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The IEB Report 4/2018 focuses on analysing the current role and impact of tax havens

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  • 80% of household financial wealth diverted to tax havens belongs to the richest 0.1% of the population
  • It is estimated that 8% of the world’s household wealth is found in these countries

Tax evasion rates are 10 times higher among the richest population compared to national averages. This is one of the conclusions set out in the latest edition of IEB report entitled ‘The Present and Future of Tax Havens‘ coordinated by Alejandro Esteller, researcher at the Barcelona Institute of Economics (IEB). Data analyzed show how 80% of household financial wealth is diverted into tax havens belongs to the 0.1% richest of the population. In a more detailed view, the statistic reveals that 50% of this offshore wealth corresponds to the top 0.01%.

In his contribution, University of Copenhagen professor, Niels Johannesen, takes this data from a study that compiled such micro-data for Denmark, Norway and Sweden from various sources: leaked customer information from the Swiss bank HSBC Switzerland (“Swiss Leaks”) and the Panamanian corporate service provider Mossack Fonseca (“Panama Papers”) as well as information from voluntary disclosure programs. The amount of wealth diverted to tax havens is particularly relevant in comparison with the results obtained through tax returns in the countries analyzed. On average, only 10% of the declared wealth belongs to the richest 0.1% of the population, and 5% to top 0.01%.

“The wealth share of the top 0.01% increases by around a quarter when accounting for undisclosed offshore accounts, and this has implications for inequality”, explains Johannesen in his article.

The researcher also cites work that focuses on the global gap between assets and liabilities that is generated by transfers to tax havens. The study concludes that personal wealth in tax haven accounts amounts to around US$6,000 billion, or roughly 8% of all household financial wealth.

Johannesen considers the results of the transparency, information exchange and fiscal amnesty programmes to be a “modest success”. In the United States, for example, 100,000 taxpayers disclosed accounts in tax havens worth US$100 billion, which represents only 10% of the estimated total US wealth on offshore accounts. “There are more people who choose to find a way to go evade the law rather than collaborating,” according to the researcher.

Multinationals divert 36% of their profits
In his contribution, Shafik Hebous, International Monetary Fund, analyses the volume of funds diverted by the multinationals. According to data in 2015, these large companies have shifted n 36% of their global profits to tax havens, a total of US$600 billion.

Hebous also cites a study that suggests that a 1-percentage point lower corporate income tax (CIT) rate increases reported before-tax corporate income by 1.5 percent. The reality is that, in recent years, the global average CIT tax on the profits has fallen from being above 40% in the 1980s to about 20% today.

“The current problem is to determine the origin of a multinational’s intangible assets due to the increasing digitalization of the economy. It is no longer necessary for companies to have a physical presence in the destination economy,” says Hebous.

The economist believes that the initiatives for reducing tax evasion undertaken by the OECD, fiscal transparency agencies and by the states have not achieved the expected results, and believes that the best way to cut the incentives for profits shifting would be the implementation of reforms based on the destination principles, such as a destination-based cash-flow tax.

Utah State University researcher, Katarzyna Anna Bilicka, closes the IEB report by describing the three main strategies that multinationals use to reduce their tax obligations. Through debt shifting, a high tax subsidiary of a multinational company borrows from its affiliate in a low tax country, as a way of reducing its taxable profits in the high tax country. With transfer pricing, these same companies purchase goods from their foreign subsidiaries at a higher price than market price to reduce their tax burden. Finally, setting up subsidiaries in low tax countries where they hold a large proportion of their intellectual property is one of the most widely used tax engineering formulas today.

In his editorial contribution, Alejandro Esteller, indicates how the existing literature can now estimate the collection that is lost diversion to tax havens and points to the next steps to be undertaken. We still do not know the individual redistributive pattern created by the multinationals’ tax avoidance strategies, because we also do not know how they affect the conditions of the workers, shareholders or consumers, for example.”

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