These are the findings of the first study led by The Tax Justice Network (TJN), which is an independent research based international network, that was published in alliance with other organisations.
‘The State of Tax Justice – 2020’, which is the inaugural edition of the report, explains that of the $427 billion in tax globally lost by countries each year to tax havens, $245 billion (or 57.4%) is directly lost owing to corporate tax abuse by multinational corporations (MNCs) and $182 billion (or 42.6%) owing to private tax evasion.
The report analyses data that was self-reported by MNCs to tax authorities, owing to the Base Erosion and Profit Shifting (BEPS) project spearheaded by the Organisation for Economic Co-operation and Development (Oecd).
MNCs paid billions less in tax dues by shifting $1.38 trillion worth of profit out of the countries where they were generated and into tax havens, where corporate tax rates are extremely low or non-existent. Private tax evaders paid less tax than they should have by storing a total of over $10 trillion in financial assets offshore, adds the report.
In the backdrop of the pandemic, the report translates the loss of over $427 terms into nurses’ salaries and states it costs countries the equivalent of nearly 34 million nurses’ annual salaries every year or one nurse’s annual salary every second.
Solutions suggested by TJN and other partners to this study, are that governments should introduce an excess profit tax on MNCs such as global digital companies, who are making excess profits during the pandemic. They also propose introduction of wealth tax with punitive rates for opaquely-owned offshore assets. Lastly, as Oecd is perceived as a rich-countries conglomerate, they seek a United Nations (UN) tax convention to set multilateral standards for corporate taxation and ensure tax co-operation between governments.
Higher income countries are responsible for 98% of global tax losses borne by countries which aggregates to over $ 419 billion each year. On the other hand, lower income countries are responsible for just 2% of the global losses, which results in annual tax loss of over $8 billion, states the report.
According to it, the five jurisdictions most responsible for countries’ tax losses are led by Cayman Islands (a British territory) which accounts for 16.5% of global tax losses, aggregating to over $70 billion. This is followed by UK, accounting for 10% of global tax losses of over $42 billion and Netherlands, which is responsible for 8.5% of global tax losses of over $36 billion. Luxembourg is responsible for global tax losses of over $27 billion (6.5%) and US accounts for 5.5% of global tax laws, of over $23 billion.
G20 member countries are collectively responsible for 26.7% of global tax losses, costing countries over $114 billion in lost tax every year. The G20 countries themselves also lose over $290 billion each year.
Impact on India: TJN, has developed a tool to analyse a country’s exposure to hidden (illicit) elements in financial flows be it via trade, investment or banking services. For India, which is said to lose $10.3 billion annually in the form of taxes lost to other countries, ‘outward foreign direct investments’ (OFDI) is its most vulnerable channel, with a 66% vulnerability score. Mauritius, Singapore and Netherlands are the top three countries that contribute the most to this vulnerability factor. The share of vulnerability contributed by each of the top three countries is indicated in percentage terms, which translates to 23.6%, 17.2% and 11.2% respectively.
Of the $10.3 billion annually tax loss that India suffers, a major chunk of it – nearly $10.11 billion is owing international corporate tax abuse. The balance $202.15 million is owing to private offshore tax evasion.
According to government data, owing to the pandemic OFDI from India dropped in the first four months (April-July 2020) to $5.7 billion, in the corresponding period in the previous year it was $11.13 billion. Historically the government has concentrated more on curbing tax evasions in inbound investments, admits a government official. However, of late, there is a watchful eye cast on outbound investments also to see if there is any tax abuse, including on royalties paid to overseas affiliates in low tax jurisdictions, he adds.
The report pegs India’s GDP at $2.51 trillion (based on the average of the past ten years), based on this India’s tax loss is placed at 0.41% of its GDP and works out to $8 per population of a billion plus.
Solutions in detail: Solutions suggested by TJN and other partners in this study, viz: Public Services International and the Global Alliance for Tax Justice, are that governments should introduce an excess profit tax on those MNCs who are making excess profits during the pandemic – such as global digital companies, in order to cut through profit shifting abuses. MNCs excess profits should be identified at the global level and not at the national level, to prevent corporations from under-reporting their profits by shifting them into tax havens and taxed using a unitary tax method.
They also propose introduction of a wealth tax, with punitive rates for opaquely-owned offshore assets. The pandemic has already seen an explosion in the asset values of the wealthy, even as unemployment has soared to record levels in many countries. Lastly, as Oecd is seen as a rich-countries conglomerate, they seek a United Nations (UN) tax convention to ensure a global and genuinely representative forum to set consistent, multilateral standards for corporate taxation, for the necessary tax cooperation between governments, and to deliver comprehensive, multilateral tax transparency.
Alex Cobham, chief executive of the Tax Justice Network, said: “A global tax system that loses over $427 billion a year is not a broken system, it’s a system programmed to fail …” “The pandemic has exposed the grave cost of turning tax policy into a tool for indulging tax abusers instead of for protecting people’s wellbeing. Now more than ever we must reprogramme our global tax system to prioritise people’s health and livelihoods over the desires of those bent on not paying tax. We are calling on governments to introduce an excess profit tax on large MNCs that have been short-changing countries for years, targeting those whose profits have soared during the pandemic while local businesses have been forced into lockdown. For the digital tech giants who claim to have our best interests at heart while having abused their way out of billions in tax, this can be their redemption tax. A wealth tax alongside this would ensure that those with the broadest shoulders contribute as they should at this critical time,” added Cobham.