How corporates keep their hands clean | Fin24
 
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How corporates keep their hands clean

Sep 14 2018 11:13
Mariam Isa

There is growing concern at the toll which tax havens are taking on economies, government budgets and inequality worldwide as recent research shows they may conceal the equivalent of 10% of global output and nearly a third of the wealth of individuals with a net worth of more than $45m.    

The estimates may be conservative. At least 366 companies in the Global Fortune 500 index operate one or more subsidiaries in tax haven countries, according to a 2017 report by the Institute on Taxation and Economic Policy, a Washington-based think tank.  

The size of assets held in these tax havens could amount to more than $21tr. 

Analysis from researchers in Denmark and the US showed that just 11 tax havens absorbed $616bn in corporate profits last year alone, as companies used legal loopholes to move money away from more costly domestic tax regimes.   

The impact of tax evasion is most severe on developing countries with widespread poverty. 

French economist Gabriel Zucman has calculated that 30% of the wealth in Africa is hidden offshore – which works out to about $14bn in lost tax revenues.    

But despite spectacular leaks of documents detailing the scale of the abuse, there appears to be little will on the part of governments to crack down on the secrecy they offer companies, wealthy individuals and criminals.   

In December last year, soon after the release of the so-called “Paradise Papers”, the European Union named and shamed 17 countries in its first tax haven blacklist and put 47 on notice. 

However, member states failed to agree on sanctions for any of the offenders and international advocacy group Tax Justice Network described the list as a “toothless whitewash”.  

One of the issues which the EU faces is that a number of its own members – including Ireland, Malta, Cyprus, Luxembourg and the Netherlands – are also involved. None of them were blacklisted and critics pointed out that the bloc had only picked on smaller countries.     

The UK came under fire last year after the release of the Paradise Papers, a set of 13.4m confidential electronic documents originating from legal firm Appleby, which were shared with the International Consortium of Investigative Journalists.   

That leak, which followed the release of the Panama Papers in 2016, showed that the UK’s tax havens were being used by figures like the Queen and Donald Trump’s commerce secretary Wilbur Ross. 

UK Prime Minister Theresa May said afterwards that she wanted “greater transparency”, but would not commit to a public inquiry or agree to open registers for shell companies and secretive family trusts.  

There are dozens of tax havens worldwide and estimates of their relative importance vary widely. The Financial Secrecy Index compiled by the Tax Justice Network and released in January identified Switzerland as the world’s biggest tax haven, followed by the US and the Cayman Islands.  

According to Consultancy.uk analysis, Ireland is the biggest recipient of shifted corporate profits with $106bn, followed by the Caribbean with $97bn, Singapore with $70bn, Switzerland with $58bn and the Netherlands with $57bn.   

There is new evidence that tax havens may also be protecting companies that are damaging the environment and contributing to global warming. 

Researchers from the Stockholm Resilience Centre discovered that more than two-thirds of the foreign capital invested in Brazil’s soy and beef sectors between 2000 and 2011 – which are associated with deforestation of the Amazon – came from corporate subsidiaries in tax havens.   

In their report, released earlier this year, they also revealed that 70% of fishing vessels engaged in illegal, unreported or unregulated activity were registered in tax havens.  

Analysts point out that making tax havens more transparent is an uphill task because of vested interests.   

The Organisation for Economic Cooperation and Development – a group of mainly wealthy countries – has established a new framework of automatic information exchange, but one member, the US, has refused to routinely release information of foreigners with assets in the country.    

One of the challenges is that for small countries, becoming a tax haven is a cheap and effective way of creating a profitable industry which boosts economic development.

Mauritius is one example – according to estimates from the United Nations, $30bn to $60bn flows annually from Africa to the island group, which has a tax rate of 15%, but effective tax rate of 3%. 

This article originally appeared in the 13 September edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.

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