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New index ranks havens behind broken global tax system: $18 trillion booked in just 10 countries

Tuesday, May 28, 2019   (0 Comments)
Posted by: Brian Monroe
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By Brian Monroe
May 28, 2019

Many large corporates are parking nearly half of current cross-border direct investments representing trillions of dollars in value in only a handful of countries – jurisdictions offering single digit tax rates that one watchdog group states is contributing to an overall broken global tax system.

Some 40 percent of today’s cross-border direct investments reported by the International Monetary Fund (IMF) – $18 trillion in value – are being booked in just 10 countries offering corporate tax rates of three per cent or less, the result of decades of tax wars among the world’s richest countries unravelling the century-old global corporate tax system, new research finds.

The Corporate Tax Haven Index, published Tuesday by the Tax Justice (TJN), has identified the United Kingdom (UK) and several Organization for Economic Cooperation and Development (OECD) countries as the jurisdictions most responsible for the breakdown of the global corporate tax system. 

The UK, according to the ranking, “bears the lion’s share of responsibility through its controlled network of satellite jurisdictions,” according to TJN. “These countries have aggressively undermined the ability of governments across the world to meaningfully tax multinational corporations.”

How much of a corporate tax bill is being skipped out on?

“An estimated $500 billion in corporate tax is dodged each year globally by multinational corporations – enough to pay the United Nations’ under-funded humanitarian aid budget 20 times over every year,” according to the report.

The data also reveals an “aggressive annexation of low-income countries’ tax rights” by powerful OECD countries including the UK, France and Sweden, among others.

The ‘top 10 most corrosive corporate tax havens’ in the world, says TJN

The Corporate Tax Haven Index is the “first ever study of its size and scope,” according to the watchdog group, adding that it ranks countries by their “complicity in global corporate tax havenry. The greater the share of global corporate activity jeopardized by the country’s tax system, the higher it ranks on the index.”

 “The hypocrisy revealed by the Corporate Tax Haven Index is sickening,” said Alex Cobham, chief executive at the Tax Justice Network. “A handful of the richest countries have waged a world tax war so corrosive, they’ve broken down the global corporate tax system beyond repair.”

Such a system leads to inequalities in terms of what countries can garner to sustain, in some cases, even basic humanitarian needs.

“When our laws for taxing global corporations stop working, the global economy stops working for the vast majority of us,” he said. “All around us we see inequalities go unaddressed, political extremism unchallenged and democratic institutions faltering – and the thread that runs through it all is a failure to defend progressive taxation.”

The top 10 countries that have done the most to “proliferate corporate tax avoidance and break down the global corporate tax system,” according to the group are:

1. British Virgin Islands (British territory)
2. Bermuda (British territory)
3. Cayman Islands (British territory)
4. Netherlands
5. Switzerland
6. Luxembourg
7. Jersey (British dependency)
8. Singapore
9. Bahamas
10. Hong Kong

These 10 jurisdictions alone are responsible for over half – 52 percent – of the world’s corporate tax avoidance risks, according to the index.

In short, more than two fifths of global foreign direct investment reported by the IMF is “booked in these 10 countries, where the lowest available corporate tax rates averaged 0.54 per cent,” according to the analysis, adding that the UK shoulders much of the blame.  

Overall, the top 10 jurisdictions alone have made many countries’ statutory corporate tax rates meaningless and triggered a “race to the bottom” across the globe that will “further deplete tax revenues as countries desperate to claw back foreign investment engage in the false economy of ‘tax competitiveness’ and increase their complicity in corporate tax havenry.”

TJN Q&A Spotlight: What is a tax haven? What is a corporate tax haven?

A corporate tax haven is pretty much what most people would imagine it to be: a jurisdiction that provides facilities to help multinationals escape taxes elsewhere. More formally, we define it as

“A jurisdiction that seeks to attract multinational companies by offering facilities that enable them to escape or undermine the tax laws, rules and regulations of other jurisdictions, reducing their tax payments in these jurisdictions,” the group stated.  

