Is the end of corporate tax evasion and tax havens finally in sight?

Is the end of corporate tax evasion and tax havens finally in sight?

Pictured above, yachts moored in the port of Saint Helier, capital of the island of Jersey (a British dependency in the English Channel), a territory considered to be one of Europe’s primary tax havens.

(AFP/Oli Scarff)

While humanity continues to endure a pandemic that has already claimed the lives of 3.3 million people, disrupted the lives of millions more, and led to a rise in unemployment, poverty and hunger among vulnerable populations across the world, some of the world’s most powerful multinational corporations have seen an increase in profits. What’s more, their immoral (though often legal) abuse of tax schemes allows them to evade taxes in amounts equivalent to the annual salaries of 34 million nurses every year according to figures from the Tax Justice Network, a coalition of researchers and anti-tax avoidance advocates.

Civil society organisations, trade unions, academics and economists have pressed the leaders of the world’s largest economies to forge a preliminary agreement that stops corporations from evading paying taxes through so-called tax havens, jurisdictions that charge minimal tax rates on profits generated offshore. This evasion amounts to billions of dollars annually and disproportionately affects lower-income nations.

Since the end of 2020, “there has possibly been more progress than in a decade in these areas,” says Paul Monaghan, chief executive of Fair Tax Mark, a UK-based civil organisation that awards certificates to fiscally responsible businesses. “There’s a sea change in developments taking place.”

The progress to which Monaghan refers could be consolidated at the 8 July meeting of G20 finance ministers. The G20 member states together account for roughly 90 per cent of the world’s GDP, 80 per cent of global trade and two-thirds of the world’s population. The aim of the meeting, hosted by the Organisation for Economic Co-operation and Development (OECD), is to agree to new rules for taxing cross-border trade, as well as a global minimum corporate tax rate, which would reduce the incentive to report profits in other jurisdictions. According to an OECD report issued in February: “Today, all the conditions to find a consensus-based solution by the July meeting of G20 Finance ministers are met.”

In addition to the publication of new data on the amounts lost to public coffers, the many calls by experts and activists for tax justice, and increased public awareness, these conditions are a direct result of the health crisis, which has highlighted the shortcomings of health systems around the world – and made it increasingly clear that improving them, as well as reviving national economies, will require huge amounts of money.

With changes on the horizon, “for the very first time mainstream investors are not looking at tax avoidance as a good thing because they think it makes more money for their shareholders, but actually as a bad thing with enormous risks,” Monaghan tells Equal Times. “We don’t even need all the countries to agree to the rules. The truth is that for the rules to work, it’s enough if the G20 agrees to them. Rightly or wrongly, that would drive the change that is necessary.”

Gaining momentum

The proposal of a global minimum corporate tax rate for multinational corporations gained strong momentum after US Treasury Secretary Janet Yellen reiterated the United States’ full support for the measure in early April. A week later, G20 financial leaders also reaffirmed their commitment to reach an international agreement by mid-2021.

A survey conducted in the US, France, Germany, Italy, Poland, the Netherlands and the UK, published last September by the think tank More in Common, shows that an overwhelming majority of citizens in those countries (87 to 95 per cent) support governments cracking down on companies using tax havens.

“There’s been like a 20-year movement for global tax justice and now it has accomplished things that no one even thought possible even 10 years ago,” says Sara Burke, a senior policy analyst at the Berlin-based Friedrich Ebert Foundation (FES). “Developing countries want to know if multinational corporations are good global citizens. Are they paying the fair amount of taxes, and are they paying them in the right places?”

A February report by the UN High Level Panel on Financial Accountability, Transparency and Integrity (FACTI) issued recommendations for preventing tax abuse, corruption and money laundering, as well as illicit financial flows, from “robbing billions of the possibility of a better future.” According to the panel, “nothing less than a transformation of the global financial system” can address the problem.

Doing so would require measuring the scale of corporate tax abuse. Just a year ago, only estimates were available.

