A first-of-its-kind analysis released Thursday shows how the amount of corporate profits being diverted to tax havens has skyrocketed in recent years with nearly $1 trillion in global profits being stored in places where corporate giants don’t have to pay taxes.
The United Nations University World Institute for Development Economics Research (UNU-WIDER) studied corporate profits and profit-shifting between 1975 and 2019, finding that the diversion of massive profits is a “relatively new phenomenon.”
In the 1970s, about 2% of profits made by corporations were shifted to tax havens such as Bahamas, Anguilla, and Panama. By 2019, the amount had grown to 40%, with the use of corporate tax havens rising sharply in the past decade.
“Profit-shifting has increased relentlessly,” tweeted Ludvig Wier, a co-author of the study and the head of secretariat at the Danish Ministry of Finance.
How has global profit shifting to tax havens evolved from 1975-2019?💸— Ludvig Wier (@LudvigWier) November 3, 2022
Me & @gabriel_zucman investigate this in a new WP. https://t.co/god22Q4udb
Key finding: profit shifting has increased relentlessly. In 2019, nearly $1Tn. was shifted to havens. (1/9)👇 pic.twitter.com/upAmElQnfI
The shift of profits to corporate tax havens has contributed to the loss of 10% of corporate tax revenues, estimated the authors, including Wier and French economist Gabriel Zucman.
“Of course, if there had been no profit-shifting, then countries may have chosen other policy paths, e.g. some might have been less likely to cut their corporate tax rate and engage in the ‘race to the bottom,'” the study reads. “It illustrates, however, that the revenue losses caused by profit-shifting are a quantitatively important aspect of the decline in effective corporate income tax rates globally since the 1970s.”
The researchers based the study on their analysis of which countries have lost the most in corporate tax revenue annually. Sixteen percent of tax revenue is lost to tax havens in the U.S. each year, according to that analysis, while 32% is lost in the U.K., 22% in France, and 29% in Germany.
“U.S. multinationals shift comparatively more profits (about 60% of their foreign profits) than multinationals from other countries (40% for the world on average),” wrote the authors. “The shareholders of U.S. multinationals thus appear to be the main winners from global profit-shifting.”
The authors noted that the significant shifting of corporate profits to tax havens came after “major policy initiatives from theOrganization for Economic Cooperation and Development (OECD)” and the 2017 tax reform package pushed through the U.S. Congress by the Republican Party, which included measures to ostensibly reduce corporate tax-dodging.
“The finding suggests that there remains a dire need for additional policy initiatives to significantly reduce global profit-shifting—such as implementing the global minimum corporate tax that more than 130 countries signed onto in 2021, but now remains in limbo as it is being blocked in the E.U. and the U.S.,” said Wier.
The global corporate minimum tax would ensure all companies worldwide pay a minimum tax of 15% and would require higher taxes of large companies in countries where they have customers.
“The United Nations sustainable development goals clearly state that in order to deliver poverty reduction and to decrease global inequalities, illicit financial flows such as profit-shifting must decline,” Wier said.
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