“This tax payment reduction results from tax base spillovers (shifting profits, tax avoidance) and/or strategic spillovers (race to the bottom effects which prompt jurisdictions to lower their tax rates or tax base in response).” 

Don’t be misled by a country’s headline tax rate: this rate might be bypassed through sweetheart deals between the tax administration and multinationals, and its tax system may well contain gaps and loopholes.

Luxembourg, for instance, claims to tax corporate income at 26 percent. Yet LuxLeaks revealed that some multinationals were taxed at less than 1 percent. 

The world of offshore tax havens is a global ecosystem, where different jurisdictions offer different mixes of facilities to mobile forms of financial capital. Corporate tax havens are among the most important players in this system, but others exist.

For example, TJN’s Financial Secrecy Index ranks “secrecy jurisdictions” which attract illicit financial flows by providing laws and other facilities to hide that capital and its ownership from the public, or from the forces of law and order.

There are also “regulatory havens” which provide facilities to help multinational corporations escape financial (and other) regulations. And so on.  

Ireland, for instance, is a very large corporate tax haven which is near the top of the CTHI, yet it is a relatively transparent jurisdiction with a fairly low ranking on the Financial Secrecy Index.

Switzerland and Luxembourg, by contrast, are major secrecy jurisdictions and also very large corporate tax havens, so they rank high in both indexes. 

UK world’s ‘greatest enabler’ of tax avoidance

The TJN index specifically calls out the UK, stating the country and the regions under its control shoulder much of the blame for the current unworkable tax system, where the bigger and richer you are, the lower the taxes you pay.

“The top three ranked jurisdictions are part of the British-controlled network of satellite jurisdictions to which the UK has outsourced some of its corporate tax havenry,” TJN stated.

For instance, while the UK ranks 13th on the index, its Overseas Territories and Crown Dependencies “dominate the top of index,” according to TJN, noting that the British Virgin Islands, Bermuda, the Cayman Islands and Jersey ranked 1st, 2nd, 3rd and 7th respectively. Bahamas, a British Commonwealth territory, comes in 9th.

“The UK with its corporate tax haven network is by far the world’s greatest enabler of corporate tax avoidance and has single-handedly done the most to break down the global corporate tax system,” according to TJN, accounting for over a third of the world’s corporate tax avoidance risks as measured by the Corporate Tax Haven Index.

As a point of context, that’s “four times more than the next greatest contributor of corporate tax avoidance risks, the Netherlands, which accounts for less than 7 per cent,” according to the analysis.

This is an interesting development and ranking that will put more pressure on the U.K. and its related territories to clean up on tax issues and stop being such a stumbling block.

As a point of context, these are many of the same jurisdictions fighting tooth and nail to resist UK and international efforts to capture and publish beneficial ownership information on corporates.

The U.K. has a problem on its hands dealing with its unruly extended family – one the country must address or it will be done for them by foreign jurisdictions and watchdog groups. 

Cellar dweller tax rates a magnet for corporates

Not surprisingly, those low tax rates are a magnet for companies and their revenues.

Nearly 14 percent of foreign direct investment reported by the IMF – more than $6 trillion – is booked in the UK network alone, where the “lowest available corporate tax rates averaged 1.73 per cent.”

Of the 10 jurisdictions whose current tax systems received the highest tax haven scores, eight are part of the UK network: the British Virgin Islands, Bermuda, the Cayman Islands, the Isle of Man, Turks and Caicos, Anguilla, Jersey, and Guernsey.

But many jurisdictions are at fault.

“The UK, Netherlands, Switzerland and Luxembourg – the Axis of Avoidance – line their own pockets at the expense of a crucial funding stream for sustainable human progress,” Cobham said.

“The ability of governments across the world to tax multinational corporations in order to pay teachers’ wages, build hospitals and ensure a level playing field for local businesses has been deliberately and ruthlessly undermined.”

There is a solution, but it is one that the world must undertake together, in unison.

“To curtail the corporate tax avoidance that costs hundreds of billions of dollars every year, governments must finally deliver international rules that ensure profits are declared, and tax paid, in the places where real economic activity takes place,” Cobham said. “Corporations should be taxed where their employees work, not where their ledgers hide.”

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