While the world struggles to mitigate the impact of COVID-19, trillions of dollars lay safely in offshore accounts.
Rabat – The inadequacy of governmental response to the COVID-19 pandemic worldwide is a direct result of putting profits before society. Market deregulation, praised in the neoliberal order as bringing never-ending economic growth, has led to fortunes being stacked offshore at the expense of the public sector.
Governments worldwide lose between $500 and $600 billion a year in corporate tax revenue. An extra $200 billion is lost from global individual income tax.
Such annual losses lead to budget cuts for essential parts of public infrastructure. A lack of funds translates to difficulties building new hospitals, providing existing health centers with the newest equipment, training doctors, building new roads, and investing in education.
The COVID-19 crisis has acutely highlighted the inequalities derived from an unjust market system, but the situation also brings with it an opportunity for change. The wealth hidden offshore has never been needed as much as at present.
Simultaneously, the world is learning once again that market forces are unable to address basic issues of human survival. Governments, not businesses, are providing much-needed relief packages for individuals and enterprises.
Relief packages vs. offshore assets
Governments worldwide are unfreezing billions of dollars in assets to prevent their citizens from sliding into poverty. Morocco poured in MAD 35 billion ($3.5 billion) as part of the Special Fund for the Management and Response, a shared effort of the government and various philanthropists to combat COVID-19.
The European Commission pledged to set up a €100 billion “solidarity instrument” called SURE, which will assist in stabilizing the economic situation for both workers and businesses. The Commission is also considering redirecting its available structural funds to alleviate the effects of the coronavirus.
Donald Trump signed the largest rescue package in US history, worth $2.2 trillion, on March 27.
The numbers look significantly less impressive if compared to the staggering wealth hidden in offshore accounts.
Gabriel Zucman, an economist at the University of California at Berkeley, estimated US multinational corporate assets held offshore at $2.6 trillion in 2017. Together with an $8.7 trillion globally from individuals, the value of hidden revenue amounts to more than $11 trillion. James S. Henry, economist and lawyer, estimated the global total in hidden assets to be up to $36 trillion in 2016.
The divergence comes from the secrecy surrounding the operations that makes estimations more difficult: The real value may be higher.
The richness of tax fraud methods
“Money makes money” may well be the most truthful sentence ever pronounced. The scheme to lower or avoid taxes for the richest, multinational companies, and individuals alike offers a multitude of options. Each tax haven has been set up in a deliberately complicated manner so that tax authorities would invest considerable amounts of time and money to track the laundered money down. That is, if the authorities ever succeed, considering the secrecy of the tax havens and the immense power of the super-rich.
Multinational companies master avoiding taxes to maximize their benefits. The basic step is to incorporate the company in a low- or a zero-tax country. Sixty-three percent of the profits made abroad by American multinationals are reported in only six countries: The Netherlands, Bermuda, Luxembourg, Ireland, Singapore, and Switzerland.
The company’s next step in tax evasion is to downplay profits to reduce taxable revenue. As Cayman Islands regulations do not allow for disclosing the identities of company owners, it is relatively easy to incorporate an anonymous shell company in the territory. Then, companies must open a bank account under the shell company’s name in any of the world’s tax havens, such as Cyprus, Hong Kong, Panama, or Switzerland.
A “real” company can buy fictitious services from the shell company and transfer the “payment” to the bank account in the tax haven. Paying for fictitious services reduces the taxable profits of the “real” company, as a result lowering the amount of corporate income tax that the company needs to pay.
The fraudulent practices are commonplace among American tech companies–no wonder since most of the practices are perfectly legal. Both Google and Apple use tax havens to reduce the amount of corporate income tax they would otherwise be obliged to pay.
In 2018, Google “saved” $24.5 billion by shifting its “management” to Bermuda, even though the company employs only a few workers there. Apple sheltered its revenues first in Ireland, one of the most prevalent tax shelters in Europe, and after tax regulations in Ireland changed, Apple shifted funds to the British dependency of Jersey.
Considering the turnovers of the two tech giants, the estimation that countries and their citizens lose $500-600 billion to tax fraud on an annual basis is believable.
