Still Broken: Governments must do more to fix the international corporate tax system | Taxes | Tax Avoidance

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The gap between where companies pay tax and where they really do their business is huge, as shown by new research described in this briefing. In 2012, US multinationals alone shifted $500–700bn, mostly to countries where these profits are not taxed, or taxed at very low rates. G20 countries themselves are among the biggest losers. The measures recently announced by the OECD leave the fundamentals of a broken tax system intact and do not stop the race to the bottom in corporate taxation. G20 governments must do more and should strongly support further reforms.
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  JOINT AGENCY BRIEFING NOTE NOVEMBER 2015 STILL BROKEN Governments must do more to fix the international corporate tax system New research shows that the gap between where companies pay tax and where they really do their business is huge. In 2012, US multinationals alone shifted $500  – 700bn, mostly to countries where these profits are not taxed, or taxed at very low rates. G20 countries themselves are among the biggest losers. The measures recently announced by the OECD leave the fundamentals of a broken tax system intact and do not stop the race to the bottom in corporate taxation. G20 governments must do more and should strongly support further reforms.  2 SUMMARY In 2013 the OECD, supported by the G20, promised to bring an end to international corporate tax avoidance which costs countries around the world billions in tax revenues each year. However, with the recently announced actions against corporate tax dodging, G20 and OECD countries have failed to live up to their promise. Despite some meaningful actions, they have left the fundamentals of a broken tax system intact and failed to curb tax competition and harmful tax practices. It is often assumed that the richest and largest economies, home to most of the world‟s mu ltinationals, defend the current system because it is in their interests. However, new research from the Tax Justice Network 1  shows that the gap between where companies pay tax and where they really do their business is huge and that among the biggest losers are G20 countries themselves, including the US, UK, Germany, Japan, France, Mexico, India, and Spain. This shows that even developed countries with state-of-the-art tax legislation and well-equipped tax authorities cannot stop multinationals dodging their tax without a thorough reform of the global tax system. Profit shifting to reduce taxes is happening on a massive scale. In 2012, US multinationals alone shifted $500  – 700bn, or roughly 25 percent of their annual profits, mostly to countries where these profits are not taxed, or taxed at very low rates. In other words, $1 out of every $4 of profits generated by these multinationals is not aligned with real economic activity. Large corporations and wealthy elites exploit the rigged international tax system to avoid paying their fair share of taxes. This practice has a relatively greater impact on developing countries, whose public revenues are more dependent on the taxation of large businesses. Recent IMF research indicates that revenue loss to developing countries is 30 percent higher than for OECD countries as a result of the base erosion and profit shifting activities of multinational companies. 2  Tax avoidance is a key factor in the rapid rise in extreme inequality seen in recent years. As governments are losing tax revenues, ordinary people end up paying the price: schools and hospitals lose funding and vital public services are cut. Fair taxation of profitable businesses and rich people is central to addressing poverty and inequality through the redistribution of income. Instead, the current global system of tax avoidance redistributes wealth upwards to the richest in society. That is why civil society organizations, united in the C20 group, together with trade unions, are calling for the actions announced by the OECD to be regarded only as the beginning of a longer and more inclusive process to re-write global tax rules and to ensure that multinationals pay their fair share, in the interest of developed and developing countries around the world. 3 Considering the enormous losses that countries around the world incur, it is alarming that the G20 seems fairly satisfied with the current agenda. Governments and citizens of G20 countries should wake up, face the facts and take additional action immediately.   3 G20 COUNTRIES LOSING OUT In new research, 4  the Tax Justice Network has assessed financial data available on US-based multinationals and identified the losers from large-scale profit shifting by US multinationals, and the countries where those profits end up. The major share of profits is shifted out of the US itself and out of other G20 countries. This data supports recent findings by Citizens for Tax Justice: that the 500 largest American companies hold more than $2.1 trillion in accumulated profits in low-tax jurisdictions abroad. 5   THE „ WINNERS ‟   Most of the profits that multinationals shift around end up in a handful of countries including the Netherlands, Luxembourg, Ireland, Bermuda and Switzerland.  