Oases are actually a good thing. In a desert they can be a lifesaver. From the point of view of companies, this also applies to tax havens – there they can save their profits from being seized by the state. From this point of view, those countries in which the sales are generated are one big desert. But that doesn’t prevent large international corporations in particular from shifting their profits to tax havens.
Two economists have now examined how much the sums that are moved have grown since 1975 and how gigantic they are now. It also showed that Germany is one of the biggest losers. Among the winners of this marshalling yard are the usual suspects, but there are also some surprises. The question is whether the planned global minimum tax can halt or even reverse the trend of the last four decades.
“Global profit shifting” is the title of their recently published study, Ludvig S. Wier, economist at the Danish Ministry of Finance, and Gabriel Zucman from the economics department at the University of California, Berkeley. And the shifts they’ve uncovered, covering the period from 1975 to 2019, are massive.
“First, global corporate profits grew far faster than global incomes between 1975 and 2019,” the economists write. As a result, the share of corporate profits in all incomes worldwide has increased from 15 to 20 percent, i.e. by around a third, during this period.
Consequently, one would expect corporate taxes to have increased by a third in relation to all tax revenues. “In fact, however, corporate tax revenues have stagnated relative to global income,” the economists said. “That means the effective global corporate tax rate has fallen by a third.” However, this is not only due to the fact that tax rates in the large industrialized countries have fallen in just over four decades.
Rather, the cause is different. The proportion of corporate profits generated by large international corporations has risen drastically; from four to 18 percent. “The increase has been particularly pronounced since the beginning of the 21st century,” according to the study. And these corporations, in turn, have the ability to shift their profits to states that charge extremely low taxes, or even no taxes at all.
And that’s exactly what they’re doing, to an increasing extent. According to the estimates of the scientists, the proportion of profits that these large corporations report in tax havens was just two percent in 1975, but by 2019 it was already 37 percent. If you look at all company profits, which also includes those of small medium-sized companies with a few employees, the proportion rose from 0.1 to seven percent. That corresponds to around 969 billion dollars, i.e. almost one trillion.
On the basis of these results, the economists calculated how much tax the states had lost as a result of profit shifting. They account for around ten percent of global revenue from corporate taxes, or $247 billion, which the finance ministers in particular, and ultimately the citizens of the major industrial nations, lose out on.
However, the individual countries are affected in very different ways. In relative terms, the UK and Costa Rica are the biggest losers. They’re missing out on about 32 percent of the corporate taxes they could earn without profit shifting. Germany follows closely behind with 29 percent. Other European countries such as France, Spain and Italy are also far ahead, while the USA loses less, but at 14 percent it is still more than the average.
The biggest winner, on the other hand, is clearly the Caribbean island nation of Bermuda, where 100 percent of corporate tax revenue comes from profit shifting. But right behind them are two EU members: Ireland with 59 percent and Luxembourg with 56 percent, and with Belgium (38 percent), Malta (29 percent) and the Netherlands (19 percent) there are three other big beneficiaries within the EU. Outside the EU, Hong Kong and Switzerland in particular are among the winners.
What is particularly interesting and surprising is that so many EU Member States are at the forefront. At the same time, the EU has been keeping a list of tax havens since 2017 – but from which EU countries are excluded from the outset. Instead, mainly small Caribbean or Pacific countries are listed there. Apparently, the EU also has an internal problem when it comes to tax evasion.
Second, there is hope. The data from Wier and Zucman shows that profit displacement has not increased since 2015. They believe that on the one hand this could be due to the “US Tax Cuts and Jobs Act”, with which the then US President Trump radically reduced corporate taxes.
On the other hand, the planned minimum tax on corporate profits, which the OECD had initiated and which 141 countries agreed to, would apparently mean that the proportion of profits postponed would not continue to grow. This minimum tax should apply from 2024 and amount to 15 percent.
The question is whether this will bring significant additional income to Germany. At the same time, the distribution of tax revenue is also to be changed. Corporations currently pay taxes in the country where they are headquartered if they don’t outsource their profits, but in the future it should play a greater role where the sales were generated.
And the DAX companies in particular sell more than half of their products outside of Germany, sometimes up to 90 percent. In the end, fewer profits could be shifted out of Germany, but more of them could be taxed abroad. Depending on how exactly the taxes are designed in the future, the reform could become a zero-sum game for Germany.
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