Opinion

Fighting financial secrecy is a way to fight Covid

Jayati Ghosh | Updated on December 06, 2020

Global tax rules must be rewritten to bring in more transparency and make tax revenues available for development

If most states in the world are unable to cope with the Covid-19 pandemic today, it is also because of the persistence of tax havens. By stealing hundreds of billions of dollars from countries around the world every year, these tax havens make it difficult for governments to fund hospitals, school systems, or programs against inequality. More ambitious efforts like reaching the UN Sustainable Development Goals are nearly impossible.

Unfortunately, the pandemic is probably only the first of a series of larger crises awaiting us, driven by the growing climate emergency. It is appalling to realise that in such a situation, the world is losing over $427 billion in tax each year to international tax abuse. This is what emerges from a report that has just been jointly launched by Tax Justice Network, Public Services International and the Global Alliance for Tax Justice.

Called “State of Tax Justice 2020”, it tells us how much each country in the world loses to corporate and private tax abuses. It also indicates the extent of the impact these losses have on each country’s health spending.

Losing to tax havens

Countries around the world are on average losing the equivalent of 9.2 per cent of their health budgets to tax havens every year, which would allow them to pay for 34 million nurses’ salaries. While this tax shortfall represents 8.4 per cent of health budgets for higher-income countries, the proportion jumps to 52.4 per cent in lower-income countries.

The US itself loses about $90 billion a year. This corresponds to 5.82 per cent of its health care budget and would cover the salaries of 1.15 million nurses. In comparison, India loses less in absolute terms ($10.3 billion), but this loss represents 44.7 per cent of the country's health budget and would pay the annual salary of 4.2 million nurses.

The irony is that a good part of these funds are disappearing legally. Of the $427 billion, nearly $245 billion is lost to multinational corporations shifting profit into tax havens. This works on a very simple principle: multinationals only pay taxes in the subsidiaries where they declare their profits. To do that, they only have to show low profits or deficits where taxes are relatively high (even if it is in those countries that they undertake the bulk of their activities) while reporting high profits in jurisdictions where taxes are very low, or even zero — even if they have only parked trademarks and rented mailboxes there.

Different tax rates and bilateral tax treaties mean that multinationals do a lot of profit shifting to advanced countries like Ireland, the Netherlands, the Channel Islands in the UK and some US states, to reduce and sometimes even eliminate their tax burdens, even when their total profits are increasing.

Multinational companies must be made to report country-by-country data on sales, costs and profits and to publish these. The continuing failure to do so means that the public is blocked from seeing the information that corporations, accountants and governments already have where multinational corporations are shifting their profits to. This prevents meaningful accountability of both multinational corporations and tax authorities — whether from States that procure profit shifting from elsewhere, or those that suffer from it.

Of the $427 billion that find their way to tax havens each year, $182 billion is lost to wealthy individuals who are able to hide undeclared assets and incomes offshore because of a lack of international transparency. There is some limited progress towards automatic exchange of information between countries on the financial accounts of residents, to limit banking secrecy. But without a requirement of having comprehensive public registers of the beneficial owners of companies, trusts and foundations, tax evasion will remain a systematic practice.

For both corporates and private individuals, the common denominator of tax abuse is secrecy. The rules and policies on which our global tax system runs can and must be rewritten to make profit shifting obsolete, which requires strong international cooperation. This also means bringing transparency to the huge private fortunes held offshore, which are currently only exposed by efforts of journalists, whistleblowers and civil society organisations.

The coronavirus pandemic has exposed the grave costs of an international tax system serving the interests of the rich and the powerful. Now more than ever, governments must overhaul their tax systems to prioritise people’s well-being.

The writer is a Senior Researcher at the Political Economy Research Institute at University of Massachusetts, Amherst.

Published on December 06, 2020

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