Thanks to legal tax avoidance strategies, illegal tax evasion schemes and creative accounting that rarely gets challenged by resource-starved authorities, countries around the world collectively stand to lose an estimated $4.7 trillion in revenue over the next decade unless substantial reforms are made to global tax rules.
That's according to the Tax Justice Network, an international tax fairness advocacy group, which published its annual State of Tax Justice report on Tuesday.
The estimated $4.7 trillion shortfall is based on an analysis of aggregated data for 47 countries from the Organization for Economic Cooperation and Development. Given the limitations of the data set as well as other studies on the issue, TJN suggests the real shortfall may be even higher.
A majority (64%) of the forgone revenue is pegged to multinational corporations that can still — despite efforts at international tax reform by the OECD over the past decade — engage in profit-shifting, which is essentially selecting low-tax jurisdictions (i.e., tax havens) to assign a disproportionate share of a corporation's profits for tax purposes even though they were largely generated by a company's economic activities in higher-tax locales.
While the term "tax haven" usually conjures images of tropical islands, TJN notes there are also plenty of corporate tax havens in large, developed economies too — such as the United Kingdom, Singapore, the Netherlands, Hong Kong and Luxembourg, all of which have effective corporate tax rates of below 10%.
A well-known example of profit-shifting came to light a decade ago, involving Apple and its subsidiaries in Ireland. While most of Apple's research and development was done in the United States, some of its R&D costs were borne by its Irish subsidiaries under a cost-sharing agreement. From 2009 to 2012, one of those Irish subsidiaries contributed $4.9 billion to Apple's R&D, but booked pre-tax profits of 15 times that amount. The problem, tax experts said, is that Apple's Irish subsidiaries may have gotten a "sweetheart deal" for their R&D investment — the kind of deal that the company wouldn't give to an outside entity that might want to get in on the ground floor of the next great Apple product.
More recently, Senate Finance Committee Democratic staff conducted an investigation that found some of the biggest pharmaceutical makers, for whom the United States is their biggest market, have reported the majority of their income offshore.
The remaining 36% of the $4.7 trillion shortfall is attributable to wealthy individuals who benefit from rules (or lack thereof) that allow for financial secrecy, making it easy to shield assets in offshore havens from tax authorities.
All in, the report's authors estimate that $4.7 trillion is roughly equivalent to a year's worth of public health spending worldwide.
They found that while high-income and low-income countries both experience revenue losses, the losses are not shared equally. "The largest losses in absolute terms are borne by major economies and higher income countries. Lower income countries, however, endure by far the deepest losses when considered as a share of current tax revenues, or current spending on vital public services such as health and education," the authors wrote.
The outlook for systemic global tax reform
While the Tax Justice Network was initially hopeful that OECD tax reform efforts that started a decade ago might reduce global tax abuse, those efforts have hit multiple roadblocks and implementation delays. Now, TJN backs proposals to move authority for global tax rulemaking from the OECD to the United Nations.
In September, the UN Secretary-General is expected to publish a report laying out options for what a UN convention on tax might look like. And by the end of this year, UN members are likely to vote on a resolution to start formal negotiations.
"The key to ending cross-border tax abuse is to deliver on a UN tax convention and to create a global tax body under UN auspices," the report's authors contend. "The people of every country stand to be empowered, with governments increasingly able to exercise their sovereign power so that tax can play its central role as a social superpower."
While the UN is far from perfect, said Alex Cobham, TJN's chief executive, it has been a place where countries with competing interests have reached complex agreements and have had to be public about their commitments as a result of those agreements. For instance, Cobham said, "[the UN] raised ambitions on climate change."
