists, as well as governments seeking to protect some of their pet tax breaks to business.
For example, a number of exit tax regimes aimed to target the practice companies moving their addresses overseas in an effort to lower their tax bills, have been referred to the Court of Justice, on the basis that they are obstructing the cross-border movement of companies.
Countries are required to do more against corporate-tax avoidance. ”The ability that big corporations have to shift profits to low-tax countries is exacerbating the growing inequality around the world", according to a recent 44-page report by international not-for-profit Oxfam. Based on research by economist Gabriel Zucman, author of The Hidden Wealth of Nations, The Scourge of Tax Havens, 2015, Economy for the 1%, reveals that corporate tax-dodging costs developing countries at least $100 billion annually.
Photo Credits: Getty/ Peter Macdiarmid