Estimates Indicate Tax Havens Cost $200 Billion Each Year to Governments

It is no secret that there is a great deal of controversy surrounding tax havens. Those against them argue that tax havens allow high net worth individuals and corporations to hide their profits and therefore pay less in taxes.

A recent report has finally put a figure on these losses, estimating that the world loses $200 billion annually due to tax havens.

Some Specific Figures

The report indicates that multinational firms from around the world shift around $650 billion or 40 percent of their profits to tax havens. This results in $200 billion of lost tax revenue globally.

The new research further indicates that 10 of the biggest multinational companies in the world account for 98 percent of the profits that are moved to these tax havens. Firms based in the United States are particularly problematic in this respect. On average, global companies shift 40 percent of foreign-earned income into tax havens, but in the United States, this is higher at 60 percent.

How They Were Calculated

The estimate comes from the latest foreign affiliate statistics, a type of macroeconomic data. The statistics in question record the wages that foreign multinational company affiliates pay as well as the profits of affiliates. The result is the ability to divide account aggregates, including operating surpluses and wages paid, into foreign and local firms. The researchers behind the report then used those statistics to develop a global database that reflects profits reported in every country in a way that compares foreign and local corporations.

Using the new database, the researchers then analyzed the ratio of corporate profits and wages, pre-tax. They completed the calculations for every country.

More Details on What Was Found

The researchers behind the report found that in countries that are not tax havens, foreign firms are less profitable than the local firms. The opposite is true to a significant degree in tax havens.

For example, the typical ratio of taxable profits to wages for local firms is about 30 to 40 percent. In comparison, foreign firms can have a ratio of up to 1,600 percent in Ireland.

The Countries Most Affected

The report found that the world loses around $200 billion, or 10 percent, in corporate tax receipts.

Interestingly enough, the countries that are tax havens end up with the largest income from taxes. This comes from their ability to attract enough multinational corporations with their low tax rates to make up the difference. The report specifically cited Luxembourg, Ireland, and Puerto Rico as having high tax revenue despite their effective tax rates being less than 5 percent. That phenomenon helps explain why countries would want to become tax havens, despite the reduction in taxes collected per company.

How Companies Manage It

The ability of international companies to dodge $200 billion in taxes annually comes from the way that current tax codes are written. Specifically, they take advantage of the fact that multinational firms are treated as multiple national entities. This lets multinational companies shift their profits from versions in countries that charge high taxes to those countries with minimal or no taxes.

Many major companies take advantage of this situation and have faced heavy criticism for doing so. Nike, IKEA, Google, and Amazon are just a few among the many that have done so.

What Opponents Want to Do

There are numerous opinions regarding tax havens, from those who think nothing should change to those who want to get rid of them and those who want to encourage these havens. The authors of the report in question, as well as many others who oppose tax havens, would like harmonization of corporate taxes around the world. With similar taxes everywhere, there would be no reason for multinational firms to shift profits.

For now, however, there are unlikely to be any significant changes to the prevailing tax haven system around the world in the immediate future.

Source:

https://theprint.in/economy/the-world-is-losing-200-billion-a-year-because-of-tax-havens/373540/