Justice Network Briefing

Tax avoidance and evasion - The scale of the problem

2018) using more robust revenues data indicates a more conservative global revenue loss nearer $500 billion – although with lower- income countries still losing around $200 billion.

Overall, current data and research suggest global, annual tax losses of $500 billion or more. This represents over 20% of revenues.

A different By their very nature, and are study (Cobham & Janský, 2017) found that the profit shifting of extremely difficult to measure. Both rely on the use of US-headquartered multinationals financial secrecy, so cash flows are hidden from view. alone likely resulted in around $130 billion of revenue losses in In the absence of financial transparency, and of detailed, 2012 (compared to just $12 billion public country-by-country reporting by multinationals, in 1994, highlighting just how the definitive statistics are impossible to determine. scale of abuse has grown over two However, over the years TJN and other researchers have decades). sought to assess the scale of tax losses to governments. A rough extrapolation on the basis of the US share of world FDI Researchers at the IMF’s Fiscal – assuming other multinationals Corporate Affairs Department (Crivelli et are equally aggressive in their al., 2016) have studied a broad tax behaviour – implies a global measure of ‘spillovers’, revenue loss of around $650 tax dodging estimating total tax losses at over billion, in line with the IMF study Overall, current data and research $400 billion for OECD member although the two are driven suggest global, annual tax losses states and around $200 billion by quite different data and of $500 billion or more. This for lower-income countries. A methodology. represents over 20% of corporate replication by Tax Justice Network tax revenues. researchers (Cobham & Janský,

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Published: November, 2017 by the Tax Justice Network • Author: Alex Cobham Tax Justice Network Briefing Tax avoidance and evasion - The scale of the problem

OECD countries (as groups), while the long-run losses are around 1% $500bn of GDP for OECD countries and $32tn 1.3% for developing countries. Estimate of annual tax losses Higeher estimate of the to governments due to profit The GDP comparison does amount of private wealth shifting by multinational not show the full difference in held offshore companies intensity of losses, however, because developing countries have lower tax revenues in general: often 10-20% of GDP, Wealth Research for UNCTAD’s World rather than 30% or more in OECD While there are significant Investment Report 2015 looked countries. The revenues foregone uncertainties over the scale of at a specific form of tax dodging, are therefore substantially undeclared offshore wealth, foreign direct investment via greater in comparison: perhaps there is no longer any doubt that tax havens and SPE (special 6-13% of existing tax revenues in the magnitudes (of tax revenues purpose entity) jurisdictions. developing countries, as opposed lost) are substantial in terms The UNCTAD study found that to just 2-3% in OECD countries. of the potential development there is a substantial reduction The country-level findings impact. Global estimates of in the declared returns to foreign provided by Cobham & Janský individual wealth ‘offshore’ span direct investment in developing (2018) make clear that the losses a wide range. The lowest is $7.6 countries when investment takes are greatest in absolute terms for trillion, Gabriel Zucman’s (2013) this route. Their figures implied high-income countries, but much assessment which is based on the a revenue loss of around $100 higher as a share of total revenues mismatch between the publicly billion annually, from this one for lower-income countries – acknowledged bilateral assets and channel of profit shifting alone. where additional revenues are liabilities of a list of ‘tax haven’ most badly needed. jurisdictions, and an estimate The OECD study (2015) is an (based on Swiss data) of the likely outlier in the research, suggesting Research on the incidence of proportion of the mismatch that a range of $100-$240 billion corporate suggests the that is actually declared to home tax globally. However, their analysis is corporation tax is a tax which is authorities. based on a database of company mostly paid for by shareholders balance sheets which has been and top executives, so that a The highest estimate, made shown to lack sufficient coverage reduction in tax avoidance is likely by James Henry for Tax Justice of either tax havens or developing to have progressive distributional Network in 2012, suggests a countries to provide the basis for implications within countries – as range of $21-$32 trillion, based on such a global analysis. well as between countries, by triangulation of multiple methods addressing the historic inequality (and data sources). The likely The impact of corporate in the distribution of taxing rights. value of assets undeclared for tax tax dodging on income purposes lies in between; Henry distribution Tax dodging is on the rise does not argue that all offshore The research in this area Cobham & Janský (2017) find that assets are undeclared, and also sheds light on the global only 5-10% of the profits of US Zucman is clear that his estimate distributive implications multinationals was misaligned relates only to one part of the of tax dodging. The more with their economic activity in the assets that should be considered, comprehensive, but less 1990s (that is, declared elsewhere while Henry includes a broader disaggregated results are those for tax purposes). This grew range. of the IMF researchers. Their sharply, however, reaching 15-20% estimates are that short-run losses of global profits in the early 2000s amount to around 0.2% of GDP and most recently to 25% or more. for both developing countries and

