Cash-strapped countries eye trillions held offshore
Foreign structures are tempting targets for governments, says Vanessa Houlder.
When governments around the world embarked on a drive to plug tax loopholes in 2012, the urgency of the move was underpinned by rising tensions over austerity and inequality.
Widespread public outrage over alleged tax-dodging by wealthy individuals and multinationals put intense pressure on policy makers to shore up their tax systems. As governments braced themselves to tackle their fiscal deficits in the aftermath of the financial crisis, they agreed a concerted effort to clamp down on evasion and tax planning.
The effort is beginning to take shape this year. One part of the initiative aimed at making it harder for individuals to hide income in offshore financial centres – is set to usher in automatic exchange of tax information between dozens of countries by 2018.
The other aspect of the global drive is an overhaul of corporate tax rules, which has been billed as “a turning point in the history of international co-operation on taxation” by the Paris-based Organisation for Economic Co-operation and Development (OECD), in charge of the project. Its recommendations will be drawn up by the end of next year. The first batch of reports and rules was released last month, before a meeting of G20 finance ministers in Australia.
For cash-strapped governments, the trillions of dollars offshore owned by companies and individuals make a tempting fiscal target. But how much these initiatives will help countries’ public finances is not yet clear – not least because there are no reliable figures on how much governments are losing.
Estimates of personal wealth held offshore run into trillions of dollars, but there is little certainty about the fraction of those funds that represent evasion. Since 2009 more than half a million tax evaders have come forward, taking advantage of reduced penalties.
Governments across the world have collected more than €37bn of tax from secret offshore accounts in this way.
As governments tighten the net on tax evasion by obtaining more information on accounts held in tax havens, some are likely to eye a much bigger prize. Trillions of dollars are held offshore – often in structures that are not illegally escaping taxation. But the more information about this money governments have, the easier it will be to tax it.
As far as multinationals are concerned, estimates of the tax losses from avoidance are equally uncertain. In the US, the non-partisan Congressional Research Service has reported that estimates of annual revenue losses from profit shifting vary from about $10bn-$60bn.
The European Commission has suggested that profit shifting in Europe is likely to be on a similar scale to the US, while a paper published by the International Monetary Fund suggested that developing countries may be particularly vulnerable. The task of reducing tax losses of this sort is one of the aims of the “base erosion and profit shifting” project being driven by the OECD for the G20 group of industrialised countries. It is drawing up rules designed to halt treaty abuse, stop companies routing profits to tax havwens and tackle the arbitrage that allows businesses to exploit gaps and mismatches in the international tax rules.
In addition, governments have agreed to make multinationals’ tax affairs more transparent by requiring country-by-country reporting of where they make their profits and pay their taxes.
The extent of the co-operation so far between governments on tackling profit shifting has surprised some observers, but there are many problems to be thrashed out over the next 15 months.
