Countries are losing US$492 billion in tax a year to multinational corporations and wealthy individuals using tax havens to underpay tax, the Tax Justice Network’s annual State of Tax Justice shows. That amount equals the investment needed for some 1500 wind farms. Nearly half the losses (43%) are enabled by the eight countries that remain opposed to a UN tax convention: Australia, Canada, Israel, Japan, New Zealand, South Korea, the UK and the US.
With countries set to vote shortly at the UN on whether to finally enter formal negotiations on the meat of a UN tax convention, the Tax Justice Network is urging all countries to vote in favour of the negotiations: “Governments now have a chance to choose differently at the UN, to choose to use tax to protect people, economies and planet.” (Liz Nelson quote)
The negotiation of a UN tax convention is widely seen as the biggest shakeup in history to the global tax system, and previously reported as the world’s best chance to avert losing nearly US$5 trillion to tax havens over the next decade in last year’s edition of the State of Tax Justice.
Of the US$492 billion lost to global tax abuse a year, two-thirds (US$347.6 billion) is lost to multinational corporations shifting profit offshore to underpay tax. The remaining third (US$144.8 billion) is lost to wealthy individuals hiding their wealth offshore.
“The hurtful eight” cost countries US$212bn a year
The eight countries that remain opposed to a UN tax convention – dubbed “the hurtful eight” by the Tax Justice Network – cost the world US$212 billion in tax losses a year by enabling multinational corporations and wealthy individuals to use their financial systems to underpay tax in other countries.
These eight countries – all OECD members – were the only ones to vote against the pre-negotiation terms agreed by a large majority in August this year on what the parameters and goals of the UN tax convention would be. Some 110 countries voted in favour of the ambitious terms and 44 abstained. The vote saw the collapse of the OECD voting bloc – which had voted almost unanimously in all previous votes in the UN process – when most OECD countries, including all EU countries, abstained.
Most of the responsibility for enabling global tax losses among the hurtful eight lies with the UK and its “second empire” of British dependencies like the British Virgin Islands, Cayman and Bermuda, for which the UK is responsible for extending its ratification of UN conventions to, and where the UK can impose or veto the law. The report finds:
- The UK and its second empire is responsible for over a quarter of all countries’ tax losses (26%), costing countries US$129 billion a year
- The US is responsible for 7.6%, costing countries US$38 billion a year
- Canada is responsible for 6.3%, costing countries US$31 billion a year
- Japan is responsible for 1%, costing countries US$4.4 billion a year
- Australia is responsible for 0.3%, costing countries US$1.5 billion a year
- New Zealand is responsible for 0.04%, costing countries US$0.2 billion a year
- Israel is responsible for 0.01%, costing countries US$0.06 billion a year
- South Korea is estimated to be responsible for no tax losses to other countries
OECD countries altogether, including the 30 members which either abstained or voted in favour, continue to be responsible for over two-thirds (69%) of all countries tax losses.
For each US$1 the hurtful eight collected in tax from enabling global tax abuse, the rest of the world lost US$16 in tax, demonstrating the extreme waste of the current arrangements that the hurtful eight voted to preserve.
Lose-lose game: hurtful eight are also the biggest losers
Some of the biggest enablers of global tax abuse are also the world’s biggest losers to global tax abuse – an outcome that highlights the lose-lose nature of the global tax abuse model.
The US lost US$73 billion a year to multinational corporations and wealthy individuals moving their profits and finances elsewhere to underpay tax in the US. The US is the world’s biggest loser, followed by the UK which lost US$45 billion a year. As for the other “no” voters:
- Australia lost US$24 billion (7th biggest loser)
- Japan lost US$16 billion (9th)
- Canada lost US$11 billion (14th)
- South Korea lost US$2 billion (28th)
- Israel lost US$1 billion (37th)
- New Zealand lost US$1 billion (42nd)
Altogether, the eight “no” voters lost US$177 billion a year. Countries that abstained lost US$189 billion a year. Countries that voted “yes” lost US$123 billion a year.
On average, higher income countries lose taxes equivalent to around 7% of their public health budget. For lower income countries, that loss is five times bigger, at around 36%. The eight ‘no’ voting countries, meanwhile, lose an average of 5% of their health budget – while both the abstaining group of countries and the ‘yes’ voters lose at least twice as much on average. EU countries, which make up most of the abstainers, are the world’s biggest losers as a region, altogether losing US$176 billion a year.
Rising tax losses a verdict of failure on OECD tax reforms, as Trump puts future OECD plans on ice
The eight blocking countries have said they oppose a UN tax convention on the grounds that it would “duplicate” the work of the OECD, a small club of rich countries including major tax havens. Originally established as a technical advisory outfit, the OECD has operated as the world’s de facto decision body on global tax rules for over 60 years – a role that would be supplanted by the UN once a UN tax convention is established.
A first-of-its-kind historical trend analysis included in this year’s edition of the State of Tax Justice, based on data7 from the OECD itself, finds that the OECD has comprehensively failed to achieve the central focus of its work since 2013: namely, to reduce countries’ tax losses due to multinational corporations shifting their profit offshore.
Between 2016, when countries first began to implement the OECD’s Base Erosion and Profit Shifting (BEPS) reforms, and 2021, the latest year for which data from the OECD on multinational corporations’ profits is available and by which point the reforms had been fully implemented, countries’ annual losses to multinational corporations shifting their profits offshore went up by more than US$36 billion from US$311 billion in 2016 to over US$347 billion in 2021.
