Corporations are laughing at the idea of paying taxes as nearly $1 trillion goes offshore every year

$1 trillion in the shade – the annual profits multinational corporations shift to tax havens continues to climb and climb


About a decade ago, the world’s biggest economies agreed to crack down on multinational corporations’ abusive use of tax havens. This resulted in a 15-point action plan that aimed to curb practices that shielded a large chunk of corporate profits from tax authorities.

But, according to our estimates, it hasn’t worked. Instead of reining in the use of tax havens – countries such as the Bahamas and Cayman Islands with very low or no effective tax rates – the problem has only gotten worse.

By our reckoning, corporations shifted nearly US$1 trillion in profits earned outside of their home countries to tax havens in 2019, up from $616 billion in 2015, the year before the global tax haven plan was implemented by the group of 20 leading economies, also known as the G-20.

In a new study, we measured the excessive profits reported in tax havens that cannot be explained by ordinary economic activity such as employees, factories and research in that country. Our findings – which you can explore in more detail along with the data and an interactive map in our public database – show a striking pattern of artificial shifting of paper profits to tax havens by corporations, which has been relentless since the 1980s.

Global crackdown
The current effort to curb the legal corporate practice of using tax havens to avoid paying taxes began in June 2012, when world leaders at the G-20 meeting in Los Cabos, Mexico, agreed on the need to do something.

The Organization for Economic Cooperation and Development, a group of 37 democracies with market-based economies, developed a plan that consisted of 15 tangible actions it believed would significantly limit abusive corporate tax practices. These included creating a single set of international tax rules and cracking down on harmful tax practices.

In 2015, the G-20 adopted the plan officially, and implementation began across the world the following year.

In addition, following leaks like the Panama Papers and Paradise Papers – which shed light on dodgy corporate tax practices – public outrage led governments in the U.S. and Europe to initiate their own efforts to lower the incentive to shift profits to tax havens.

Profit-shifting soars
Our research shows all these efforts appear to have had little impact.

We found that the world’s biggest multinational businesses shifted 37% of the profits – or $969 billion – they earned in other countries (outside the headquarter country) to tax havens in 2019, up from about 20% in 2012 when G-20 leaders met in Los Cabos and agreed to crack down. The figure was less than 2% back in the 1970s. The main reasons for the large increase were the growth of the tax avoidance industry in the 1980s and U.S. policies that made it easier to shift profits from high-tax countries to tax havens.

We also estimate that the amount of corporate taxes lost as a result reached 10% of total corporate revenue in 2019, up from less than 0.1% in the 1970s.

In 2019, the total government tax loss globally was $250 billion. U.S. multinational corporations alone accounted for about half of that, followed by the U.K. and Germany.


Global minimum tax
How do policymakers fix this?

So far, the world as a whole has been trying to solve this problem by cutting or scrapping corporate taxes, albeit in a very gradual way. In the past 40 years, the global effective corporate tax rate has fallen from 23% to 17%. At the same time, governments have relied more heavily on consumption taxes, which are regressive and tend to increase income inequality.

But the root cause of profit-shifting is the incentives involved, such as generous or lenient corporate tax rates in other countries. If countries could agree on a global minimum corporate tax rate of, say, 20%, the problem of profit-shifting would, in our estimation, largely disappear, as tax havens would simply cease to exist.

This type of mechanism is exactly what more than 130 countries signed onto in 2021, with implementation of a 15% minimum tax set to begin in 2024 in the EU, U.K., Japan, Indonesia and many other countries. While the Biden administration has helped spearhead the global effort to implement the tax, the U.S. has notably not been able to get legislation through Congress.

Our research suggests implementing this type of tax reform is necessary to reverse the shift of ever-greater amounts of corporate profits going to tax havens – instead of being taxed by the governments where they operate and create value.

 

Well the news did sound familiar. "4 trillion" was on the books profits American corporations keep sloshing offshore.

~1T is off the books money stashed in tax havens.

It's funny right? We have a "tool box" to punish Russia and Iran by closing up the money spigot, but somehow we can't track money flowing across our borders and our closest allies...



Trump said the tax law would bring home $4 trillion in offshore profits. Just a fraction of that is back - Los Angeles Times

Corporate America brought $665 billion of offshore profits back to the U.S. last year — falling well short of the $4 trillion that President Trump predicted would return because of the 2017 tax overhaul.

Companies repatriated $85.9 billion in the fourth quarter of 2018, the lowest sum for the year and down from $100.7 billion the previous quarter, Commerce Department data showed Wednesday. That adds to the $579 billion in the first three quarters of 2018.

Corporations are bringing back more than they did in 2017, before the tax law was enacted, when U.S. firms repatriated $155 billion. But in touting the tax overhaul, Trump predicted trillions would return to the U.S., creating jobs and spurring investment. Investment banks and think tanks have estimated that U.S. corporations actually don’t hold that amount in offshore cash, pegging it at $1.5 trillion to $2.5 trillion.

Companies had kept much of their overseas profit offshore over the years because a 35% tax kicked in only if they brought the cash back to the U.S. The Republican tax law set a one-time 15.5% tax rate on cash and 8% on noncash or illiquid assets, regardless of the country where the profits sat.

The repatriation figures were part of a quarterly report on the current-account deficit, which widened from $126.6 billion to $134.4 billion in the October-to-December period. The gap is considered the broadest measure of international trade because it includes income payments and government transfers.

There have long been doubts the tax-law changes would bring about the level of repatriation that Trump suggested. Only about 54% of corporate offshore earnings are held in cash, according to a 2016 paper led by Jennifer Blouin, a researcher at the University of Pennsylvania. The remaining 46% are illiquid assets that would be difficult, if not impossible, to repatriate without selling.

Any claims made about how repatriated cash would boost wages and investment in the U.S. are probably overblown, according to researchers at the University of Richmond and Claremont McKenna College. “Policy changes have a relatively small impact on hiring and investment decisions if firms have relatively easy access to credit markets,” the researchers said in a 2018 paper.

Instead, companies have been plowing the tax-cut cash into stock buybacks. Earlier this month, data from Citigroup Inc. showed that companies in the S&P 500 repurchased more than $800 billion of shares last year, surpassing the amount they invested in new or upgraded equipment.

That’s the first time that buybacks have been larger than capital expenditures, despite a change in the tax law that gives companies immediate write-offs if they buy machinery. Capital expenditures by contrast were slightly more than $700 billion, according to the Citigroup data.

Democratic politicians have blasted the Republican tax law for benefiting corporations and their investors rather than workers. House Ways and Means Committee Chairman Richard Neal (D-Mass.) began a congressional hearing on the tax law, saying the middle class has been left behind.

“Investors are doing very well. Corporate CEOs have it great. Wealthy heirs couldn’t be doing better,” Neal said in a prepared statement Wednesday. “Let’s not pretend that stock market gains and corporate profits tell the whole story of today’s economy.”

Now, uncertainty about whether Democrats could upend the tax law in the coming years is making companies hesitant to overhaul their operations, said Lisa De Simone, an accounting professor at Stanford University.

“There is a lot of concern about doing some of the things intended by the law — repatriating profits, bringing back intangible assets, moving significant operations to the U.S.,” she said. “Those changes are incredibly hard to undo.”​