June 23, 2020

On February 18, 2020, the Economic and Financial Affairs Council of the EU (ECOFIN) adopted a revised EU blacklist of non-cooperative jurisdictions for tax purposes. The EU Finance Ministers agreed to add four new jurisdictions to the list: Cayman Islands, Palau, Panama and Seychelles. Following this latest revision, as at February 18, 2020, the EU blacklist comprises the following twelve jurisdictions: American Samoa, the Cayman Islands, Fiji, Guam, Oman, Palau, Panama, Samoa, Seychelles, Trinidad and Tobago, the US Virgin Islands and Vanuatu.

It is good to see the EU sharpen its focus on this topic. The scale of corporate tax haven activity has been growing remarkably fast, especially since the 1990s: a Tax Justice Network study in 2018 found that US-headquartered multinationals alone used tax havens to escape paying $130 billion in corporate taxes in 2012 — an increase from $12 billion in 1994. The IMF estimates that rich countries lose some $450 billion annually to tax-haven related corporate tax dodging, while lower-income countries lose $200 billion (which represents a bigger share relative to their smaller economies).

Fast forward to June 2020. In the context of COVID-19 the issue of corporate tax dodging takes on special relevance and the need to address it comprehensively is compelling.

The pandemic is causing severe economic disruption and to minimise the impact many countries are providing their private and corporate citizens with generous financial support. These measures include direct monetary grants to supplement lost income and a variety of backstop assurances such as guarantees and tax holidays. In addition, central banks around the globe have stepped forward to ensure financial stability and prevent a financial seizure.

To fund these support measures countries are taking on significant amounts of debt, borrowing directly or through their central banks by money creation. As a result, country budget deficits are growing at an alarming rate across the globe. Fortunately, global interest rates are low and the risk of inflationary pressure is minimal but the reality is that these support measures will weigh heavily on governments’ future spending and limit the ability to address other political priorities such as climate change.

Naturally, governments will wish to closely scrutinise opportunities to increase tax revenues and ease the repayment of these massive amounts of debt. Whilst future economic growth will supplement tax revenue to an extent, by itself this source is unlikely to be sufficient.

An analysis of the financial crisis of 2009-2012 shows that the private sector endured most of the fiscal burden of government intervention and the corporate sector remained relatively unaffected. Governments will be tempted to turn to their private citizens once again as a source of much-needed financial relief. This would be a mistake.

Whatever the rationale for laying the burden with families in the aftermath of the financial crisis, the reality is that the subsequent revival of the global economy has largely passed them by. While corporate profits and stock markets soared between 2012 and 2019 (the average annual gain of the S&P 500 index between 2012 and 2019 was 11.7%), average wage rises have been modest. Put more succinctly: ‘labour’ paid for the cost of the recovery that has mainly benefited ‘capital’.

This politically uncomfortable shift of wealth towards ‘capital’ has been amply described by economists like Thomas Piketty. Seen in this light, the loss of $650 billion annually in corporate tax revenues as a result of international tax ‘gimmicks’ that the IMF identifies is not only unhelpful, it erodes the social contract that underlies successful, inclusive capitalist economies.

It may be tempting to ‘tar and feather’ large multinational corporations for this situation, but that would be neither reasonable nor effective. Such gratuitous political hypocrisy was evident in the legally dubious announcement of several European countries that they are refusing to offer taxpayer-funded relief to companies with links to offshore tax havens. The Boards of these companies answer to their owners and it is unlikely that their mandate requires them to support national budgets by maximising tax contributions. Their shareholders do however demand that they abide by the laws and regulations of the countries in which they operate. The solution to this conundrum lies with governments.

Contrary to tax evasion, which is illegal, the issue of addressing undue tax optimisation schemes is politically sensitive. That is not because identifying low, or no-tax jurisdictions is technically difficult, as the recently revised EU blacklist shows. Also, as a powerful economic actor the EU has ample leverage to encourage offshore jurisdictions to abide by minimum tax integrity standards. And, if reducing tax incentives is combined with economic assistance to make these jurisdictions economically viable in a more productive sense, this can be a win-win proposition. Aligning this strategy with the OECD’s Base Erosion and Profit Shifting initiative would furthermore provide resource rich developing countries with a fair share of value creation and a sustainable tax revenue base to fund their future economic growth. It would also strengthen the foundation of the globalised economic order that has provided much benefit to mankind over the past decades. All are convincing arguments to move ahead decisively, one would think.

What is holding back progress is that several, mostly European countries have a vested financial interest to maintain the status quo. It is lamentable and, frankly, inexcusable that the current debate about tax integrity, which rightly includes naming and shaming offshore tax havens, is not equally forceful about addressing the facilitation role of ‘conduit’ countries[1] such as The Netherlands, The UK, Switzerland, Singapore and Ireland in diverting corporate revenues tax efficiently. For these rich countries to continue to facilitate a system that complicates a transition to a fair distribution of wealth and undermines future economic stability is morally reprehensible.

Put in the context of addressing the budget hangover in the aftermath of the COVID-19 crisis, it does not even require much ‘Dutch’ courage to explain this to those who stand to lose from change. Showing vision and moral leadership on this topic at this historically significant time should be an easy decision. Never waste a good crisis.

Pieter van den Akker

June 2020

[1] https://www.nature.com/articles/s41598-017-06322-9