Firms stash tens of billions in tax havens

Developed and developing countries alike are losing billions each year as a result of corporate tax-dodging practices.

by Carey L Biron

WASHINGTON: The research arm of the US Congress is warning that US corporations’ use of tax havens has risen substantially in recent years, with companies offering massively inflated profit reports from small countries with loose tax regulations.

“Ample evidence of a significant amount of profit shifting exists, but the revenue cost estimates vary from about 10 billion to 60 billion [dollars] per year,” Jane G Gravelle, a senior specialist in economic policy, writes in a new report for the nonpartisan Congressional Research Service (CRS).

Elsewhere, Gravelle suggests that the revenue losses from this “profit shifting” could reach as high as $90 billion a year, while the cost of evasion on the part of individuals could be as high as $70 billion a year.

Further, these numbers appear to be growing. Extrapolation from the new CRS statistics suggests that US corporate profits reported from, for instance, Bermuda grew by five times during the decade leading up to 2008, the last year for which data is available.

Perhaps the most striking part of the new findings is simply the brazenness with which US corporations appear to have become accustomed to misreport-ing their overseas earnings.

To run her analysis, Gravelle chose five relatively small but well-known tax havens – Bermuda, Ireland, Luxembourg, the  Netherlands  and  Switzerland – and then looked at the percentage of profits US companies reported as having come from those countries in 2008.

Incredibly, notes Citizens for Tax Justice (CTJ), an advocacy group in Washington, these countries were found to have accounted for 43% of the $940 billion of overseas profits reported by US multinational corporations, even though these companies made just 7% of their foreign investments in those same countries.

On the other hand, the five countries where US corporations do much of their overseas business (the United Kingdom, Germany, etc) were reported to tax authorities as having accounted for just 14% of overseas profits.

“Obviously they aren’t making their money in these countries – their economies are nowhere near large enough,” CTJ director Robert S McIntyre told Inter Press Service (IPS). He points out, for instance, that US multinationals’ reported profits in Bermuda amounted to 1,000% of the island’s economic output.

“This is just more significant proof that we have a really serious problem, both in the United States and in Western Europe,” McIntyre says, noting that the trend has almost certainly continued, if not increased, since 2008.

Lost revenue

A December report by Global Financial Integrity, a Washington watchdog, found that the developing world lost nearly a trillion dollars in 2010 due to tax evasion, corruption and other financial crimes. That figure is 10 times larger than the $88 billion provided as development assistance to developing countries that year – and, the researchers warned, this figure was almost certainly an underestimate.

“Whether you’re a big, developed country like the United States or a smaller developing country in Africa,” McIntyre says, “if you can’t get tax money out of the businesses operating in your territory, how are you going to pay for infrastructure, health, education and all of the other things you need to maintain and grow an economy?”

On 30 January, Oxfam International, a humanitarian aid organization, called for global policymakers to close off loopholes that have allowed for the recent increase in tax evasion.

The group is suggesting that just a quarter of the revenue that could accrue from taxing misreported profits would be able to “lay the foundation for ending global hunger”.

“Governments should agree to end global hunger by 2025 and an end to tax havens, which could help pay for this and much more. Tax-dodging effectively takes food from hungry mouths,” Stephen Hale, advocacy head for Oxfam, said in a 30 January statement.

The group offers an estimate of $32 trillion currently sitting in tax havens around the world, and notes that taxes on this lump sum could raise nearly $190 billion a year. In contrast, Oxfam states, “Just 50.2 billion [dollars] a year is estimated to be the level of additional investment needed, combined with other policy measures, to end global hunger.”

While the United States’ ability to impose taxes is supposed to span worldwide, that system includes a significant exception, in that foreign profits are not taxed until companies bring their earnings back into the country.

On the ground, the result has been more and more companies looking to keep their profits overseas – or claiming that the money was made in countries that have either strict privacy regulations or lax reporting requirements.

Due to legalities and bilateral treaties, the Netherlands has become a significant transit point for unreported earnings for companies across the world. According to recent estimates, the Netherlands is allowing some $13 trillion to funnel through its financial system en route to classic tax havens such as the Cayman Islands.

Particularly given the current fiscal crunch in Europe, such figures have caught the attention of European Union policymakers; in December, the European Commission warned that tax avoidance was costing the regional bloc a trillion euros every year.

The EU is currently trying to put in place a system that would divide up corporate profits among member states before they could, say, end up in the Netherlands and then leave the continent.

In January, the Dutch legislature took up the issue in what appears to be a broad-based attempt to tweak the country’s laws. Also, UK Prime Minister David Cameron stated that, when his country takes over the rotating presidency of the Group of 8 (G8) rich countries this year, corporate tax evasion will be one of his central priorities.

In Washington, much of the effort is currently revolving around attempts to lower the US corporate tax rate – at 35%, the highest among all developed countries. Beyond this, though, CTJ’s McIntyre warns that there are few allies for any major legislative push.

“Republicans like the fact that these companies are successfully avoiding taxes, while the Democrats are afraid that if they do anything strong, corporate money will go against them in the next election,” he says. “Companies are hoping that they’ll get away with these practices, and currently they have the [tax authorities] outgunned.” (IPS)           

Third World Economics, Issue No. 538, 1-15 Feb 2013, pp 15-16