Global tax avoidance – a trillion dollar evil
In a world of widening inequality, it is perhaps the most pernicious injustice of them all. Multinational corporations and wealthy individuals avoiding tax on an unprecedented scale, shuffling assets, income and debt to the most favourable tax jurisdictions and confounding hapless authorities.
It is impossible to identify exactly how much tax is being avoided, but the estimates are mind-boggling. Some $20 trillion in funds is parked in tax havens, according to The Economist.
About $160 billion each year is stripped from developing nations thanks to tax avoidance by multinationals, a report by Christian Aid found, comfortably more than they receive in aid handed out by rich nations.
“Essentially, what this means is that the poor are subsidising the rich. That’s the heart of the injustice,” says Mark Zirnsak, Australian convener of the Tax Justice Network, a global non-profit activist group.
Poor nations rely much more on corporate tax revenue than wealthy nations and have the most undeveloped tax systems and enforcement, so tend to be hit hardest by tax minimisation schemes.
But the rich/poor divide wrought by corporate tax avoidance stands for developed nations as well. Typically it is only the well-heeled, and those who can move assets around the world, who can take advantage of the tax loopholes.
Certainly, tax avoidance is not just an issue that exercises do-gooding NGOs and impoverished nations.
Developed countries such as Australia, grappling with a rolling series of fiscal crises and growing community outrage about extraordinary tax avoidance by iconic companies, are also taking up the cudgels, including at the G20 meeting of finance ministers this weekend.
“Citizens expect a comprehensive response from the G20 on this, given the inefficiencies and unfairness apparent in the current system,” Treasurer Joe Hockey said this week.
The rhetoric is fine, the political will is there. But how can the loopholes be closed in an era where billions of dollars can be transferred to up to 60 tax havens with the click of a mouse?
Underpinning it all is the ever-increasing globalisation of the economy, where an extraordinary 60 per cent of international transactions occur within entities controlled by multinational corporations.
The practice hints at the scale of transfer pricing – where a corporation sells a good or provides a service to itself at vastly inflated rates so the income is booked in a low-tax country.
It also indicates the extent of soft loans, where one part of a company lends to another arm, again to avoid tax.
Transfer pricing, or mispricing as it would more accurately be dubbed, and intra-corporate lending, underpin much tax avoidance. So, too, do tax havens, where the beneficial ownership of millions of companies remains shrouded in secrecy.
And there is another, rapidly expanding trend as the digital economy takes hold, that is further imperilling the global tax regime.
Companies, most notably tech behemoths such as Google, Apple and Microsoft, that generate sales online are shifting their profits on a hitherto unseen scale to low-taxing countries.
They use a vast array of complex schemes but a key component of the strategy is to shift the domicile of the intellectual property rights which underpin their products.
Under long-standing tax principles, tax is paid where the value is created. That’s why Australian miners selling iron ore to China, pay tax to the Australian government, not China. The rise of online commerce – as opposed to the physical extraction or creation of a good or service – makes it easy for corporations to shift the locale of their primary value-generating asset, their intellectual property rights.
Microsoft dodged $4.5 billion in tax in the US by shifting its intellectual property to Puerto Rico.
Google, meanwhile, funnelled 80 per cent of its global pre-tax profits from international subsidiaries to Bermuda in 2011, which has no corporate tax rate.
That same year in Australia, Google paid $74,000 tax, rising to $4 million in the year after.
Apple paid $40 million of tax on sales of almost $6 billion in Australia in 2012-13.
Google’s executive chairman Eric Schmidt has declared he is “very proud” about his company’s tax avoidance.
For a company that has an unofficial motto of “Don’t Be Evil”, Google’s tax minimisation and Schmidt’s blase attitude seem breath-takingly hypocritical.
The same might be said of Bill Gates’ multi-billion dollar philanthropy, for which the Microsoft owner gains considerable kudos. The tax dodging may be unethical, but it is perfectly legal, and therein lies the perversity of the phenomena, and the urgency for reform.
Already on the agenda at the G20 is a system of automatic sharing of tax information between its member states, as well as its broader political support for the OECD’s more comprehensive suite of recommendations to curb tax havens and reform laws known as the Base Erosion and Profit Shifting project.
But international tax law is so complex, involving so many jurisdictions and a rapidly changing global economy, many wonder whether the changes can be effective on their own.
Throw into the mix the immense resources of multinationals and their army of tax lawyers and the problem almost seems insurmountable.
Mike Callaghan, a former Treasury deputy secretary who is now an analyst at the Lowy Institute, says the principle of transparency needs to be taken further.
Tax authorities should not only share information about revenues, expenses, taxable income and tax paid by multinationals with each other, but with the public as well.
This, he says, would invite further scrutiny of global corporations, and allow ordinary citizens to name and shame those avoiding tax.
“What really motivates multinational corporations is reputational damage,” he says. “That’s what will force them to change their behaviour, not a fine.”
The former Labor government proposed just such a measure for companies generating more than $100 million in revenue in Australia, although it never got legislated.
Assistant Treasurer Arthur Sinodinos has expressed doubts previously about the idea but told Fairfax Media this week he was not opposed but wanted to make sure the information released wasn’t misleading.
Any regime would need to “add to the sum total of knowledge, not the sum total of information.”
“We need to maximise disclosure where we can,” he said.
Whether the G20 gets behind this new level of transparency remains to be seen, although it is likely be discussed this weekend by G20 finance ministers.
Certainly, public campaigns have been effective. Coffee chain Starbucks, for example, volunteered a £20 million payment to tax authorities after public outrage in Britain about its tax minimisation.
As chair of the G20, Australia has a unique opportunity to push the case for tax justice. Hockey and prime minister Tony Abbott have both said it’s a priority.
The rise of China, India and other developing countries has reduced income inequality between nations over the past decade, and impressive poverty reduction has occurred in Asia especially.
But the disparity between rich and poor individuals is widening. Some 1 per cent of the world’s population owns 50 per cent of its wealth and the top 10 per cent control 86 per cent of the world’s assets, according to a recent Credit Suisse report.
Reforms of the international tax system could be a great equaliser, contributing significantly to boosting incomes and reducing poverty in the developing world and spurring overall growth in the world economy.
A crackdown on tax loopholes would also help developed nations balance their budgets.
It’s a classic win-win, except for the major shareholders of global corporations, the tax havens themselves and the coterie of global tax lawyers who have made a fine art of avoiding tax.