A new report by the Tax Justice Network claims that globally countries are losing $427 billion each year to international corporate tax abuse and private tax evasion.
According to the advocacy group’s analysis of country-by-country earnings reported by multinationals, the Cayman Islands tops the list by being responsible for 16.5% of global tax losses or more than $70 billion.
The other jurisdictions in the top five are the UK (10%; $42 billion), the Netherlands (8.5%; $36 billion), Luxembourg (6.5%; $27 billion) and the US (5.53%; $23 billion).
The report is partially based on data that is self-reported by multinational corporations under the country-by-country reporting standards that are part of Action 13 of the OECD/G20 Action Plan on Base Erosion and Profit Shifting (BEPS).
The data was made publicly available by the OECD in July 2020. In 2017, Cayman introduced a country-by-country reporting regime for entities that are part of multinationals with a turnover of more than $850 million.
The State of Tax Justice 2020 report says that $245 billion worldwide is directly lost to corporate tax abuse by multinational corporations and $182 billion to private tax evasion.
In Cayman, however, the tax advocates estimate, private tax evasion of $47.6 billion exceeds corporate tax abuse, which is allegedly responsible for $22.8 billion of tax losses in other countries.
The group said it arrived at private tax evasion estimates based on the size of bank deposits reported to the Bank for International Settlements (BIS) from 2018.
The Cayman Islands Monetary Authority regularly reports the assets and liabilities of Cayman banks to the BIS. Since the 2007 financial crisis, the assets held by the Cayman banking sector have dropped from $2 trillion to about $725 billion. More than 80% of the deposits are inter-bank bookings made by onshore banks with their Cayman branches or subsidiaries.
“Private tax evaders paid less tax than they should have by storing a total of over $10 trillion in financial assets offshore,” the Tax Justice Network said in a press release.
In their methodology, the tax campaigners relate inward bank deposits to local GDP and describe anything above the average ratio observed for 188 countries as “abnormal”.
In the Cayman Islands, 99.97% of the $1.39 trillion in bank deposits in 2018 were thus classified as “abnormal deposits”.
Using the BIS Locational Banking Statistics, which Cayman does not report, the group then estimated both their origin countries and the share of global offshore wealth of these countries.
It then derived at a tax revenue loss estimate from wealth stored offshore by assuming that “investments made in secrecy jurisdictions” yield on average a 5% annual return; and by multiplying this figure by the top bracket personal income tax rates that would have been applied in the country of origin “had the assets not been moved to the secrecy jurisdictions”.
For the Cayman Islands, this combination of estimates resulted in an assumed 8.3% share of global offshore wealth of $880.7 billion and “a tax loss inflicted” on other countries of $47.6 billion.
The country-by-country corporate earnings data was interpreted by estimating profits that are “misaligned”, because they are considered too high in relation to the company’s local number of employees, wages and revenues.
In response to the report, Cayman Finance said in a statement the “Tax Justice Network’s distorted interpretations of the Cayman Islands’ statistics get more inaccurate, further from the facts and less believable as they continue to be undermined by the credible findings of recognised international bodies like the OECD and the EU”.
The organisation that represents Cayman’s financial services industry said “just last month the EU completed an exhaustive, multi-year review of the Cayman Islands tax neutral regime and found it to be transparent, consistent with good tax governance principles and without the existence of harmful tax regimes”.
Despite enormous pressure from critics to blacklist the Cayman Islands, the EU had drawn conclusions based on the facts, which is something the Tax Justice Network has not done, the statement said.
Cayman Finance further argued that Cayman’s tax neutral regime supports a level of transparency that arguably made it better at combatting tax evasion, aggressive tax avoidance and base shifting than those jurisdictions that rely on often opaque systems of double taxation treaties.
The report said that while higher income countries lose much more tax to global tax abuse, tax losses have much greater consequences in lower income countries, where they account for 5.8% of total tax revenue, compared with 2.5% in higher income countries.
The Tax Justice Network said its report “provides strongest evidence to date that the greatest enablers of global tax abuse are the rich countries at the heart of the global economy and their dependencies – not the countries that appear on the EU’s highly politicised tax haven blacklist or the small palm-fringed islands of popular belief”.
The organisation said the “UK spider’s web” of Overseas Territories and Crown Dependencies alone was responsible for 37.4% of all tax losses suffered by countries around the world, or more than $160 billion.
It also called on the G20 heads of state before the summit last weekend to require the publication of individual multinationals’ country-by-country reporting, so that corporate tax abusers and the jurisdictions that facilitate them could be identified and held to account.
Alex Cobham, chief executive of the Tax Justice Network, said the global tax system is programmed to fail and tied it to the effects of the COVID-19 pandemic.
“Under pressure from corporate giants and tax haven powers like the Netherlands and the UK’s network, our governments have programmed the global tax system to prioritise the desires of the wealthiest corporations and individuals over the needs of everybody else.”
He said, “We’re calling on governments to introduce an excess profit tax on large multinational corporations that have been short-changing countries for years, targeting those whose profits have soared during the pandemic while local businesses have been forced into lockdown.
“For the digital tech giants who claim to have our best interests at heart while having abused their way out of billions in tax, this can be their redemption tax. A wealth tax alongside this would ensure that those with the broadest shoulders contribute as they should at this critical time,” he added.
In a communique issued after the G20 summit, held in Riyadh, Saudi Arabia, G20 leaders committed to continuing their cooperation for a globally fair, sustainable, and modern international tax system.
The declaration welcomed recently issued blueprints for the reform of the international corporate tax system released by the G20/OECD Inclusive Framework on BEPS.
The OECD timetable, which aims to bring tax reform negotiations to a close by mid-2021, is supported by the G20. The leaders of the largest industrialised nations also welcomed the progress made on implementing international tax transparency standards.
In a statement, the Cayman Islands Ministry of Financial Services said Cayman supports the development of a fair tax system that enables countries to collect their rightful tax revenues, according to their sovereign tax policies.
“That’s why we joined the OECD’s Inclusive Framework in 2017, whose more than 130 member countries work together to support global tax compliance by continually improving a shared set of standards,” the statement said.
“It’s also why Cayman collects and shares information with tax and legal authorities all over the world. The intention remains that tax systems become increasingly efficient and beneficial for governments worldwide and their citizens.”