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TAX HAVENS

Nearly $500 billion lost yearly to global tax abuse due mostly to corporations, new analysis says

The State of Tax Justice 2021 report highlights the role of wealthier countries like the U.S. in draining global tax revenue — an issue under discussion by policymakers after the Pandora Papers.

Governments around the world are losing nearly $500 billion in tax revenue per year to global tax abuse, according to a new report.

The State of Tax Justice 2021 — published Tuesday by the Tax Justice Network, the Global Alliance for Tax Justice and the global union federation Public Services International — found that countries miss out on $312 billion annually due to tax abuse by multinational corporations and an additional $171 billion via individual tax evasion.

TJN data scientist Miroslav Palanský said in a release that those numbers, which represent direct losses by governments, are likely only “the tip of the iceberg.”

The International Monetary Fund has estimated that the race to the bottom among tax havens has caused additional indirect losses by driving global tax rates down, and the indirect impact of tax abuse by multinational corporations is at least three times larger than the direct losses, according to the report.

Amid the ongoing COVID-19 pandemic, the report frames the scope of tax avoidance — and the disparate impact on lower-income countries — through the lens of public health. Using data on the cost of delivering vaccinations, TJN estimates that the $483 billion in global tax losses would be enough to vaccinate the entire world three times. And while lower-income countries lose far less in tax revenue — $40 billion — than wealthier nations, that figure represents nearly half of those countries’ public health budgets.

“The parallels with global tax injustice are striking,” the report says. “As the Pandora Papers highlighted once again, the failure of international rules for taxing multinational companies and offshore income and wealth plays out in predictable ways.”

The report identifies the wealthy countries that make up the Organization for Economic Co-operation and Development, a group that sets global tax rules, as the source of most of the global tax abuse. OECD members and their dependencies are responsible for 78% of all global tax losses — including over 90% of individual tax evasion, according to TJN’s analysis.

It calls for the United Nations to step in and take over OECD’s role as the setter of global tax standards, a recommendation that mirrors the findings released by the UN’s High-Level Panel on Financial Transparency, Accountability, and Integrity (FACTI) in February.

“The richest countries, much like their colonial forebearers, have appointed themselves as the only ones capable of governing on international tax, draped themselves in the robes of saviours and set loose the wealthy and powerful to bleed the poorest countries dry,” Dr. Dereje Alemayehu, executive coordinator of the Global Alliance for Tax Justice said in a statement. “Rules on where and how multinational corporations and the superrich pay tax must be set at the UN in the daylight of democracy, not by a small club of rich countries behind closed doors.”

Last month, 136 countries and territories signed on to an agreement spearheaded by OECD and the U.S. that would institute a global minimum corporate tax rate of 15% and require multinational companies to pay taxes in the countries where they do business. But TJN chief executive Alex Cobham said at the time that the measures were watered down and retained sizable incentives for multinationals to shift profits.

TJN’s report found that the United States is responsible for other countries losing out on nearly $20 billion a year in tax revenue, a figure topped only by the Cayman Islands and the United Kingdom. As part of the Pandora Papers investigation, the International Consortium of Investigative Journalists exposed the United States’ growing role as an enabler of illicit financial flows.

“What was fantastic and frankly fascinating about the Pandora Papers is how it’s centered the U.S.,” investigative journalist Casey Michel said Wednesday in a webinar discussing “American Kleptocracy,” his forthcoming book on the rise of the U.S. as a major player in the offshore industry. “The U.S. is now at the center of all of these networks.”

The Pandora Papers were also referenced this week at a U.S. Helsinki Commission hearing on combating foreign corruption and kleptocracy. Scott Greytak, advocacy director of Transparency International’s U.S. office, cited ICIJ’s reporting about how Jho Low, the financier at the heart of Malaysia’s 1MDB scandal, used affiliates of the American law firm Baker McKenzie to set up a network of companies despite “fitting the ‘textbook definition’ of a high-risk client.”

Greytak called on Congress to pass new legislation, like the ENABLERS Act introduced days after the publication of the Pandora Papers in October, that would require law firms, investment advisers or other parties involved in forming companies to perform full due diligence checks on prospective clients.

In addition to calling for the UN to take a bigger role on global taxation, the report also recommends that governments introduce an excess profits tax on multinational companies and a wealth tax on individuals to address the growing inequality that has been exacerbated by the pandemic.

“Tax can be our most powerful tool for tackling inequality, but instead it’s been made entirely optional for the superrich,” Cobham said Tuesday in a release. “It’s time they were held accountable.”

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