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In terms of annual tax revenues appear disproportionate to their volume produced by the African lost as a result of undeclared shares of world GDP – a finding Economic Research Consortium income generated by these confirmed anecdotally by analysis (Ajayi & Ndikumana, 2015). assets, Henry offers an indicative of the leaks from HSBC Private figure of $189 billion (based on Bank Switzerland, carried out by They estimate that the stock statutory tax rates applied to a Christian Aid and the Financial of unrecorded capital built up conservative 3% return on the Transparency Coalition. between 1970 and 2010 for lower bound of his asset range). 39 African countries and held Zucman estimates a global tax loss offshore is approximately $1.3 of $190 billion based on his much Zucman estimates a trillion, or 82% of those countries’ lower undeclared asset total and global tax loss of $190 2010 GDP. In contrast, the stock of a nominal offshore return of 7% billion [from private external debt stood at $283 billion (based on research findings that wealth held offshore] – so the scale of hidden African pre-tax returns rise with wealth, wealth offshore is estimated to and on returns data from large based on his much lower exceed recorded external debt by diversified funds). undeclared asset total a ratio of more than four to one. and a nominal offshore Estimates of undeclared wealth return of 7% also suggest a particular intensity in lower-income countries. The regional breakdown of Zucman’s estimates show that, with the Supporting this finding for Africa, exception of Russia and the there are also regional estimates Gulf countries where the tax of lost capital that strongly imply implications are trivial, the the region is a net creditor to, proportion of wealth held offshore rather than a net debtor of, is largest for Africa and Latin the rest of the world. Former America – more than twice that African Development Bank chief of Europe and many times higher Léonce Ndikumana and than that of the US. While it is his co-author James Boyce have difficult immediately to construct produced a series of estimates of an equivalent share of current the stock of African flight capital revenues, the estimated revenue offshore since the 1970s, most losses for Africa and Latin America recently for an important new

References Ajayi, I. & L. Ndikumana. (2015). Cobham, A, & Janský, P. (2018). Henry, J. (2012). The Price of Zucman, G. (2013). The Missing Capital Flight from Africa: Causes, Global distribution of revenue Offshore, Revisited. Tax Justice Wealth of Nations: Are Europe Effects and Policy Issues. Oxford: loss from corporate tax avoidance Network: London. and the US net Debtors or net Oxford University Press. - Re-estimation and country OECD. (2015). Measuring and Creditors? The Quarterly Journal of Cobham, A, & Janský, P. (2017). results. Journal of International Monitoring BEPS, Action 11 - 2015 Economics, 128(3), 1321–1364. Measuring Misalignment: The Development, Forthcoming. Final Report. : Organisation Location of US Multinationals’ Ungated version: for Economic Co-operation and Economic Activity versus Crivelli, E., de Mooij, R., & Keen, Development. the Location of their Profits. M. (2016). Base Erosion, Profit UNCTAD. (2015). World Investment Development Policy Review, n/a- Shifting and Developing Countries. Report 2015 - Reforming n/a. FinanzArchiv: Public International Investment Analysis, 72(3), 268–301. Governance. Geneva: UN.

We are an independent international network launched Published by the Tax Justice in 2003. We conduct high-level research, analysis and Network, 38 Stanley Avenue, advocacy on international tax; on the international Chesham, Buckinghamshire aspects of financial regulation; on the role of tax HP5 2JG United Kingdom in society; and on the impacts of tax evasion, tax email: [email protected] avoidance, tax ‘competition’ and tax havens. We seek to create understanding and debate, and to promote Company number 05327824 reform, especially in poorer countries. We are not aligned to any political parties. © Tax Justice Network 2017