One of the virtues of globalization, from the perspective of a corporation, is the ability to move operations from one jurisdiction to another to take advantage of better tax deals. Some countries, like Ireland and Hungary, have billed themselves as havens for corporations that want to pay as little tax as possible.
At the prodding of the United States, the Organization for Economic Cooperation and Development (OECD) has been pushing through a corporate minimum tax rate of 15 percent. It will also tax digital companies in locations where they operate even if they don’t maintain any offices there.
All of this is lower than what the United States initially pushed for – a 21 percent rate. The measure, if passed, will have a 10-year transition period. And it’s not entirely clear that the United States itself will ratify the accord given the predictable Republican opposition. But hey, it’s something.
This effort might make a small dent in the gross receipts of the world’s wealthiest, like Amazon’s Jeff Bezos and Facebook’s Mark Zuckerberg. But even a small dent adds up to a lot of revenue. “Tax havens collectively cost governments between $500 billion and $600 billion a year in lost corporate tax revenue,” writes tax haven expert Nicholas Shaxson. “Of that lost revenue, low-income economies account for some $200 billion – a larger hit as a percentage of GDP than advanced economies and more than the $150 billion or so they receive each year in foreign development assistance.”
It’s not just corporations that are hiding their profits from tax authorities. Individuals continue to profit enormously from the global economy and, with the help of their accountants, avoid paying as much as possible to their respective governments. Shaxson offers a range of anywhere between $8.7 trillion and $36 trillion, which adds at least another $200 billion in lost government tax revenue per year.
To take advantage of low to non-existent tax rates, the rich love to park their money, and sometimes themselves, in places like the Bahamas and the Cayman Islands. But the real surprise of the Pandora Papers is South Dakota’s status as a capital magnet. Like those island hideaways, South Dakota has no income tax, inheritance tax, or capital gains tax. And, like the Switzerland of old, it protects the money of the rich behind walls of secrecy.
On top of that, South Dakota trusts offer something else the rich crave: deniability. As Felix Salmon explains, “All three parties – the settlor, the trustee, and the beneficiary – can legally claim that the money isn’t theirs. The settlor and the beneficiary can say they don’t have the money, it’s all in a trust run by someone else. The trustee can say that she is just looking after the money and doesn’t own it.”
In other words, the rich often want to be as inconspicuous as possible — to avoid the tax inspector, that persistent creditor, and the anger of crowds.
So, the first step to clean up this highly lucrative mess is sunlight. One global tool is the Common Reporting Standard by which participating countries provide basic information about foreign assets held in their territories.
Excerpted: ‘The Embarrassment of Riches’