Does tax abuse by multinationals and the wealthy cost the world $5 trillion?

The Tax Justice Network claims the world will lose $5 trillion in tax abuse over the next 10 years. They say $301bn of tax is lost each year to cross-border corporate tax abuse by multinationals, and £171bn is lost each year to tax evasion by wealthy individuals using tax havens.

Both claims are false. The corporate tax abuse calculation measures fictitious tax avoidance. The “tax haven” calculation has been falsified by actual cross-border tax reporting. TJN have used the same methodology for years, and ignored criticisms of it. Nobody should take these numbers seriously.

The claims

Here’s the TJN press release:

I’ll look at the tax haven accounts and multinational profit-shifting claims separately.

Wealthy individuals and tax havens

The claim is that the world loses $171 billion each year to wealthy individuals putting funds in tax haven bank accounts, which are not disclosed to the tax authorities, and therefore tax is evaded:

Historically, it was very easy for a wealthy individual to do exactly this. If I opened a bank account in Monaco in 2002, in my own name, or the name of my dog, it would be very hard for HMRC to find out. That all changed with various international agreements in the 90s and 2000s, culminating in the US enacting FATCA, and most of the rest of the world adopting the OECD Common Reporting Standard. If I open a bank account in Monaco today, it will be reported straight back to HMRC. It is still certainly possible to evade tax using offshore accounts, or indeed onshore accounts, but it’s significantly more difficult.¹For example you could find a bank that is both corrupt and brave, use a normal bank but provide it with fraudulent identification documents (which it does not challenge), or bank in a country, which has not signed up to CRS (but those are generally countries where your bank account would not be particularly safe).

CRS and FATCA have been extremely successful.

The OECD reports that information on EUR 11 trillion of financial accounts was exchanged in 2021:²See page 5 of this report

US taxpayers’ accounts are reported separately under FATCA:³See table 1, page 11 of this fascinating new paper by Niels Johannesen and others.

So that’s about $16 trillion in cross-border accounts, reported to each accountholder’s home tax authority. The days of anonymous offshore tax evasion are over.

The TJN figure of $171bn of tax lost to tax haven accounts is based on a figure of $10 trillion of undisclosed offshore accounts. ⁴That’s the total of the second column of table 5.2, on page 46 of the report. It is unclear how this figure is derived – the explanation in the methodology document is convoluted, and the calculation spreadsheets are not published.

What adjustments do TJN make to the $10 trillion to reflect reporting to tax authorities, voluntarily and under FATCA/CRS? Absolutely none. How do they incorporate that FATCA and CRS data? They don’t.⁵TJN claim that “the State of Tax Justice does not assume all offshore bank deposits are related to tax abuse and goes to great lengths to account for this.” But whatever (unclear) steps they take, plainly do not take account of FATCA and CRS

Astonishingly, the report doesn’t mention FATCA or CRS, even in passing. The research cited in the report all pre-dates FATCA and CRS. They are trying to estimate a problem (offshore tax evasion) without taking any account of the central measure introduced to solve that problem. It’s as if someone came up with a theoretical estimate for the number of burglaries in the UK, on the assumption that all doors and windows were left open and unlocked.

The $171bn figure is simply $10 trillion, multiplied by an assumed 5% return on investments, multiplied by an average top personal income tax rate of 34%. There is nothing else in the calculation.⁶There is more to say about the way they allocate the $10 trillion between different countries; they calculate a regression based on cherry-picking, and make the unexamined (and false) assumption that financial centres only exist because of tax abuse. But that is a sideshow; everything goes wrong once they start with a $10 trillion figure, and don’t adjust for reporting.

How do TJN reconcile it with the data, when we know for a fact that $16 trillion of financial accounts were reported to taxpayers’ home tax authorities under CRS and FATCA? They don’t even try. To believe the $10 trillion figure is correct would require an enormous worldwide conspiracy to undermine FATCA/CRS, involving all the world’s largest tax authorities. It’s not credible.

Now FATCA/CRS clearly isn’t perfect. Some percentage of the $16 trillion will be accounts which were never reported under FATCA/CRS, which were wrongly reported (intentionally or not), or where the tax authority failed to act on the reporting. There will be wealth which is entirely outside FATCA/CRS (for example many cryptocurrency accounts). What percentage of the $16 trillion is that? That’s a fascinating question which will be the subject of a later article. By comparison with known tax non-compliance effects, if it was 1% we should be pleased; if 10% we should be disappointed; more than 10% would (at least to me) be shocking.

The $10 trillion figure for undisclosed offshore accounts, and hence the $171bn figure for evaded tax, assumes non-compliance of 66%. That’s not credible.

This has been pointed out many times. A couple of years ago, I had an exchange with one of the authors of the report, who it turned out was not even aware of FATCA/CRS. He said he’d incorporate their effects in a future report. He didn’t.⁷Subsequently, TJN justified their conclusions on the basis that the data showed little change in offshore wealth since FATCA/CRS had been introduced. The obvious explanation is that TJN’s methodology has always been wrong, and FATCA/CRS merely reveals this. TJN, however, prefer to believe that their methodology is correct and the actual measurable outcomes of FATCA/CRS should be discarded.

