A global financial registry to fight tax evasion

If all countries have access to info about final beneficiaries, MNCs will not be able to fraudulently assign profits to tax havens

Can you imagine how much governments all over the world could improve public services like education, healthcare and access to publicly provided clean drinking water and sanitation with more than $600 billion? That is what they lose every year in tax revenue due to the shifting of corporate profits to tax havens.

India loses $41.17 billion, or 2.34 per cent of its gross domestic product (GDP), as a result of corporate tax avoidance, according to a report published by the United Nations University World Institute for Development Economics Research in 2017.

Fixing prices

Multinationals fix the prices of transactions between their subsidiaries to guarantee that their revenues are taxed in countries where tax rates are lower — and not necessarily where their economic activity and the creation of value really take place.

With financial globalisation, the opportunities for tax optimisation for multinationals have multiplied. Nowadays, they are able to concentrate enormous profits in just a handful of tax havens, thanks to a powerful industry of intermediaries — banks, consultants and law firms.

French economist Gabriel Zucman calculates that more than 40 per cent of profits made by multinationals are artificially transferred to tax havens.

And all these procedures are so complex that it is almost impossible to keep track of where the money goes.

These taxes that are dodged are compensated for with higher contributions from the middle and working classes, making it much more difficult for these population groups to save or accumulate wealth. For that reason, this issue increases levels of inequality all over the world.

Since 1980, the richest 1 per cent of the world have received double the earnings of the poorest 50 per cent of the world, even if the latter group has experienced a significant increase in income, thanks to high growth rates in Asia.

Ten per cent of global GDP is hidden in tax havens as deposits, shares, bonds and investment funds.

And this is a conservative estimate, which also varies a lot among countries: in northern European countries this hidden wealth is no more than 5 per cent, but this figure goes up to around 15 per cent in continental Europe, and even to 60 per cent in Russia, some Gulf states and a few countries in Latin America. This diversion of funds has an obvious consequence for global inequality.

As revealed by a recent study, the wealth kept in tax havens is concentrated in the hands of only a few people: half of the funds stored there belongs to households with a net worth of over $50 million.

Besides reducing public income, this concentration of wealth in tax havens erodes respect for the law and discourages the creation of jobs, as it benefits those who transfer their wealth abroad instead of investing in the countries where this income is generated. It also makes it more difficult for governments to manage, as these unrecorded funds cannot be taken into account in the traditional databases used to calculate economic activity and measure real inequality.

The progress made in the fights against tax havens must be real. We need an international perspective to deal with this issue.

An important part of the wealth kept in tax havens is concentrated in dummy corporations, which clearly aim to keep their final beneficiaries unidentifiable. A global financial registry of the real and final individual beneficiaries of these companies, bank accounts and properties would be a crucial measure to deal with this. It would allow limiting tax evasion, money laundering and even the financing of terrorism.

Process has begun

Various countries have started establishing registries of this type or asking for this information to be added to the commercial registries, but these registries do not always comply fully with transparency standards.

If all countries had access to information about the final beneficiaries, it would make this strategy of covering funds up through chains of legal vehicles obsolete. In fact, it would make it impossible for multinationals to fraudulently assign profits that were generated in countries where they should be taxed, to tax havens.

It would also be a great contribution to improving the distribution of wealth and income. For this reason, the development of this registry should be a central axis of improved tax cooperation between the countries all over the world.

The writer is Chair of the Independent Commission for the Reform of International Corporate Taxation.