The United States loses, according to my
estimates, close to $70 billion a year in tax revenue due to the
shifting of corporate profits to tax havens. That’s close to 20 percent of the corporate tax revenue that is collected each year. This is legal.
Meanwhile, an estimated $8.7 trillion, 11.5 percent of the entire world’s G.D.P.,
is held offshore by ultrawealthy households in a handful of tax
shelters, and most of it isn’t being reported to the relevant tax
authorities. This is… not so legal.
These figures represent a huge loss of resources
that, if collected, could be used to cut taxes on the rest of us, or
spent on social programs to help people in our societies.
How do they do it?
For an example, look no further than your search
bar. In 2003, a year before it went public, Google (now a multinational
conglomerate known as Alphabet) began a series of moves that would allow it to obtain favorable tax treatment in the future.
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First, it transferred ownership of intellectual property related to
its all-important search and advertising technologies to an entity named
Google Ireland Holdings.
Why Ireland? Because not only did it have favorable corporate tax
rates, its regulations also allowed Google Ireland Holdings to
incorporate there but be “managed” in Bermuda.
Google Ireland Holdings then created another Irish subsidiary,
Google Ireland Limited, and granted it a license to use the technology
now owned by the Irish parent company.
Under this arrangement, which as far as we know is still in place,
it is Google Ireland Limited that actually licenses the tech of Google’s
main business to all the Google affiliates in Europe, the Middle East
and Africa. (Google has a similar offshoot in Singapore that covers
business in Asia).
Google France, for example, pays royalties to Google Ireland Limited.
That entity in turn moves its profits to Bermuda via a royalty payment to the Google Ireland Holdings.
See where this is going? In 2015, $15.5 billion in profits made their way to Google Ireland Holdings in Bermuda
even though Google employs only a handful of people there. It’s as if
each inhabitant of the island nation had made the company $240,000.
The corporate
tax rate there?
Zero
In doing this, Google didn’t break the law.
Corporations like Google are simply shifting profits to places where
corporate taxes are low. It’s not just Internet companies with valuable
intellectual property that do this. A car manufacturer, for instance, might shift profits
by manipulating export and import prices – exporting car components
from America to Ireland at artificially low prices, and importing them
back at prices that are artificially high.
According to the latest available figures,
63 percent of all the profits made outside of the United States by
American multinationals are now reported in six low- or zero-tax
countries: the Netherlands, Bermuda, Luxembourg, Ireland, Singapore and
Switzerland. These countries, but above all the shareholders of these
corporations, benefit while others lose.
My colleagues Thomas Torslov and Ludvig Wier
and I combined the data published by tax havens all over the world to
estimate the scale of these losses. The $70 billion a year in revenue
that the United States is deprived of is nearly equal to all of
America’s spending on food stamps. The European Union suffers similar
losses.
So what can be done?
Thankfully, Ireland has announced it will close
the “double Irish” loophole that Google used, and arrangements that take
advantage of that loophole must be terminated by 2020. But similar
strategies will be used as long as we let companies choose the location
of their profits.
Just look at what Apple did in 2014 — it’s one of the most spectacular revelations from the newly released Paradise Papers.
After learning Irish authorities were going to close loopholes it had
used, Apple asked a Bermuda-based law firm, Appleby, to design a similar
tax shelter on the English Channel island of Jersey, which typically
does not tax corporate income. Appleby duly obliged, and Jersey became
the new home of the (previously Irish) companies Apple Sales
International and Apple Operations International.
A potential fix would be to allocate the taxable
profits made by multinationals proportionally to the amount of sales
they make in each country.
Say Google’s parent company Alphabet makes $100
billion in profits globally, and 50 percent of its sales in the United
States (a relatively similar scenario to the first quarter of this year,
in which that figure was 48 percent).
In that case, $50 billion would be taxable in the United States,
irrespective of where Google’s intangible assets are or where its
workers are employed. A system similar to this already governs state
corporate taxes in America.
Such a reform would quash artificial
profit-shifting. Corporations may be able to shift around profits,
assets, and subsidiaries, but they cannot move all their customers to
Bermuda.
This system is not perfect, but it’s orders of
magnitude better than both the laws that now govern the taxation of
international profits and the tax package being proposed by
congressional Republicans. Under the proposed plan some international
profits would be taxed at 10 percent, but there are many likely exemptions.