The continued publication of this report, and the use of a $171bn figure which cannot be right, is inexplicable. The authors know it’s wrong, and don’t care. One of the founders of the Tax Justice Network, Richard Murphy, says that the “State of Tax Justice” report is “hopelessly misleading”. He’s being kind.

Multinational profit shifting

The Tax Justice Network claim is that $301bn of tax is lost each year to cross-border corporate tax abuse by multinationals, “shifting” profit from highly taxed countries into tax havens.

Nobody should deny that some/many multinationals do avoid tax by shifting profits into lower tax jurisdictions. This is about to become much less effective, when the OECD 15% global minimum tax is implemented. But until then, whilst there are many anti-avoidance rules intended to stop profit shifting, it undoubtedly happens. And the OECD global minimum tax will certainly not eliminate profit-shifting altogether.⁸Multinationals will still be able to obtain an advantage by shifting profits from a country with a tax rate of over 15% into a tax haven (or a country with a corporate tax rate of 15% or less). And companies with a global turnover of less than €750 million will not be subject to the OECD global minimum tax, and so their profit shifting will be unaffected.

There are a variety of ways in which profit shifting can be estimated. However, the Tax Justice Network do not try to do this.

This is the claim:

And here’s the methodology:

The methodology (“misalignment”) and the claim (“tax abuse”) are not remotely the same thing.

The methodology is looking at the amount of theoretical tax that would be paid if there was an international corporate tax system that allocated each country taxing rights based on the wages paid in that country and the number of employees in that country.

That is, however, not the way international tax works. No country taxes on this basis. I’m not aware of any proposal that any country should tax on this basis. Any company that actually paid tax on this basis would be breaking the law in every country in which it operates. It’s a fictitious calculation.

The Tax Justice Network then calculate the difference (“misalignment”) between the tax actually paid, and the tax that would be paid in their fictitious calculation. This could be fairly described as the potential tax revenue if their model was adopted (assuming no behavioural change). However, it is not a measure of profit-shifting, and absolutely not a measure of tax avoidance or tax abuse.

To give an example, take a German real estate investment company which has all its employees in Germany, but which owns real estate across Europe via local subsidiaries. It will pay corporate income tax only in the countries where it holds real estate, and not in Germany.⁹Technically this is because the dividends from the subsidiaries will be exempt from German corporate income tax and trade tax. There will be some German tax, as transfer pricing rules will require the German headquarters to be remunerated on an arm’s length basis, in a way that reflects the contribution of its German personnel. That will in most real-world scenarios be much less tax than is due on rental/gains on the real estate. That’s a perfectly sensible result. But the TJN methodology sees this as a “misalignment” from its fictitious calculation, and labels it as tax abuse.

The disparity between what the methodology does, and what TJN claims it does, is indefensible.

• 1
  For example you could find a bank that is both corrupt and brave, use a normal bank but provide it with fraudulent identification documents (which it does not challenge), or bank in a country, which has not signed up to CRS (but those are generally countries where your bank account would not be particularly safe).
• 2
  See page 5 of this report
• 3
  See table 1, page 11 of this fascinating new paper by Niels Johannesen and others.
• 4
  That’s the total of the second column of table 5.2, on page 46 of the report. It is unclear how this figure is derived – the explanation in the methodology document is convoluted, and the calculation spreadsheets are not published
• 5
  TJN claim that “the State of Tax Justice does not assume all offshore bank deposits are related to tax abuse and goes to great lengths to account for this.” But whatever (unclear) steps they take, plainly do not take account of FATCA and CRS
• 6
  There is more to say about the way they allocate the $10 trillion between different countries; they calculate a regression based on cherry-picking, and make the unexamined (and false) assumption that financial centres only exist because of tax abuse. But that is a sideshow; everything goes wrong once they start with a $10 trillion figure, and don’t adjust for reporting.
• 7
  Subsequently, TJN justified their conclusions on the basis that the data showed little change in offshore wealth since FATCA/CRS had been introduced. The obvious explanation is that TJN’s methodology has always been wrong, and FATCA/CRS merely reveals this. TJN, however, prefer to believe that their methodology is correct and the actual measurable outcomes of FATCA/CRS should be discarded.
• 8
  Multinationals will still be able to obtain an advantage by shifting profits from a country with a tax rate of over 15% into a tax haven (or a country with a corporate tax rate of 15% or less). And companies with a global turnover of less than €750 million will not be subject to the OECD global minimum tax, and so their profit shifting will be unaffected.
• 9
  Technically this is because the dividends from the subsidiaries will be exempt from German corporate income tax and trade tax. There will be some German tax, as transfer pricing rules will require the German headquarters to be remunerated on an arm’s length basis, in a way that reflects the contribution of its German personnel. That will in most real-world scenarios be much less tax than is due on rental/gains on the real estate