The Tide Is Turning in the Global Tax Evasion Fight
But better targeting of the $12 trillion in wealth held offshore is essential to reconciling globalization with political legitimacy. The EU Tax Observatory at the Paris School of Economics has published a report detailing the progress being made in the global tax fight against tax loopholes. The Observatory suggests that in 2021, over 140 countries and territories, including the Organization for Economic Cooperation and Development, will implement a minimum tax of 15% on multinational profits and redirect tax revenue to countries where the products are actually sold or used. The report also highlights the potential for an estimated quarter of the offshore wealth that may have been converted to real estate, accounting for $1 trillion worth of profits booked in tax havens. However, the report also notes that globalization is not the only villain, with US companies locating their “intangible assets” there. It suggests that a global minimum tax on all billionaires equal to 2% of their wealth is needed.
प्रकाशित : 2 साल पहले द्वारा Adrian Wooldridge | Bloomberg में Business
But for how much longer? The past decade has seen an impressive global effort to fill in tax loopholes. In 2017, governments introduced a system of automatic exchange of bank information whereby offshore financial centers must inform the tax authorities in the account holder’s resident country about bank transactions. In 2021, more than 140 countries and territories, coordinated by the Organization for Economic Cooperation and Development, struck a deal to implement a minimum tax of 15% on multinational profits and redirect tax revenue to countries where the products are actually sold or used.
A new report from the EU Tax Observatory at the Paris School of Economics provides the first detailed look at what progress is being made. (The Observatory uses the term “evasion” generously to cover not just illegal tax evasion but also creative acts of tax avoidance that involve tax havens or shell companies.) The authors may get carried away with their pursuit of a perfectly fair tax system, bringing billionaires and tax-dodging companies into line. But they also provide vital data, generated by what they call an “informational big bang,” for improving the global tax system. Whatever their faults with over-zealousness, they are right that we need to do what we can to reconcile globalization with justice if we are to save the global system from self-destruction.
But even here the success is qualified: An estimated quarter of the offshore wealth that was previously held in the form of financial assets may have been converted to real estate. About $500 billion of real estate is owned by foreign owners, often companies rather than individuals, in six places: London, Paris, Singapore, Dubai, Cote d’Azur, and, surprisingly, Oslo. This is equivalent to about 10% of the total real estate in these areas.
And when it comes to anti-profit shifting, the picture is even more mixed. In 2022, $1 trillion worth of profits were booked in tax havens — that is about 35% of all profits booked by multinational companies outside their home countries and roughly the same as the figures for before the legislation. This is not to say that nothing has been achieved — the growth in the amount of profit shifting has slowed — but carve-outs and exceptions are rapidly eroding the legislation’s impact.
Ireland exemplifies the ability of a ruthless country to play the system. (Ireland has been much more successful at acting as a buccaneering state within the EU than Britain has outside it.) In 2022, Ireland collected the equivalent of €4,500 ($4,770) in corporate income tax per inhabitant — nearly five times as much as France or Germany, which have much higher corporate tax rates. Ireland’s introduction of a particularly low (6.25%) tax rate for royalties (as part of a so-called “patent box” regime) has led to a surge in global companies locating their “intangible assets” there.
Globalization is not the only villain in the Observatory’s story: One of the biggest distortions in the global tax system takes place at the national rather than the global level. US billionaires have an effective tax rate equivalent of 0.5% of their wealth and French billionaires a tax rate of zero. US billionaires achieve this, in many cases, by getting their companies to retain their earnings; French billionaires by paying their dividends into intermediate wealth-holding companies. The Observatory thinks it has a global solution to these national problems: Impose a global minimum tax on all billionaires equal to 2% of their wealth.
It was the US that fired the starting gun in the race against tax havens with the 2010 Foreign Account Tax Compliance Act (FATCA), which required all banks to report on the bank accounts held by US citizens. It is the US that holds the key to dealing with profit shifting. US multinationals put almost half of their foreign profits in tax havens compared with about 30% for non-US multinationals. Congressional opposition to the new profit shifting regime is growing, with Representative Jason Smith, the chairman of the House Ways and Means Committee, fuming that “the global technocrats negotiating this backroom deal have sought to attack the United States.” Its chances of passage will not be increased by calls from an EU-branded organization for a global minimum tax on billionaires.
Many conservatives would no doubt go further and denounce the report’s entire premise — that global technocrats should limit the freedom of nation states to set their tax rates. What is the point of sovereignty if not to give you the power to decide on your tax-and-spending rates? And how are emerging countries supposed to emerge if they cannot compete with established ones to attract mobile companies and talented individuals? Too true. But closing tax loopholes and preventing profit shifting does not prevent genuine competition between countries. It simply prevents companies from engaging in a game of hide-and-seek that has nothing to do with wealth creation.
The deeper objection to the argument is arguably that it does not go far enough: It addresses the old world of free-booting globalization rather than the new one of state activism and trade barriers. The race to subsidize providers of green energy — a race that China started with its generous treatment of state companies, but which Joe Biden’s Inflation Reduction Act then turbocharged — will more than offset the gains from the global minimum corporate tax. The next great tax battle is how to prevent countries from distorting their economies through subsidies rather than how to expose hidden wealth.
Yet it would be foolish to despair about global tax policy. The automatic reporting of bank payments proves that progress is possible in this difficult area: Shrinking tax evasion by a factor of three is no small achievement. It also shows that we have a formula for success: forcing financial authorities in tax havens to register financial transactions as a condition of remaining part of the global financial system. Tax reformers should now make applying the same principle to cross-border real estate deals their number one priority.
Progress matters if we are to reconcile globalization with political legitimacy. Globalization is hard to sustain if it means lower taxes for the winners, who can keep their income hidden, and higher taxes for regular people who have no choice but to pay payroll and consumption taxes. It is even harder to sustain if successful people, particularly the young, find it ever harder to live in big cities because tax dodgers are converting urban property into the equivalent of Swiss bank accounts. There is no point in hiding your wealth from the taxman if, in the process, you are putting a flame to the foundations of the capitalist system.
विषय: Tax Fraud