A report published in November 2011 by the advocacy group Citizens for Tax Justice looked into this tax dodging behaviour among the US’s 280 largest corporations and found that 78 of them paid no taxes, or even negative tax rates, for at least one year since 2008. Among the many loopholes at the disposal of these large corporations is tax arbitrage, the common practice of analysing tax rules that differ from country to country, to strategically exploit the differences in order to keep the amount of taxes paid to any government, anywhere, as low as possible.
Expert practitioners of tax arbitrage have developed many means of tax avoidance, some of which border on the absurd. One is to chop cars in half such that they qualify as “spare parts” at the border. Upon clearing customs, the two halves are simply welded back together and ready for sale having paid substantially lower taxes than on an otherwise new, imported vehicle.
Most corporations do their best to keep their efforts to use loopholes secret, and therefore it’s no surprise that their tactics succeed in costing governments billions of dollars, while remaining invisible.
In 2011 the OECD, led by Secretary-General Angel Gurría, urged policymakers in the world’s most developed economies to limit the scope for “gaming” the system by using multiple deductions, the creation of untaxed income and other unintended consequences of international tax arbitrage. In addition to lost revenue, the OECD also recognises the negative impacts of “tax arbitrage on competition, transparency and fairness” in the global economy.
In line with the OECD’s resolve on tax arbitrage, US President Barack Obama also announced his intention to close tax loopholes on foreign investment, just weeks before the French and other governments declared an end to tax havens during the G20 Summit in Cannes.
With public debt front and centre on the international stage, the strong posture of the OECD and the leaders of its member countries towards corporate tax avoidance is a step in the right direction. To be sure, the world’s debt woes will not come to an end by tightening tax loopholes. But as the OECD’s former top tax official, Jeffrey Owens, who led the international stand against tax havens and bank secrecy, put it, tax may not have been among the root causes of the financial crisis, but inappropriate tax measures can have an indirect effect on financial instability by encouraging greater leveraging, greater risk-taking and less transparency.
We agree that improved transparency and accountability in the global financial system can slow down aggressive tax planning. In a 2010 report by one of our members, Global Financial Integrity, as much as $9.4 trillion is hidden away in offshore tax havens and secrecy jurisdictions located across all continents. Moreover, over the past two years alone, cracking down on bank secrecy has brought governments nearly $20 billion in additional revenue, according to figures published in November by the OECD.
That’s why our Task Force is asking that countries require all multi-national corporations to report sales, profits and taxes paid in all jurisdictions in their audited annual reports and tax returns, as well as mandating public availability of information regarding beneficial ownership, such that financial institutions can rightly identify the ultimate beneficial owners or controllers of any company, trust or foundation seeking to open an account.
In combination with fine-tuned fiscal policies, tackling aggressive tax planning can be a powerful weapon against the debt burden borne by EU countries as well as the United States, and the Task Force on Financial Integrity and Economic Development is counting on the OECD’s continued leadership in closing those holes in the system in order to get out of a much bigger one.
*Global Financial Integrity is a member of the Task Force on Financial Integrity and Economic Development
Owens, Jeffrey (2011), “Tax evasion: Ready when the call came” in OECD Yearbook 2011.
Owens, Jeffrey (2011), “Options for financial sector taxation following the crisis”, Remarks, 28 March.
©OECD Observer No 290-291, Q1-Q2 2012