Research: Tax havens to swell to nearly $1 trillion by 2019

But according to our estimates, it didn’t work. Instead of restricting the use of tax havens – countries like the Bahamas and the Cayman Islands with very low or no effective tax rates – the problem has only gotten worse.

According to our calculations, companies shifted almost $1 trillion in profits generated outside their home countries to tax havens in 2019, up from $616 billion in 2015, the year before the global tax haven plan by the Group of 20 top economies also known, was implemented like the G-20.

In a new study, we measured excessive profits reported in tax havens that cannot be explained by ordinary economic activities such as employees, factories and research in that country. Our findings – which you can examine in more detail, along with the data and an interactive map in our public database – reveal a striking pattern of artificially shifting paper profits to tax havens by companies that has been unrelenting since the 1980s.

Global crackdown

The current effort to stem the legal practice of using tax havens to avoid paying taxes began in June 2012, when world leaders at the G-20 meeting in Los Cabos, Mexico, discussed the need agreed to do something.

The Organization for Economic Co-operation and Development, a group of 37 market-based democracies, developed a plan consisting of 15 specific measures that it believed would significantly curb abusive corporate tax practices. These included creating a single set of international tax rules and tackling harmful tax practices.

In 2015, the G-20 formally adopted the plan, and global implementation began the following year.

In addition, public outcry following leaks such as the Panama Papers and Paradise Papers – which shed light on corporate tax practices – prompted governments in the US and Europe to make their own efforts to reduce the incentive to shift profits to tax havens.

Profit shifting increases

Our research shows that all of these efforts have had little effect.

We found that the world’s largest multinationals shifted 37% of their profits – or $969 billion – generated in other countries (outside the country of headquarters) to tax havens in 2019, up from about 20% in 2012 , when G-20 leaders met in Los Cabos and agreed to crack down. In the 1970s it was less than 2%. The main reasons for the sharp increase were the growth of the tax avoidance industry in the 1980s and US policies that made it easier to shift profits from high-tax countries to tax havens.

We also estimate that the amount of lost corporate taxes reached 10% of total corporate revenues in 2019, up from less than 0.1% in the 1970s.

In 2019, the total global government tax loss was $250 billion. About half of this was accounted for by US multinationals alone, followed by Great Britain and Germany.

Global minimum tax

How does politics regulate this?

So far the whole world is trying to solve this problem by lowering or abolishing corporate taxes, albeit very gradually. Over the past 40 years, the global effective corporate tax rate has fallen from 23% to 17%. At the same time, governments have relied more heavily on consumption taxes, which are regressive and tend to increase income inequality.

But the main cause of profit shifting is the associated incentives, such as B. Generous or lenient corporate tax rates in other countries. If countries could agree on a global minimum corporate tax rate of, say, 20%, we believe the profit shifting problem would largely disappear as tax havens would simply cease to exist.

This type of mechanism is exactly what more than 130 countries signed up to in 2021, with implementation of a 15% minimum tax to start in 2024 in the EU, UK, Japan, Indonesia and many other countries. Notably, while the Biden administration has helped spearhead global efforts to introduce the tax, the US has been unable to get legislation through Congress.

Our research suggests that implementing this type of tax reform is necessary to reverse the shifting of ever-increasing corporate profits to tax havens – rather than being taxed by governments where they operate and create value.

Ludvig Wier is Associate Professor of Economics at the University of Copenhagen and Gabriel Zucman is Associate Professor of Economics at the University of California, Berkeley.

This article was republished by The Conversation under a Creative Commons license. Read the original article.

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