20/08/18

Global corporates shifted $616 billion in profits to 11 tax havens

(consultancy.uk) -- Despite growing global outrage at the existence of tax havens, the schemes for massive global conglomerates to swerve paying their share seem more popular than ever. Now a new study has shown that just 11 tax havens continue to soak up some $616 billion in profits, as companies continue to leverage legal loopholes to move profits away from domestic tax regimes.

The Panama papers were an unprecedented leak of 11.5 million files from the database of the world’s fourth biggest offshore law firm, Mossack Fonseca. After the records were handed to German newspaper Süddeutsche Zeitung by an anonymous source, the paper then shared the information with the International Consortium of Investigative Journalists (ICIJ). The documents revealed a web of secretive offshore tax regimes, which wealthy individuals and companies exploit to avoid paying domestic tax. The news came after a decade of austerity had seen many developed nations selling off aspects of their public services in order to pay for the failure of the global financial sector, while explaining to citizens that there was no money to maintain such institutions.

As a result, the Panama papers caused a wave of indignation to sweep the globe, however their release ultimately did little to persuade legislators to take action, particularly as many lawmakers themselves were since revealed to share in the benefits of tax havens. Now, new research has revealed that the practices highlighted by the leak are in fact stronger than ever before. According to analysis by three economists (Thomas Tørsløv, Ludvig Wier and Gabriel Zucman) affiliated with University of Copenhagen, UC Berkeley and the National Bureau of Economic Research (NBER), an American platform for economic research, corporates globally made $11,515 billion in profit last year alone. Of that amount, 85% is made by local corporations, the remainder (15%) is made by foreign-controlled corporations.

However, of the $1,703 billion profit made by foreign companies, nearly 40% (36% to be precise), amounting to $616 billion, was shifted to other tax jurisdictions outside their home country. 92% of that amount went to just 11 countries – with these countries subsequently earning the infamous title of tax havens. Perhaps unsurprisingly, the US is the biggest country which is seeing profit shifted, $142 billion, followed by UK, at $61 billion and Germany at $55 billion. The trio were among those which lost out to tax havens in the Panama papers as well.

The most important tax havens of the world

For small countries to create an entire profitable industry by passing a few laws appears to be a cheap and effective road to economic development for countries traditionally neglected. As a result, a number of locations have bid to make themselves attractive destinations for businesses of all shapes, and it is estimated that the size of assets held in these tax havens is in excess of $21 trillion, most of which is beyond the reach of tax collectors. However, this also enables many companies to maintain some of their least ethical practices without fear of public accountability.

A recent study found that the deforestation of the Amazon and widespread illegal fishing have both been linked to tax havens, with some 68% of the investments tracked in the Amazon came from companies based in countries where no tax is paid, and around 70% of illegal fishing vessels being similarly registered in tax havens. Some drew the conclusion from this that tax avoidance schemes are essentially subsidising the destruction of the environment, along with a number of other unsavoury acts.

Of the existing tax havens in the world, with their reputation for being ‘undeveloped’ looking to fast track their way to financial success, it is perhaps surprising to see that Ireland is the world’s biggest tax haven of all. However, following a period of crisis, when Ireland was stung by punitive debt repayment requirements by the EU in a way similar to Greece, the nation ramped up its effort to make itself attractive as a tax haven. As a result, last year Ireland received $106 billion in shifted profits, on a working tax rate of just 4%.

The whole of the Caribbean, which is perhaps more notorious for operating as a tax haven, raked in a further $96 billion, ahead of Singapore on $70 billion. Only Bermuda has a lower tax rate than the Caribbean’s collective 2%, with the region not charging any effective tax rate. By contrast, famous European tax haven Switzerland operates the highest effective tax rate listed at 21%, while the Netherlands brings in $51 billion a year, taxing at just 10%.

For the smaller countries mentioned, what is striking is that the profit shifted into the coutry can be nearly as much as all corporate profits made in the country combined, showing exactly why becoming a tax haven can appeal to them. Bermuda sees 96%, the Caribbean 95% and Malta 86%, compared to the larger economies, though the likes of Ireland, Switzerland and Singapore still see more than 50% of their domestic profits shift into the nation.

Interestingly, many leading economies are now considering measures to emulate these havens, in order to keep larger amounts of domestic and foreign profit in their own borders – though it is questionable as to how useful this with the bulk of the UK’s tax burden still falling on those less able to pay, as a result. The UK, for example, is working on reducing corporation tax from 19% in 2017 to 17%, lower than a number of havens listed here, compared to the US rate of 21%, the 27% of France, and the 26% of Japan. However, it is also important to note that effective corporate tax rates are averages, and can differ per firm and from origin. For example, in Netherlands, American subsidiaries effectively did not pay more than 12% profit tax in the Netherlands.

According to the study, American multinationals avoid the most tax, they account for half of the profits that end up in tax havens. The chief culprits are Google, Apple, Facebook and Nike. Elsewhere, European multinationals account for another 30% total.

The authors added that this form of tax evasion is unethical and not good for economy. The biggest losers are the countries of the European Union that are not a tax haven and the developing countries, as well as the civilian tax payers lumbered with the financial burden of subsidising public infrastructure that the users of tax havens are all too happy to use for a proportionally lower price. Countries with higher taxes that lower their rates also actually steal income from each other, with the result is that capital is being taxed less and less, benefitting usually well-to-do shareholders benefit from this, and few others.