The True Cost of Global Tax Havens – IMF F&D
Source details
- Canonical URL
- The True Cost of Global Tax Havens – IMF F&D
Other formats
Bibliographic details
- Authors: NICHOLAS SHAXSON
- Published: September 1, 2019
Overview
- Tax havens are far bigger and more central to the global economy than commonly perceived and the largest havens are often located in rich jurisdictions or their territories.
- Tax havens enable escape from taxes, financial regulations, disclosure, and criminal liability, tilting the playing field toward large financial institutions and multinationals and against small and medium enterprises.
- Political damage includes hiding places for illicit activities of elites and increased financial instability risks for emerging market economies.
Scale and distribution of losses and holdings
- 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’ hit as a percentage of GDP is larger than for advanced economies, and exceeds the roughly $150 billion they receive each year in foreign development assistance.
- American Fortune 500 companies alone held an estimated $2.6 trillion offshore in 2017.
- Individuals have stashed $8.7 trillion in tax havens (Gabriel Zucman, 2017 estimates).
- James S. Henry’s (2016) more comprehensive estimate yields up to $36 trillion held offshore.
- Both estimates imply global individual income tax losses at around $200 billion a year, to be added to the corporate total.
Mechanisms of profit shifting and definitions
- The author’s working definition of a tax haven emphasizes “escape” and “elsewhere.”
- The international corporate tax system treats multinationals as “separate entities” under the arm’s length principle, a fiction that enables profit shifting.
- Transfer pricing manipulation example: a firm’s affiliate in a low-tax haven holds a patent and charges high royalties to affiliates in high-tax countries.
- Alternative described: “unitary tax with formulary apportionment,” which treats a multinational as a single entity and apportions profits geographically according to a formula (sales, employment, tangible assets).
- Practical and political difficulties exist for formulary apportionment, but it is presented as simpler, fairer, and more rational than current practice.
Empirical trends and sectoral impacts
- Average corporate tax rates declined byhalf, 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.
- Offshore capital tends to drain from poor countries to rich ones.
- Research on “too much finance” indicates financial sector growth is beneficial up to an optimal point, after which it harms economic growth; most advanced economies, including major tax havens, have passed that point.
- Concept introduced: the “finance curse”—an oversize financial sector produces effects analogous to a resource curse (brain drain, inequality, higher local prices, boom-bust cycles, rent seeking, loss of entrepreneurship, and financialization).
Policy responses, reforms, and international initiatives
- Post-2008 political pressure, Panama Papers and Luxembourg Leaks, and activism led to OECD initiatives:
- Common Reporting Standard (CRS) for automatic exchange of financial information; CRS has loopholes (passport-based residence claims; the United States’ limited reciprocity under FATCA makes it a geographic loophole).
- OECD estimated that 90 countries had shared information on 47 million accounts worth €4.9 trillion; bank deposits in tax havens reduced by 20 to 25 percent; voluntary disclosures ahead of implementation generated €95 billion in additional tax revenue for OECD and G20 members.
- Base erosion and profit shifting (BEPS) project aimed at realigning taxation with economic substance but was seen as limited, particularly for the digitalized economy.
- Political and institutional shifts in 2019:
- January 2019: the OECD publicly 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: the 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.
- Incremental and data-driven steps: country-by-country reporting and publication of multinational breakdowns could provide data for international allocation formulas.
- Enforcement lesson from Switzerland: targeting private enablers (bankers, banks, accountants, lawyers) can prompt reform; effective international responses must include strong sanctions against private enablers of tax evasion and other crimes.
Strategic approaches and recommendations
- Move toward unitary taxation with formulary apportionment (gradual or evolutionary implementation possible through stepping-stones such as enhanced transparency and country-by-country data).
- Strengthen sanctions and enforcement against private enablers of secrecy and evasion (accountants, lawyers, bankers).
- Use unilateral actions by jurisdictions that recognize hosting offshore financial centers is detrimental—stepping out of the race to the bottom can improve domestic well-being.
- Pursue multilateral reforms while acknowledging collective-action challenges and incentives for jurisdictions to cheat; complement cooperative approaches with measures that change domestic incentives in havens.
- Continue research into the finance curse and the broader macroeconomic and political consequences of large offshore finance sectors.
Source: The True Cost of Global Tax Havens – IMF F&D (page overview)
Content in this bundle
- التصدي للملاذات الضريبية
- Combatir los paraísos fiscales ● Finanzas y Desarrollo ● Septiembre de 2019
- Haro sur les paradis fiscaux
- タックスヘイブンという病巣 ニコラス・シャクソン著 ファイナンス＆ディベロップメント 2019年9月
- Борьба с налоговыми убежищами – Финансы и развитие – сентябрь 2019 года
- The True Cost of Global Tax Havens – IMF F&D
- 应对避税港问题 - 《金融与发展》2019年9月号·第56卷·第3期 - 国际货币基金组织季刊
- sdn1508