Although these are very different countries, they have in common that they are often used in the tax planning structures of multinationals  –  in part because they provide low- or zero-tax environments. Together, these five countries account for roughly two-thirds of worldwide excess profits, defined as profits over and above what could be expected on the basis of economic activity indicators. 6  In a country like the Netherlands, these tax dodging schemes generate income for a small group of service providers only and contribute very little to the broader economy. Ultimately, the real winners are those multinational companies that are pocketing billions in tax savings by playing a tax system that allows them to have profits appear conveniently in low- or zero-tax environments. In 2012, US multinational companies reported $80bn of profits in Bermuda, which does not tax corporate income at all  –  that is more than the profits that these companies reported in Japan, China, Germany and France combined. This amount is so large that it clearly does not reflect the real economic activity taking place in Bermuda . US multinationals‟ gross profit in Bermuda represents 3.3 percent of their profits before tax in all countries combined. However, Bermuda‟s share in total sales by US multinationals is only 0.3 percent, and its share of the total number of employees or total wage costs is a tiny 0.01  – 0.02 percent. Figure 1 : Bermuda’s share in gross profit and economic activity  of US multinationals Source: Cobham and Jansky, based on US Bureau of Economic Analysis. 0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%Gross profit Tangible assetsSales Employees Wages    4 Bermuda is not alone. US multinationals also book large profits in four OECD countries: Ireland, the Netherlands, Luxembourg (known for offering abusive tax rulings that were not exchanged with other countries and for providing low effective taxation) and Switzerland (also known to provide low effective tax rates). 7  Ireland is a profit shifting destination in part because it has allowed structures where entities managed from abroad are not taxed at all  –  the so-called „ Double Irish ‟ . This loophole might have saved companies collectively billions of euros. 8  In recent years Ireland has taken positive steps against tax avoidance by phasing out the Double Irish structures (but allowing companies that already use them to continue doing so until 2021), committing to introduce country-by-country reporting (although not made public, see below) and by publishing a spill-over analysis on the effects of the Irish tax system on developing countries. 9  At the same time, Ireland proposed the introduction of a special 6.25 percent tax regime for income from innovations. It has been argued this simply replaces one loophole with another, because it would create a new low-tax environment that also brings a risk of profit shifting by companies. 10  The estimates for profit shifting to the Netherlands, and to a lesser extent to Luxembourg, partly reflect the use of holding companies (stepping stones to foreign investment, for example to take advantage of bilateral tax treaties) instead of profit shifting. However, the data does reflect profit shifting too. It is known that US multinationals shift profits into Dutch limited partnerships, and that in effect, these entities are not taxed at all. 11  Multinationals also use the Netherlands and Luxembourg in other tax planning structures. The European Commission recently  judged that some of these structures are in fact illegal: a profit shifting structure of Starbucks involving a Dutch entity and a structure of Fiat involving largely tax-exempt profits booked in Luxembourg. 12  The Tax Justice Network had access to data on US-based multinationals only. Many European multinationals shift interest income into Belgium, using a low-tax structure somewhat similar to the Dutch untaxed entity structures of US multinationals. Thus, for French and other non-US multinationals, Belgium would probably also appear among the major profit shifting destinations. 13  Most people and many companies in countries like the Netherlands and Belgium would gain from a more effective approach against corporate tax havens and harmful tax regimes, as these countries would become better able to claim their share of tax revenues and competition would be fairer for companies. This highlights that the only true winners of the current system are tax-aggressive multinationals and their shareholders. Box 1: Major profit shifting destinations Countries in which multinationals show disproportionately high profits: The Netherlands, Luxembourg, Ireland, Bermuda, Switzerland Key countries with no or insufficient tax data: British Virgin Islands, Cayman Islands, and Jersey   are generally known to be major destinations of profit shifting as well. These countries have zero corporate tax regimes; they played a key role in cases of large-scale tax dodging by individual multinationals and can be identified from studies using other data sources. 14  The US data source used in the TJN research did not include sufficient data for these countries, so they were not individually included in the analysis. The TJN research shows that roughly a quarter of profit shifting goes into a group of more than 100 unidentified countries, which include tax havens as well as many developing countries.
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