Is it time to stop big firms from shifting profits to tax havens?

For the first time, researchers have been able to estimate the profits that multinational companies have moved to tax havens without paying their share of corporate tax in the countries where they actually earned the money. 

And the picture they paint isn’t good. 

More than $650 billion each year is shifted to low-tax jurisdictions such as Luxembourg, a figure that corresponds to nearly 10 percent of global corporate tax, a report by Thomas Torslov and Ludvig Wier of the University of Copenhagen and UC Berkeley’s Gabriel Zucman, has found. 

The biggest losers are EU member state, despite steps taken by the bloc in recent years to curb the practice of transfer pricing - a technique used by big firms to move profits via a network of offshore subsidiaries. 

But when the research team analysed the data for 2015-2017 period they found the policy initiatives including the Base Erosion and Profit Shifting (BEPS) mechanism have not had the desired result. 

“We thought the level of profit shifting will go down but it’s completely constant,” Wier told TRT World.

“To really fix the system, we need a new way of taxing multinationals on a global level.” 

Wier and his colleagues have created an interactive map which reveals how much corporate tax a country is losing to different tax havens. 

Ireland, Luxembourg, the Netherlands, Bermuda, and Singapore are among the places where multinationals park their profits because of really low tax rates or none at all.

The countries from where the profits were being shifted include UK, Germany, China, France and Italy, Brazil, and India. 

Around $667 billion was shifted to low-tax jurisdictions such as Ireland by the likes of Google in 2016. 

Corporate tax avoidance is an issue that has tested the limits of government intervention. Large corporations exploit legal loopholes to avoid paying tax, but up until recently it has been difficult to see the full extent of this practice. 

Earlier this year, France became the first European country to tax the local revenues of tech giants like Amazon and Google. This type of fixed tax on sales reduces the incentive for companies to move their profits to low-tax places like Luxembourg. 

Tracing the profits of tech companies is particularly challenging since it involves valuing intangible assets.  

Google has managed to sell its algorithm to its own subsidiary in Bermuda. Its affiliates around the world use that search algorithm and accordingly pay Google Bermuda even though it hardly generates any economic activity. 

“In 2017 Google Bermuda’s income was $23 billion which is absurd given that Google barely has any employees in Bermuda,” says Wier.

This makes it difficult for authorities to ascertain how much profit a multinational company is making in the different countries where it sells products and services.  

A way to stop tax evasion is to use what is known as the formula apportionment system, which uses a host of variables to establish the pre-profit of these large firms. 

“For instance, if a company has ten percent of its customers, employees and factories in France then ten percent of the global profits of the company will be allocated to France (for calculating the corporate tax),” says Wier. 

The EU, the United States, and other countries have begun sharing data on the profit shifting of multinational subsidiaries. 

Corporate tax avoidance wasn’t a big problem until a few years ago but multinationals have come to play a much bigger role in the past decade, inviting the scrutiny of government officials.