“Only the little people pay taxes,” the billionaire hotelier, and serial tax cheat, Leona Helmsley said in the ’80s. And that’s perhaps a truer statement now than it was then. While the rank-and-file among us continue to send checks to the IRS, the big people pay less than ever. These days, many corporations actually get a refund from the government because they’re so adept at bilking and manipulating the rules.
How bad has the problem got? According to new figures from the United Nations Conference on Trade and Development, total tax avoidance now amounts to $200 billion a year. Primarily, multinationals achieve this by routing investments through offshore centers, like those in the Caribbean, and shifting taxable profits from high-tax to low-tax jurisdictions. “In essence, corporate structures built through [foreign direct investment] can be considered ‘the engine’ and profit shifting ‘the fuel’ of [multinational] tax avoidance schemes,” the report says.
The report, which is a serious look at international trade flows, argues that a lot of what seems like “investment” in foreign places by multinationals is actually an effort to avoid paying taxes somewhere else. Between 2008 and 2012, 27% of foreign direct investment was “transit investment,” the report says, meaning it is money routed through somewhere with a tax purpose rather than a long-term investment purpose.
Of course, $200 billion would pay for an awful lot of schools and hospitals if governments invested the money properly. And the good news is that there are international efforts to clamp down on rampant tax abuse. The G20 countries have committed to taxing where “where value is created” (rather than where the profits end up), while tax authorities and banks are meant to start sharing information on money flows so countries can see how they’re owed.
The difficulty however is that capital is global and easily moved, and tax havens make a living by providing “special purpose vehicles” and have little incentive to change. Tax avoidance is a hard nut to crack, now more than ever.