New Delhi: A new report has addressed what has really been done to curb tax evasion, globally, and what remains to be done.
This question, the report acknowledges, is of tremendous importance, given the rising income and wealth inequality, high public debt in the post-COVID-19 context, and the significant need for government revenue to address climate change and fund essential services like healthcare, education, and infrastructure.
The report titled ‘Global Tax Evasion Report’ is prepared by the EU Tax Observatory, a research laboratory established in 2021 with expertise in international tax issues.
This is the first edition of the report. It summarises the work of more than 100 researchers worldwide, in collaboration with tax administrations. This work analyses new data on multinational companies (MNCs), and the offshore wealth of households, and how policy initiatives of the last decade have impacted them. This is the first systematic attempt to analyse information available in the field of taxation.
Gabriel Zucman, co-author of the report, says, “Tax evasion, wealth concealment, profit shifting to tax havens are not laws of nature. They are the results of policy choices or of the failure to make certain choices. It is necessary to assess the consequences of policies enacted in this area and to investigate what else needs to be done to improve the sustainability of our tax systems. There is, fundamentally, a need for an IPCC [Intergovernmental Panel on Climate Change] of taxation – and we hope to contribute to this evolution with this first-of-its-kind report.”
The report investigates the effects of international reforms adopted over the past 10 years, such as the automatic international exchange of bank information, and the international agreement on a global minimum tax for MNCs, among other issues.
The automatic exchange of information was introduced in 2017 to fight offshore tax evasion by wealthy individuals. In 2023, more than 100 countries exchanged information on the deposits of non-residents to foreign tax authorities as part of the common reporting standard.
In October last year, India received the fourth set of Swiss bank account details of its nationals and organisations as part of this exchange. Switzerland has shared particulars of nearly 34 lakh financial accounts with 101 countries as part of this exchange, news agency Press Trust of India had reported.
However, a number of loopholes are watering down the impact of the measures, says the Global Tax Evasion Report.
Firstly, offshore tax evasion by wealthy individuals has decreased over the past decade, the report says, attributing it to the automatic exchange of bank information.
The report estimates that offshore tax evasion has diminished by a factor of about three over this period. In other words, it has been reduced to one-third of its original value.
Before 2013, households held the equivalent of 10% of world GDP in financial wealth in global tax havens, much of which was undeclared. Today, about 25% of this offshore wealth remains untaxed, marking a substantial reduction in non-compliance, the report says.
The report, however, highlights that offshore tax evasion still happens due to non-compliance by offshore financial institutions and limitations in the automatic exchange of bank information.
While many institutions adhere to reporting requirements, some do not due to fears of losing customers and lax enforcement by foreign tax authorities, it adds.
Furthermore, not all assets are subject to the automatic exchange of bank information, allowing individuals to exploit these gaps, especially in the realm of real estate, it further says.
Second, the report finds a considerable amount of profit shifting to tax havens, with no apparent impact of policies so far.
Approximately $1 trillion was shifted to tax havens in 2022, equivalent to 35% of all profits booked by MNCs outside their headquarters’ countries. This profit shifting has resulted in a substantial loss of corporate tax revenues globally, nearly 10% of the total collected. it says.
US multinationals are responsible for around 40% of this profit shifting, with Continental European countries being the most affected by this evasion, it adds.
The report also sheds light on the weakening of the global minimum tax of 15% on multinationals, which had generated high expectations in 2021. It was initially anticipated to significantly increase global corporate tax revenues. However, several loopholes have reduced its expected impact by a factor of 3, as earlier mentioned.
The ongoing subsidies race for green-energy producers may outweigh the revenue gains generated by the global minimum corporate tax, it says.
It finds that global billionaires have effective tax rates equivalent to 0% to 0.5% of their wealth due to the frequent use of shell companies to avoid income taxation. Surprisingly, there have been no serious attempts to address this situation, which risks eroding the social acceptability of existing tax systems, it adds.
In addition, the report highlights the emergence of new forms of aggressive tax competition that negatively affect government revenues.
Over the past 15 years, many countries have introduced preferential tax regimes aimed at attracting specific socio-economic groups perceived as particularly mobile.
“From a single-country perspective, this strategy can enhance tax collection and boost domestic activity. But globally these policies are negative sum: taxpayers attracted by one country reduce the tax base by the same amount in another, and global tax revenue collection falls. Because the special regimes are primarily targeted to wealthy individuals, they reduce the progressivity of tax systems, fueling inequality. The tax-savings per beneficiary are high as are the fiscal costs for governments,” it says.
Referring to the findings, Zucman says, “It’s like in Sergio Leone’s movie, The Good, the Bad and the Ugly. Our research uncovers a major success worth celebrating – the end of bank secrecy, a setback – the dramatic weakening of the global minimum tax on MNCs, and issues that remain unaddressed, such as the persistently low effective tax rates of global billionaires.”
In response to these challenges, the report proposes several solutions.
“A key proposal we consider in the report is to institute a global minimum tax on billionaires, equal to 2% of their wealth,” says Zucman.
“This is the logical next step after the global minimum tax on MNCs – which demonstrates that it is possible for countries to agree on minimum tax rates,” he adds.
“To understand the logic of this proposal, consider a billionaire, John, who lives in the United States and owns a stake in a company worth $10 billion. To simplify, assume that this $10 billion stake accounts for all his wealth. Any country could compute the tax deficit of John, namely the difference between what John pays in personal taxes today and what he would have to pay if he was subject to a 2% minimum tax on wealth,” the report explains.
“For instance, if John pays $50 million in personal taxes, he has a tax deficit of 2% times $10 billion minus $50 million, which is $150 million. Any country could then collect a portion of this tax deficit. For example, if the firm from which John derives his wealth makes 10% of its sales in India, then India could collect 10% of John’s tax deficit, i.e., $15 million. The underlying logic is that 10% of John’s wealth (the value of the business he owns) can be seen as deriving from access to India’s market. If no country ensures that John pays at least 2% of his wealth in taxes, some countries need to step in and play the role of “tax collector of last resort”.
Separately, it says, “If a US resident owns real estate in India (or business property like commercial real estate), then India already taxes this wealth today. The mechanism we describe here is simply an extension of this long-standing practice to all other forms of wealth beyond tangible properties.”
Additionally, the report calls for strengthening of the global minimum tax on MNCs, and ensure it is free of loopholes. This, it believes, could raise an additional $250 billion per year.
“Increasing the minimum tax to 20% leads to an increase in revenue by a factor of 1.75 relative to a minimum tax rate of 15%. With a minimum rate of 25%, the revenues nearly triple. With a minimum rate of 30% they almost quadruple,” it says.
“To allocate these additional revenues to specific countries, we consider two polar cases: full collection of the minimum tax by headquarter countries and full collection by host countries. Where the revenues end up depends on whether host countries will implement minimum taxes. If they do not, headquarter countries will reap the benefits. For this reason, country-level results should be interpreted with care.”