One advantage of allocating taxable profits as I
suggest is that this reform can be adopted unilaterally. There is no
need for the United States (or any other nation that wants to cut down
on tax avoidance) to obtain permission from anybody.
But we’d still face an equally daunting problem,
the far more shadowy – and ultimately illegal – tax evasion of
ultrawealthy individuals, many of them with net worths already bolstered
by the proceeds of corporate tax avoidance. Here’s an example.
Meet Michael. Michael is the (fictional) chief
executive and owner of an American company, Michael & Company. Like
many people, he would like to pay as little in taxes as possible. But
unlike most people, he can take some steps that will allow him to do
just that.
Michael & Co.
America
Anonymous
Shell Co. Inc.
Cayman Islands
Michael & Co.
America
Anonymous
Shell Co. Inc.
Bank
Cyprus
Cayman Islands
Michael & Co.
America
Anonymous
Shell Co. Inc.
Bank
Cyprus
Cayman Islands
Michael & Co.
America
Anonymous
Shell Co. Inc.
Bank
Cyprus
Cayman Islands
First, he creates an anonymous shell company incorporated in the Cayman Islands, which has lax regulations on disclosing the identities of company owners.
He then opens an account under the shell company’s name in Cyprus (or one of many other tax havens, such as Switzerland, Hong Kong and Panama, whose banks cater to the wealthy and aren't reliable about cooperating with foreign tax authorities).
Finally, Michael & Company buys fictitious services from the Cayman shell company (“consulting,” for example) ...
… and, to pay for these services, wires money to the shell company’s Cyprus account.
The transaction generates a paper trail that can
appear legitimate at first glance. But the reality is more insidious.
By paying for fictitious consulting, Michael fraudulently reduces the
taxable profits of Michael & Company, and thus the amount of
corporate income tax he pays.
And once the money has arrived in Cyprus, it is
invested in global financial markets and generates income that the
Internal Revenue Service can tax only if Michael reports it or if his
Cypriot bank informs the I.R.S.
It’s supposed to, but many offshore banks have routinely violated their obligations in the past, by
pretending they didn’t have American customers or hiding them behind
shell companies. So this way, Michael can evade American federal income
tax as well as paying fewer corporate taxes through his company.
And meanwhile, in America, if he wants to use
any of the money stashed in Cyprus, he can simply go to an ATM and make a
withdrawal from his offshore account.
How do we know all this?
Until recently, we did not have a good sense of who owns the wealth held offshore, but with my colleagues Annette Alstadsaeter and Niels Johannesen, we have been able to make progress thanks to leaks over the last few years. In 2015, the Swiss Leaks revealed the owners of bank accounts at HSBC Switzerland, and in 2016 the Panama Papers
revealed those of the shell companies created by the Panamanian law
firm Mossack Fonseca. These showed that 50 percent of the wealth held in
tax havens belongs to households with more than $50 million in net
wealth, a minuscule number of ultra-high-net-worth individuals who avoid
paying their fair share. In the Paradise Papers, we see that these are not only Russian oligarchs or Belgian dentists who use tax havens, but rich Americans too.
As I mentioned above, about 11.5 percent of world G.D.P.
is held offshore by households. For a long time, the bulk of it was
held in Switzerland, but a fast-growing fraction is now in Hong Kong,
Singapore and other emerging havens.
We can stop offshore tax evasion by shining some
light on darker corners of the global banking industry. The most
compelling way to do this would be to create comprehensive registries
recording the true individual owners of real estate and financial
securities, including equities, bonds and mutual fund shares.
One common objection to financial registries is
that they would impinge on privacy. Yet countries have maintained
property records for land and real estate for decades. These records are
public, and epidemics of abuse are hard to come by.
The notion that a register of financial wealth
would be a radical departure is wrong. And the benefits would be
enormous, as comprehensive registries would make it possible to not only
reduce tax evasion, but also curb money laundering, monitor
international capital flows, fight the financing of terrorism and better
measure inequality.
The onus here is on the United States and the
European Union. Why do we allow criminals, tax evaders and kleptocrats
to ultimately use our financial and real estate markets to launder their
wealth? Transparency is the first step in making sure the wealthy can’t
cheat their way out of contributing to the common good.
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