In July 2020, however, the OECD published an unprecedented report based on standards that were described as “utopian and unrealistic” when the Tax Justice Network first proposed them in 2002. According to the report, countries are losing US$427 billion (€352 billion) to tax havens every year through both corporate tax abuse and private tax evasion.

While lower-income countries account for just over 10 per cent of that amount, their tax losses are equivalent to nearly 52 per cent of their combined public health budgets. Higher income countries’ tax losses are equivalent to just 8 per cent of their combined public health budgets.

“For the first time ever, we have been able to see how much tax every country in the world loses to both tax abuse by multinational corporations as well as offshore private tax evasion by wealthy individuals,” says Mark Bou Mansour, communications coordinator at the Tax Justice Network. “That’s money that could have gone to health services, to the doctors and nurses that were and still are on the front lines saving lives every day.”

Contrary to popular belief, tax havens are not small nations in the Caribbean Sea: the highest income countries are responsible for 98 per cent of countries’ tax losses. The five jurisdictions most responsible are the British overseas territory Cayman Islands, the United Kingdom, the Netherlands, Luxembourg and the United States.
“The figure of US$427 billion is just the tip of the iceberg. This is just what we could observe. There are studies out there that estimate that countries are losing much more,” says Mansour.

Solutions in sight

The new US administration has announced an ambitious US$2.25 trillion (€1.86 trillion) infrastructure spending programme to build and repair roads, bridges, rail lines and national public utilities. This comes on top of a US$1.9 trillion (€1.6 trillion) economic stimulus plan that US President Joe Biden signed into law in March. This boost in spending will be financed by a substantial increase in corporate taxes.

As part of these plans, the US government is also pushing for an update of the international tax system. Last February, for example, the United States withdrew its demand to the OECD that US corporations only voluntarily adhere to a global tax framework for digital services, a decision that Monaghan describes as “incredibly important”.

According to observers, the United States’ new position substantially increases the likelihood of an international tax agreement that would halt “the race to the bottom,” in which tax havens compete to offer lower and lower tax rates in order to attract capital.

The US Congress is also considering raising the corporate tax rate from 21 per cent to 28 per cent, as well as creating a minimum tax on income earned abroad. The initiatives would halt a 40-year trend of systematically cutting corporate taxes, which has stripped governments of key resources for social spending. Theaverage global corporate rate has decreased from 40 per cent in 1980 to the current average rate of 23.8 per cent.

“We see the resistance, and the big companies are going to resist to the degree that they can,” says Burke. However, as she explains, the damage to a corporation’s image for refusing to pay fairer tax rates would eventually be unsustainable.

A watered-down implementation of the US-driven push to establish a global corporate minimum tax is already being discussed at the OECD.

According to this plan, roughly 75 per cent of recovered taxes would be absorbed by the richest OECD member states. A group of international economists led by Tax Justice Network is proposing a more equitable distribution of recovered taxes based on the US plan.

The long-term plan includes the creation of a global asset registry that would determine who owns which stocks and bonds. Detailed in French economist Gabriel Zucman’s book The Hidden Wealth of Nations (2013), the aim would be to consolidate information from all the world’s banks and share it with national tax authorities. Such a registry, according to Zucman, would be “a fatal blow” to so-called financial secrecy, a ruse that has thus far allowed illicitly amassed wealth to be concealed.

A global agreement on a minimum corporate tax in the coming months would represent a major achievement that would dramatically reduce the attractiveness of tax havens.

Over the past 13 months, millions of people have lost their jobs, health and wealth. Over the same period, the total wealth of billionaires in the United States alone increased by US$1.6 trillion, or 44 per cent, according to the Institute for Policy Studies, a progressive US think tank. At the same time it has become increasingly clear: the billions of dollars that the world’s most powerful corporations have avoided paying in taxes would be crucial to just economic recovery in the post-pandemic era.

“As countries and people look to rebuild, one of the things we tend to hear is that we need to build back better. But you can’t build back better on top of a tax haven trap door. So we need to take back control of our tax system,” says Mansour.

This article has been translated from Spanish.