Up to 40% of foreign multinational profits going to tax havens, research finds
Country-by-country reporting data has afforded researchers an unprecedented look into global profit shifting.
Each year, multinational corporations shift up to 40 per cent of their foreign profits to tax havens, amounting to an estimated $850 billion in 2017 alone.
Relying on previously unavailable data released under new country-by-country reporting standards, researchers from Utrecht University in the Netherlands and Charles University in Prague were able to fill the knowledge gap surrounding the depth and nature of global profit shifting.
“Publicised case studies, such as those based on the Panama and Paradise Papers, have detailed how little some large multinational corporations (MNCs) pay in corporate income tax as a result of their profit shifting to low-tax jurisdictions or tax havens,” they said.
“The case studies are not exceptions.”
Corporate tax avoidance does more than deprive local economies of concessions in the form of tax revenue. It harms the “efficiency and equity” of financial markets by, for instance, elbowing out smaller competitors.
As noted by the Tax and Transfer Policy Institute: “The artificial and non-justified tax concession advantage for multinationals becomes a barrier to entry for the domestic base and emerging companies.”
Research from the EU Tax Observatory found that Australians held more than $370 billion in known overseas tax havens and that the country lost $11 billion in tax revenue to multinational profit-shifting activities in 2020.
That report identified a “widespread view” that the mobile capital of multinationals means that traditional forms of taxation are increasingly difficult, “if not impossible” in a globalised world.
“If a country tries to tax multinational firms, according to this view, then multinationals will move their headquarters, their activity, or their profits to lower-tax countries,” said the Tax Observatory.
“If a country tries to tax wealthy individuals, these taxpayers will relocate to tax havens.”
The discussion is particularly germane to the Australian context, given the ATO’s recent enforcement efforts against multinationals, most notably captured in the PepsiCo decision.
Jason Casas, partner and national head of transfer pricing at Grant Thornton, said it would be difficult to predict whether the PepsiCo decision will impact foreign business activity in Australia. Proposed transparency measures for multinationals operating in Australia, however, will be a “significant change,” however.
The transparency measures will require companies to release information regarding their profitability and their operations in Australia and globally, he said.
“While it has been pared back from what it was originally proposed to be, it still is adding to that regulatory burden at the top end,” he added.
While profit shifting is notoriously difficult to regulate, the Tax Observatory stressed that tax avoidance is “not a law of human nature; they are policy choices.”
“Countries can choose to adopt minimum taxes just like they can choose to put no floor to international tax competition,” it said.
“Policymakers can regulate the industry that facilitates tax evasion just like they can choose to deregulate (or even legitimise) it.”
