International Tax Haven Agreement Weakened by Loopholes, Warns EU Tax Observatory
An ambitious agreement made by over 140 countries and territories in 2021 to crack down on tax havens and ensure that multinational corporations pay a minimum tax has been undermined by loopholes, according to the EU Tax Observatory. The landmark agreement, which set a minimum global corporate tax rate of 15%, aimed to prevent companies like Apple and Nike from exploiting legal and accounting tactics to lower their tax bills by shifting profits to low-tax jurisdictions such as Bermuda and the Cayman Islands.
The tax avoidance measures employed by these companies result in a loss of tax revenue between $100 billion and $240 billion per year, as estimated by the OECD.
The EU Tax Observatory’s report, released on Monday, highlighted that the agreement would only generate less than 5% of global corporate tax revenue, instead of the expected nearly 10%, due to its weakened state. Loopholes have been introduced during the refinement of the agreement, causing much of the anticipated revenue to disappear. The report estimates that a 15% minimum tax could have raised around $270 billion in 2023, but with the loopholes, this figure drops to approximately $136 billion.
One key provision that was delayed until 2026 was the ability for foreign countries to impose additional taxes on US multinational companies failing to pay a 15% tax rate on their overseas earnings.
Even under the rules of the agreement, there are still opportunities for companies to evade taxes. For instance, companies with tangible assets in a country can still pay a tax rate lower than 15%. This exemption may encourage companies to relocate their production to countries with lower tax rates, thereby intensifying the race-to-the-bottom in corporate income tax rates.
Additionally, countries can offer tax credits for activities like research and investment in local factories, which can reduce companies’ tax rates below the 15% threshold while remaining compliant with the 2021 agreement.
The EU Tax Observatory also highlighted concerns about government’s race to grant tax breaks for green technologies to combat climate change. While supporting green-technology subsidies, the group cautioned that these tax breaks could exacerbate inequality by primarily benefiting the wealthy through increased after-tax profits.
Although the EU Tax Observatory did commend efforts to combat tax evasion by the wealthy through the exchange of taxpayer information between financial institutions, it stressed that billionaires still pay a significantly lower effective tax rate compared to other income groups due to tax-avoidance schemes. The group suggested implementing a 2% global tax on billionaires’ wealth, a measure that could generate $250 billion yearly from fewer than 3,000 individuals.