While the first BEPS process is already widely considered a failure by economists, tax experts and policymakers, as is implied in the G20’s decision that the OECD should immediately begin work on ‘BEPS 2.0’, the transparency data on multinational corporations’ profits for the period 2016 to 2021 published by the OECD after years of resistance and delays provides the strongest evidence to date of the failure of BEPS.
The OECD committed to deliver the BEPS 2.0 reforms in two years, by 2020. The continuing failure to finalise any agreement, after a process three times as long as scheduled, has shaken confidence in the organisation’s ability to achieve agreement even among member states. The ‘Inclusive Framework’, meanwhile, has been heavily criticised for failing to provide an effective voice for non-OECD members. And while the US has dominated the decisions taken on each of the two ‘pillars’ of the OECD proposals, the incoming US administration has threatened economic countermeasures against countries that implement the proposals, including the EU.
Even if the two pillars were to be finalised and implemented, independent analysis has shown that they would generate much less new revenue than the OECD had claimed. In addition, the proposals have been so heavily influenced by lobbyists that the great bulk of new revenues would go to corporate tax haven jurisdictions, rather than the countries that lose out under the current rules.
The new evidence on the OECD’s failure, exacerbated by uncertainty around the incoming Trump administration, raises significant questions for the abstainers. This applies particularly to EU countries, who will continue to lose the most in tax under OECD tax rules, while likely finding the OECD as a forum increasingly less cooperative, and potentially even hostile to EU values and interests, during a Trump administration. The Republican-dominated US House Ways and Means Committee has already written to the head of the OECD to remind him that the US is the organisation’s largest funder.
These developments provide further reasons for countries to support the negotiation of an ambitious UN tax convention. Active US attempts to undermine the two pillar proposals can only add to dissatisfaction with the OECD’s responsibility for designing a global tax system that loses nearly half a trillion dollars to tax havens every year, with the OECD’s failure to include the majority of countries meaningfully in its decision-making process, and ultimately with its decade-long failure to end global corporate tax abuse.
Multinational corporations cheated more after getting tax cuts, disproving policymakers
Over the same period in which multinational corporations increased their tax cheating, countries on average cut their corporate tax rates by 3 percentage points, the State of Tax Justice’s analysis of the OECD’s data on multinational corporation’s profits for 2016 to 2021 further reveals.
Despite corporate tax rates dropping, multinational corporations shifted more profit into corporate tax havens, rising to the highest value yet recorded in the State of Tax Justice reports, at US$1.42 trillion in 2021. Asked to pay less tax, multinational corporations cheated more, the data shows.
Had corporate tax rates stayed where they stood in 2016, countries’ tax losses in 2021 would have been US$32 billion higher, at a total of US$380 billion. Countries effectively surrendered US$32 billion in tax to multinational corporations, the Tax Justice Networks says, and in return multinational corporations rinsed countries even harder.
The Tax Justice Network is describing these findings as the largest inadvertent real-world testing of corporate tax policy ever conducted. The OECD data, collected by over 50 governments from over 7,600 multinational corporations, and spanning 6 years, confirms that cutting corporate tax rates did not reduce multinational corporation’s incentive to cheat on tax, and so, did not inversely result in more tax revenue as predicted.
The theory that cutting corporate tax rates can generate more tax revenue (and vice versa), often referred to as the Laffer curve, has been long debunked. Some politicians continue to reference the theory despite the evidence, often on the advice of corporate lobbyists. The findings from the OECD’s data mark the first time the theory has been demonstrably tested and disproved at such a large global scale, using real-world data provided directly by multinational corporations to tax authorities on the whereabouts of their profits.
The data itself, known as country by country reporting14 and long advocated for by the Tax Justice Network, only become available in recent years, albeit not without significant omissions, after years of resistance and delays from the OECD.
Offshore tax evasion by wealthy individuals drops, but by far less than claimed
Countries’ tax losses to wealthy individuals hiding their wealth offshore have dropped in comparison to the 2023 edition of the State of Tax Justice, from US$169 billion to US$144.6 billion.
The drop is largely attributed to countries’ beginning in recent years to automatically share information with each other about bank accounts in their local bank’s held by the other’s residents. The automatic exchange, facilitated under the Common Reporting Standard, makes it harder for an individual to hide their wealth from their tax authority simply by moving their finances to a bank in another country.
However, the resulting drop in hidden offshore wealth is far less than some have previously claimed. The majority (63%) of wealth hidden offshore remains unexposed by the Common Reporting Standard and continues to elude tax authorities.
This year’s State of the Tax Justice provides the most detailed evaluation of the impact of the Common Reporting Standard on countries’ individual tax losses to date. While previous editions of the annual report relied on the best estimates globally available at the time on the scale of offshore hidden wealth, this year’s report makes use of recent advances in measuring hidden offshore wealth as well as new research on countries’ implementation of the Common Reporting Standard.
The report applies a new, granular assessment of the impact of the Common Reporting Standard at a country level that considers countries’ different levels of effectiveness with the Standard, recognising that countries’ tax authorities are differently equipped and not all countries are granted equal access to information under the Standard (while many non-OECD countries remain excluded altogether).
The results show that progress has been much more limited than claimed and that the world is far from the end of bank secrecy.
Nonetheless, even the limited progress is proof that automatic exchange of information does work, the Tax Justice Network argues, and can bring about an end to offshore tax evasion – if implemented properly without loopholes and exemptions, and with all countries participating instead of the OECD’s exclusionary approach.
