## Tax Havens — TACKLING (Nicholas Shaxson)

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### Scale and impact
- Tax havens collectively cost governments between $500 billion and $600 billion a year in lost corporate tax revenue.
- Low-income economies account for some $200 billion of that lost corporate tax revenue.
- Low-income economies’ corporate tax losses are a larger hit as a percentage of GDP than advanced economies and exceed the roughly $150 billion they receive each year in foreign development assistance.
- American Fortune 500 companies held an estimated $2.6 trillion offshore in 2017 (a small portion repatriated following US tax reforms in 2018).
- Individuals have stashed $8.7 trillion in tax havens (estimate by Gabriel Zucman, 2017); James S. Henry’s 2016 estimates yield up to $36 trillion.
- Both Zucman and Henry, using different rates of return, put global individual income tax losses at around $200 billion a year (to be added to the corporate total).
- Corporate tax rates have declined from 49 percent in 1985 to 24 percent today.
- For US multinationals, corporate profit shifting into tax havens rose from an estimated 5 percent to 10 percent of gross profits in the 1990s to about 25 to 30 percent today.

### Nature of tax havens and mechanisms
- Definition emphasized: “escape” and “elsewhere” — jurisdictions that allow money to escape rules by going offshore.
- Havens provide escapes from tax, financial regulations, disclosure, criminal liability, and more, benefiting large financial institutions and multinationals and tilting the playing field against small and medium enterprises.
- Main corporate technique: manipulation of transfer prices between affiliated entities to shift profits from high- to low-tax jurisdictions (example: patent held in low-tax haven charging royalties to affiliates in high-tax countries).
- Arm’s length principle treats multinationals as “separate entities,” which is a fiction given their unitary nature; the system favors headquarters locations (usually rich countries).

### Alternative: unitary tax with formulary apportionment
- Unitary tax treats a multinational as a single entity and apportions profits geographically according to a formula reflecting real economic activity (mix of sales, employment, tangible assets).
- Advantage: limits benefit of token presence in low-tax havens (e.g., one-person office in Bermuda would receive a minuscule share).
- Practical challenges: technical difficulties and political contestation over choice of formula.
- Precedent: limited versions used by many US states, Canadian provinces, and Swiss cantons for subnational taxes.
- Country-by-country financial reporting could provide data relevant for an international allocation formula.
- Incremental, evolutionary steps toward formula apportionment are possible.

### Recent political and institutional responses
- Post-2008 crisis pressures (budget deficits, public anger over bailouts and inequality) increased efforts to curb tax havens.
- OECD initiatives:
  - Common Reporting Standard (CRS): automatic exchange of financial information across borders.
    - OECD estimated in July 2019 that 90 countries had shared information on 47 million accounts worth €4.9 trillion.
    - CRS reportedly reduced bank deposits in tax havens by 20 to 25 percent.
    - Voluntary disclosures ahead of implementation generated €95 billion in additional tax revenue for OECD and Group of 20 members.
    - CRS contains loopholes (e.g., passport-based residence claims, and the United States’ limited reciprocal information sharing under FATCA makes the United States a major tax haven for nonresidents).
  - Base erosion and profit shifting (BEPS) project: aimed to “realign taxation with economic substance” while preserving the arm’s length principle; ultimately seen as limited, especially for the digitalized economy.
- Political shifts:
  - Emerging market economies (including Colombia, Ghana, India) gained clout starting in 2016 and pushed for approaches favoring employees and tangible assets in formulas.
  - January 2019: OECD conceded a need for “solutions that go beyond the arm’s length principle.”
  - March 2019: Christine Lagarde called the arm’s length method “outdated” and “especially harmful to low-income countries,” urging moves toward formula-based approaches.
  - May 2019: OECD published a “road map” proposing reforms based on two pillars: (1) determining where tax should be paid and on what basis and what portion of profits should be taxed on that basis; and (2) getting multinationals to pay a minimum level of tax.
  - Professor Reuven Avi‑Yonah characterized the plan as “extraordinarily radical.”
- Tax Justice Network’s four core demands gaining traction: automatic exchange of financial information across borders; public registers of beneficial ownership of financial assets; country-by-country reporting; and unitary tax with formula apportionment.

### Private enablers and sanctions
- Effective international response requires strong sanctions against private enablers (bankers, accountants, lawyers), especially where they facilitate criminal activity such as tax evasion.
- Case study: US Department of Justice action against Swiss bankers after 2008 compelled major concessions from Swiss private banking interests on banking secrecy.

### Broader economic and political effects: “too much finance” and the finance curse
- New research (IMF, BIS, others) finds financial sector growth is beneficial up to an optimal point, after which it harms economic growth.
- Most advanced economies, including the United States and the United Kingdom, passed that optimal point; for them, shrinking harmful financial activities should boost prosperity.
- Concept of the “finance curse” (developed by John Christensen and Nicholas Shaxson): jurisdictions with oversize financial sectors suffer a “paradox of poverty in the midst of plenty.”
  - Causes and consequences include:
    - Brain drain of skilled people into the financial sector.
    - Rising, growth-sapping inequality between dominant financial sector and others.
    - Increase in local prices that harm tradables sectors.
    - Recurrent booms and busts in prices of commodities and financial assets.
    - Increased rent seeking and loss of entrepreneurship.
    - Shift toward predatory, wealth-extracting activities (financialization), monopolization, too-big-to-fail banking, and use of tax havens.
- Financial flows seeking secrecy or tax avoidance likely exacerbate the finance curse, worsening inequality, vulnerability to crises, and political damage through secrecy-shrouded capital infiltration.
- Offshore centers often transmit harm outward to other countries and inward to the host; hosting an offshore financial center can be a lose-lose proposition.
- Policy implication: countries that recognize these dangers can act unilaterally to step out of the race to the bottom and curb tax haven activity while improving citizens’ well-being.

*Nicholas Shaxson, Finance & Development, September 2019.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2019/september/tackling-global-tax-havens-shaxon.pdf_