Corporate havens spur breakdown of global tax system, says report

Report by Tax Justice Network cites list of OECD countries as responsible for global inability to tax multinationals.

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    The United Kingdom and its network of satellite jurisdictions, including the Cayman Islands, are responsible for more than a third of the world's corporate tax avoidance risk, says a new Tax Justice Network report [Phil Noble/Reuters]
    The United Kingdom and its network of satellite jurisdictions, including the Cayman Islands, are responsible for more than a third of the world's corporate tax avoidance risk, says a new Tax Justice Network report [Phil Noble/Reuters]

    A short list of infamous tax havens is responsible for the lion's share of global corporate tax dodging, says a new report released on Tuesday by the United Kingdom-based Tax Justice Network.

    An estimated $500bn is lost annually as large companies undermine tax-collection efforts by hiding profits in far-off overseas locations, said the report by the independent research and advocacy group.

    The three jurisdictions that have most contributed to the dissolution of the international taxation regime are the British Virgin Islands, Bermuda and the Cayman Islands, all of which are British territories.

    In just the top-10 countries, $18 trillion in value - some 40 percent of cross-border direct investment logged by the International Monetary Fund - is being stowed away with corporate tax rates of 3 percent or less.

    Other places that round out the list are the Netherlands, Switzerland, Luxembourg, Jersey, Singapore, the Bahamas and Hong Kong. Together, these areas alone are responsible for 52 percent of total corporate tax avoidance risk in the world, the report found.

    Collectively, these countries have dealt a "devastating double blow" to national efforts to tax multinationals, the report concludes. 

    "First, the colossal scale at which the jurisdictions have enabled corporate tax avoidance risks [in order] to woo multinational corporations has made countries' statutory corporate tax rates meaningless," it said.

    "Second, the jurisdictions have 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," the report continued.

    Tax havens often seek to attract capital by introducing a new loophole or secrecy facility, which can pressure competing jurisdictions in turn to implement their own tax cuts. In general, the biggest beneficiaries of tax incentives across the world are the finance and banking sectors.

    "The corporate tax avoidance risks and corrosive lose-lose outcomes documented by the new index illustrate that what is often referred to as 'tax competition' is more aptly described as 'tax war'," said the report. 

    'Better tax regime'

    The study singles out the UK for being responsible for more than a third of the world's corporate tax avoidance risk, in places where the lowest available tax rates averaged 1.73 percent.

    But not all tax experts and economists agree that tax competition is bad. 

    "Just as competition between companies is good for customers, competition between governments is generally good for taxpayers," said Matthew Mitchell, a senior research fellow with the free-market oriented Mercatus Center at George Mason University. "If another government has a better tax regime, then governments should figure out how to make themselves more competitive rather than how to get other the governments to change."

    "Corporate taxes are generally not major revenue raisers," Mitchell told Al Jazeera, adding that they are "surtaxes" on income "already taxed by other taxes ... [and that] a better approach is to rely on a broad-based, low tax, with no loopholes".

    The report also analysed what it termed "aggressive annexation of low income countries' tax rights" by the UK and the Organisation for Economic Co-operation and Development (OECD) countries. These included France and Sweden as well as the United Arab Emirates, Switzerland and the Netherlands.

    Through double-tax treaties negotiated with lower-income countries, these countries reduce the ability of poorer governments to protect against illicit financial flows by securing diminished withholding tax rates.

    Among the other European Union countries singled out by the report for driving down other countries' withholding rates were Ireland, Spain, Cyprus and Austria.

    Alex Cobham, the Tax Justice Network's chief executive, said the global corporate tax system was broken "beyond repair".

    "It is lower-income countries that lose the greatest share of their tax revenues to multinational companies' tax avoidance," he told Al Jazeera. "Until the international tax rules are set at the United Nations, rather than the OECD, it's hard to see how the global inequalities in taxing rights will be redressed."

    He said that a select few "governments line their own pockets at the expense of a crucial funding stream for sustainable human progress", adding that the ability to "pay teachers' wages, build hospitals and ensure a level playing field for local businesses has been deliberately and ruthlessly undermined". 

    To curtail corporate tax avoidance, the Tax Justice Network recommends global rules to "ensure profits are declared, and tax paid, in the places where real economic activity takes place".

    The report said this could be best accomplished by a "unitary tax approach" that would help governments collect revenue and avoid corporate tax avoidance risk by treating "each multinational corporate group as a single global entity".

    SOURCE: Al Jazeera News


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