Concerning global tax evasion patterns emerging, report reveals
The use of tax havens by individuals has declined recently but profit shifting by companies is still a significant issue, a global report into tax evasion shows.
International efforts to curb tax evasion are falling short in number of areas, particularly initiatives aimed at reducing profit shifting, the Global Tax Evasion Report 2024 has found.
The report examined the extent of global tax evasion and the effectiveness of policies aimed at addressing the issue.
The research found that while there has been positive progress in addressing tax evasion, there are also setbacks and major issues that remain unaddressed.
Offshore tax evasion has declined by a factor of three in less than 10 years due to the automatic exchange of bank information.
The report noted that before 2013, households owned the equivalent of 10 per cent of world GDP in financial wealth in tax havens globally, most of which was undeclared to tax authorities and belonged to high-net-worth individuals.
While there is still the equivalent of 10 per cent of world GDP in offshore household financial wealth, the report estimates that only about 25 per cent of it evades taxation.
However, despite this progress, some offshore tax evasion remains, mainly due to two main issues.
“First, it remains possible to own financial assets that escape being reported on, whether it’s due to non-compliance by offshore financial institutions or to limitations in the design of the automatic exchange of bank information,” it said.
“Many offshore financial institutions duly comply with their requirements, but others may fall short, for fear of losing their customer base and facing no real threat from foreign tax authorities. Second, not all assets are covered by the automatic exchange of bank information.”
The report said that recent research indicates that some individuals who used to hide financial assets in offshore banks have exploited these loopholes by shifting holdings to non-covered assets, most importantly real estate.
It also estimates that a large amount of profits is still being shifted to tax havens including approximately $1 trillion in 2022.
“This is the equivalent of 35 per cent of all the profits booked by multinational companies outside of their headquarter country,” the report said.
“The corporate tax revenue losses caused by this shifting are significant, the equivalent of nearly 10 per cent of corporate tax revenues collected globally. U.S. multinationals are responsible for about 40 per cent of global profit shifting, and Continental European countries appear to be the most affected by this evasion.”
The OECD launched the Base Erosion and Profit Shifting (BEPS) and in 2017, the United States introduced measures to reduce profit shifting by US multinational companies while cutting its corporate tax rate from 35 to 21 percent.
Despite these efforts, the report said that 7 years after the start of the BEPS process and 5 years after the U.S. law, global profit shifting appears to have changed only marginally.
“The global loss of tax revenue due to this shifting appears to have stagnated at about 10 per cent of corporate tax revenue collected,” it said.
“This is not to say that the policy initiatives of the last decade have had no effect: absent these policies, profit shifting may have been even higher today.”
The report also found that global minimum tax has been dramatically weakened despite an agreement in 2021 across more than 140 countries and territories to implement a minimum tax of 15 per cent on multinational profits.
“This was a landmark development: it is the first time that an international agreement puts a floor to how low certain taxes on profits can go,” it said.
“Previously, policymakers attempted to regulate the definition of the tax base, to address inconsistencies in the definition of profits across countries, to improve the allocation of profits internationally – but there was no agreement about tax rates, the key aspect of tax policy.”
A growing list of loopholes has dramatically weakened the global minimum.
“The global minimum tax, as things stand, would generate only a fraction of the tax revenue that could be expected from it based on the principles laid out in 2021,” it said.
The global minimum tax also still allows for a race-to-the bottom with corporate taxes because it allows firms to keep effective tax rates below 15 per cent as long as they have sufficient real activity in low-tax countries.
“This exemption – a carveout for economic substance – provides incentives for multinational companies to move production to very low-tax countries – and in turn incentives for tax havens to keep providing rates below 15 per cent,” it said.
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