Countries could lose $4.7 trillion over the next decade to tax havens, tax group estimates

Unless substantial changes are made to global tax rules, countries around the world will lose an estimated $4.7 trillion in revenue over the next decade due to legal tax avoidance strategies, illegal tax evasion schemes, and creative accounting that rarely gets challenged by resource-starved authorities.

Those are the findings of the Tax Justice Network’s annual State of Tax Justice report, released on Tuesday.

An analysis of aggregated data from 47 countries by the Organization for Economic Cooperation and Development estimates a $4.7 trillion shortfall. According to TJN, the real shortfall could be even higher due to the limitations of the data set and other studies on the topic.

A majority (64%) of the forgone revenue is pegged to multinational corporations who can still – despite the OECD’s efforts at international tax reform over the past decade – engage in profit-shifting, which involves choosing low-tax jurisdictions (i.e., tax havens) to assign a disproportionate share of a corporation’s profits for tax purposes, despite the fact that the profits were generated mainly in high-tax locations.

While the term “tax haven” usually conjures images of tropical islands, TJN notes that there are also plenty of corporate tax havens in large, developed economies too — such as the United Kingdom, Singapore, the Netherlands, Hong Kong and Luxembourg, which have effective corporate tax rates of below 10%.

Apple and its subsidiaries in Ireland were involved in a well-known case of profit-shifting a decade ago. The majority of Apple’s research and development was done in the United States, but some of its R&D costs were borne by its Irish subsidiaries. During the same period, one of those Irish subsidiaries contributed $4.9 billion to Apple’s R&D, but booked pre-tax profits 15 times that amount. Experts believe Apple’s Irish subsidiaries may have gotten a sweetheart deal for their R&D investments, the kind of deal the company wouldn’t offer to an outside entity wishing to get in on the ground floor.

Recently, Senate Finance Committee Democratic staff discovered that some of the biggest pharmaceutical companies report the majority of their income offshore, even though the United States is their biggest market.

In addition to the $4.7 trillion shortfall, 36% of it is due to wealthy individuals who benefit from financial secrecy laws that allow them to shield assets in offshore havens from tax authorities.

As a whole, the report’s authors estimate that $4.7 trillion is roughly equivalent to a year’s worth of public health spending.

While both high-income and low-income countries suffer revenue losses, the losses are not equally distributed. Major economies and high-income countries suffer the greatest losses in absolute terms. As a percentage of their current tax revenues, or current expenditures on vital public services such as health and education, low-income countries suffer by far the most.

In September, the UN Secretary-General will publish a report presenting options for a UN convention on taxation. By the end of this year, UN members will likely vote on a resolution to begin formal negotiations.

Creating a global tax body under UN auspices is essential to ending cross-border tax abuse, according to the report’s authors. Governments are increasingly able to exercise their sovereign power so that tax can serve as a social superpower, thereby empowering the people of every country.”

Alex Cobham, TJN’s chief executive, said that the UN is far from perfect, but it is a place where countries with competing interests have reached complex agreements and have been forced to disclose their commitments. As an example, Cobham said, “[the UN] raised its climate change ambitions.”