In the UK alone, the losses in tax coming from fraudulent VAT reporting reach between £500m to £1bn yearly. The scam is simple: Shell companies ship high-value goods, usually mobile phones, in and out of the EU, and receive VAT returns every time. Collecting free money from the state simply entails registering several shell companies and executing business exchanges between one another.
Across the EU, the “VAT gap” was estimated at €193 bln in 2013. In comparison, the European Commission’s SURE “solidarity instrument” to alleviate the effects of COVID-19 was envisioned at €100 billion.
‘Race to the bottom’
Corporations use legal loopholes to maximize their profits, but some of the mechanisms described are legal under governmental jurisdictions. Governments engage in a “race to the bottom” to cut costs for multinational companies to set up businesses in their country. The average corporate tax rate declined by half, from 49% in 1985 to 24% in 2019.
Governmental “incentives” for multinational companies only benefit the few officials at the top. Apart from cuts in obligatory public spending to afford hosting a company, governments may also choose to ease their environmental or workforce regulations. A silent agreement for tax havens is an open door for corruption.
If one is a resident of Morocco and owns a bank account in Egypt, the Egyptian tax authorities are obliged to inform the Moroccan government about that account. In the given situation, both tax offices are informed about the assets that the individual needs to declare.
“Secrecy jurisdictions,” such as the Cayman Islands or Nevis, offer secrecy as their main service. One can create a so-called shell company on the territory of any “secrecy jurisdiction,” and the company will not attach the holder’s name to the account. Then, one can safely transfer the dirty assets to that account without concerns of being tracked. The money can then be withdrawn and used legally in any country.
Such smoothness in hiding wealth has far-reaching consequences, especially for the developing world. A scandal broke in January over Isabel dos Santos, daughter of former Angolan President Jose Eduardo dos Santos and the richest woman in Africa. Dos Santos used her personal connections to build a $2 billion empire at the expense of the Angolan state. The businesswoman managed to secure her fortune with the help of various offshore service providers, such as consultancy firms and banks.
Offshore accounts are routinely used to hide the wealth stolen from nations, and as a result, severely cripples development. Africa’s debt to the IMF equals $177 billion, while estimates of wealth hidden in offshore accounts by African individuals amounts to approximately $944 billion. As most tax havens are either developed countries or under the jurisdiction of developed countries, the money continues to flow out of developing economies to benefit the Global North.
The dangers of offshore money
The system that allows companies and individuals to hide their wealth from tax collectors has inequality embedded in its very premises. The lack of questions asked about the origins of hidden funds is a silent admission of corrupt looting. Deliberately reducing corporate tax rates sends a clear message about the priorities of national governments: Profits, not people, are put first.
Inequalities run deep in an economic system that allows for massive wealth accumulation. While the super-rich becomes invincible, with the scope of public services cut to satisfy their greed, the poor–or even the middle class–stay dependent on those shrinking public services.
The world, as a whole, faces increasingly urgent needs: Recovery after the COVID-19 crisis requires a unified governmental response to mitigate the economic impact of lockdowns. Climate change and global warming pose an existential threat to humanity and hence demand immediate, collective action. Staggering inequalities that continue to grow are brewing social unrest worldwide.
Once again, quarantine is a solution
Nobel Prize-winning economist Joseph Stiglitz states that tax havens should be treated like carriers of a disease.
“We know what to do with dangerous contagious diseases: quarantine. And so too for the secrecy-havens. They should be cut off from the global financial and economic system.”
Multiple solutions exist to stop the money flowing to offshore accounts. Some, like the OECD’s Common Reporting Standard, are already in place, but they contain loopholes and lack implementation mechanisms that would ensure results.
A comprehensive framework including creating public registries of beneficial owners of companies or trusts, introducing automatic information exchange between all countries, and ordering country-by-country public reporting by multinationals should be set up and implemented worldwide.
After years of deregulation which took power out of their hands, governments find themselves in an advantageous negotiating position. It will not be businesses that save the workers from unemployment, but governmental aid packages.
COVID-19-induced economic recession can be an opportunity for national governments to regain their regulatory power over multinational corporations and the super-rich. Only then will global society attain the ability to deal with international crises in an adequate manner.