The IRS is cracking down on domestic tax evasion by going after wealthy individuals and complex private partnerships, but some of the biggest tax evaders — U.S. multinational corporations — are still exploiting legal gray areas to stash money overseas and keep it out of the government’s reach.
Fed up with a stalled international effort at the Organization for Economic Cooperation and Development (OECD) to rein in the use of tax havens and put a global corporate minimum tax into force, African countries at the United Nations are now leading a charge for greater transparency and fairness in international tax.
$1 trillion a year lost to tax havens
In 2022, profits stowed in tax havens by giant companies totaled $1 trillion, amounting to about 35 percent of foreign profits, according to the EU Tax Observatory’s 2024 global tax evasion report, published this week.
“Foreign profits are the profits made by multinational companies outside of their headquarter country – they include, for instance, the profits booked by Apple outside of the United States, by BMW outside of Germany, and by Toyota outside of Japan. In 2022, according to the best available estimates, profits shifted to tax havens totaled $1 trillion globally,” the report’s researchers found.
“The corporate tax revenue losses caused by this shifting are significant, the equivalent of nearly 10 percent of corporate tax revenues collected globally,” they noted.
The findings back up a 2021 study by the U.K.-based International Centre for Tax and Development (ICTD) that found multinationals moved about $1 trillion to tax havens in 2016.
U.S. companies do more of this profit shifting compared to their international peers, both groups of researchers found, with about half of all U.S. foreign profits being slid into tax havens, as opposed to 30 percent for non-U.S. multinationals.
“[Multinational corporations] headquartered in the United States and Bermuda are the most aggressive at shifting profits towards tax havens, while [those] headquartered in India, China, Mexico and South Africa the least,” ICTD researchers found, calling out the Cayman Islands, Luxembourg, Bermuda, Hong Kong and the Netherlands as among “the most important tax havens.”
New push to track down tax dodges
Earlier this month, Nigeria filed a draft resolution at the General Assembly on behalf of the U.N.’s group of African states to set up an intergovernmental committee on global tax rules that could effectively supplant the rich countries in the OECD as the global coordinating tax authority.
The resolution stresses “the need for all countries to work together to eliminate tax evasion, tax base erosion and profit shifting, and to ensure that all taxpayers, including multinational companies, pay taxes to the governments of countries where economic activity occurs and value is created.”
Experts say the resolution could go to a vote in mid-November, building on the momentum of a similar resolution that passed by surprise consensus in the General Assembly at the end of last year.
That resolution resulted in a report from the secretary-general that recommended that the U.N. offered the most “viable path” for actually getting a global tax agreement signed, sealed and delivered.
“Enhancing the UN role in tax-norm shaping and rule setting, fully taking into account existing multilateral and international arrangements, appears the most viable path for making international tax cooperation fully inclusive and more effective,” the report found.
The EU bemoaned the U.N. push in September, warning of a duplication of efforts and wasted time.
“It could imply reopening negotiations, potentially on issues for which promising outcomes already exist,” the European Council said. “This would be time consuming for all jurisdictions.”
Pillar One sputters in Luxembourg
Moving money around to skimp on taxes takes a significant bite out of the domestic governmental revenues of countries where multinationals operate but pay minimal tax.
That is why experts say it’s no surprise that less well-off countries should be pushing for an alternative to the OECD’s hollowed out framework, known as Pillar One.
“Pillar One, which was supposed to deal with profit shifting, has now become very, very narrow, only addressing a small part of the profits of less than 100 multinationals. Everything else is left on the old rules, which we know don’t work,” Alex Cobham, economist and chief executive of the Tax Justice Network, an international tax advocacy organization, told The Hill.
“The instruments the OECD has put forward can’t come into effect unless the United States ratifies it, and we know that the United States doesn’t have political agreement to be able to ratify,” he said. “Pillar One is pretty much dead in the water.”
Treasury Secretary Janet Yellen said during a meeting of finance ministers in Luxembourg last week that the process of agreeing on Pillar One could drag on into next year.
“Much of the treaty has been agreed to. … There are some matters that are important to the United States and other countries that remain unresolved,” she told reporters, as reported by Politico.
The matters “need to be resolved before the treaty can be signed, so these processes will take into next year,” she said.
No market for ‘intangibles’
The entities actually doing the work of shifting profits internationally include the “big four” accounting firms, which are statistically correlated with the use of tax havens, according to research carried out in part by Cobham.
He and his fellow researchers found a “strong correlation and causal link between the size of an [multinational enterprise’s] tax haven network and their use of the Big 4,” comprising KPMG; Deloitte; Ernst and Young; and Price Waterhouse Coopers.
The growth rate of tax haven subsidiaries is 2.9 percent higher for multinationals that employ one of the big four to file accounts compared to those firms that do not, they found.
KPMG declined to comment on the findings. Ernst and Young, Price Waterhouse Coopers and Deloitte did not respond to request for comment for this story.
The current techniques of international tax avoidance really exploded in the early 1990s, Cobham said, when the big accounting firms started playing with transactions among company subsidiaries, which happen entirely inside a given legal structure and are not subject to market forces such as price discovery.
These techniques got more advanced when applied to “intangible assets,” such as brands and intellectual property, the true value of which is known only to its owner.
“They discovered intangibles. It’s very difficult for anybody to put a price on the Google brand being sold by Alphabet to a Google subsidiary. There is no open market for this. The transaction only happens within the multinational,” he said.
The United States Mission to the United Nations, the Nigerian Mission, and the White House declined to comment.