Taxation – A Social Justice Issue
Citizens’ groups around the world are increasingly raising concerns about the social costs that tax evasion is imposing on their societies. Offshore tax havens – commonly called offshore financial centers, or OFCs – are central to these concerns. Today there are more than seventy OFCs, many based in small island states such as the Cayman Islands and the Bahamas. OFCs levy little or no tax on income and provide few rules on incorporation. Corporations can conduct their business without having a physical presence in these jurisdictions. Most importantly, OFCs guarantee secrecy so that their clients are beyond the scrutiny of tax authorities and regulators in their home countries.
These characteristics have attracted wealthy individuals and corporations to move their assets offshore. One-third of the wealth of the world’s richest individuals, or US$11.5 trillion, is now held offshore. More than half of all global trade is conducted through OFCs, and half the world’s money supply is estimated to pass through OFCs at some point.
OFC secrecy provisions are enabling massive amounts of tax evasion; the loss in global tax revenues is now estimated to be at least $500 billion annually. Secrecy provisions also facilitate bribery, theft, insider trading, drugs and arms trafficking, and money laundering. Today an estimated $1 trillion of “dirty” money flows into OFCs each year.
For multinational corporations, OFCs provide opportunities for “profit laundering,” assigning profits and losses according to where taxes can be minimized. Profit laundering is conducted through offshore shell companies that have no function other than holding corporate assets. A company can lend itself its own money hidden in an offshore shell company, deducting fees, insurance and interest on its tax returns. Or a company might transfer the ownership of its patents, copyrights or other intangibles to an offshore shell company and collect royalties in a low-tax jurisdiction.
A common method of concealing corporate income is through falsified transfer pricing. Half of all global trade is conducted among affiliates of the same parent company and much of this trade is falsely priced so that profits and losses can be allocated on paper. A parent company might sell a product to an offshore affiliate at a sharply reduced price; the affiliate then sells the item at market price with the profits remaining offshore. Alternatively, an offshore affiliate might buy an item at the real market price, but sell it to its parent company at a grossly inflated price so the company has a huge cost to deduct. Multinational companies now account for a global tax loss of at least $280 billion a year through the use of shell companies and falsified transfer pricing.
Wealthy individuals are also escaping their tax obligations by holding their assets offshore. A 2006 U.S. Senate report concluded that Americans with offshore assets avoid $40 to $70 billion in taxes each year. The Tax Justice Network (UK) calculated that if the returns on $11.5 trillion of individual wealth now placed in OFCs were taxed at 30 percent, it would generate $255 billion in tax revenues globally.
For developing countries, the loss of tax revenues of at least $50 billion annually has been disastrous. In addition, an estimated $148 billion of illegal capital flight leaves the African continent every year. This loss of tax revenues along with illegal capital flight has resulted in the deaths of thousands of vulnerable people as health services have been dismantled and public infrastructure crumbled. However, the role of OFCs in enabling tax evasion and illegal capital flight is rarely considered in debates about Third World poverty.
Citizens' groups are calling for urgent action to put an end to the abuses associated with the offshore system. The first step is to put an end to secrecy provisions. The privacy rights of citizens must be distinguished from regimes of financial secrecy. If progress is to be made on tax evasion, illegal capital flight and corruption, financial institutions must be legally required to disclose all income paid to citizens of other countries.
A second important step is to criminalize those involved in tax evasion. Very few corporate executives, their lawyers, bankers, or accountants have been held liable for tax evasion. This must change.
Democratic public debate about these issues is urgently required. Taxes are a crucial foundation of democratic societies as they pay for the public goods and services that benefit us all.
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