The State of Tax Justice 2020

Summary

The report presents global estimates of the tax revenue losses due to corporate tax avoidance and personal income tax evasion. Estimates are broken down to a large number of countries including many low-income countries and set in relation to each country’s GDP, total tax revenue and public health budgets.

The estimates of profit shifting are based on the idea that in the absence of profit shifting, profits would be aligned with economic activity which the authors proxy by the location and estimated compensation of employees and the location of unrelated party revenues. The authors use aggregate country-by-country data recently published by OECD. To account for the incompleteness of the dataset, they impute missing observations based on U.S. CbCR data and Orbis data and extrapolate data for missing countries based on additional data sources. Results suggest that over $656 billion of profits are shifted out of the countries where the economic activities take place leading to a tax revenue loss of $117 billion globally.

The tax revenue losses due to cross-border tax evasion by individuals are estimated based on the estimate of global offshore wealth by Zucman (2017). To allocate offshore wealth to the countries of origin, the authors use a different methodology. According to the TJN, many countries offer some financial secrecy that can attract foreign bank deposits not declared in their owners’ respective home countries. For this reason, they replace the term offshore deposits with ‘abnormal’ deposits which is the share of foreign deposits in a country that is incommensurate to the size of a country’s GDP. The countries of origin of these abnormal deposits can be estimated based on the BIS locational banking statistics. It is assumed by the authors that ownership of portfolio assets held offshore is distributed in the same way as the ownership of deposits. A special feature of the TJN’s estimates of tax revenue losses is that countries can lose tax revenues due to tax evasion of their citizens and at the same time be responsible for tax losses inflicted on other countries. With this approach, TJN estimates that The State of Tax Justice reports that OECD countries are responsible for 59% of the estimated $182 billion of global annual revenue loss due to individual cross-border tax evasion.

Key results

• TJN estimates that the world is losing over $427 billion a year due to international tax abuse of which $245 billion are due to corporate tax avoidance and $182 billion are due to tax evasion by individuals.
• Higher income countries are responsible for facilitating 98% of all global tax losses.
• Higher income countries lose more tax revenues in absolute terms. However, lower income countries lose a higher share of their collected tax revenue.
• The tax revenue losses for lower income countries appear much more severe in relation to their public health budgets.

Policy recommendations

The Tax Justice Network advocates a comprehensive rewriting of the international rules and tax transparency measures to collect more tax revenues from multinational companies and high-net-worth individuals in order to relax public health budgets and finance the social cost of the Covid-19 pandemic. Their proposals include an excess profits tax on MNE in the short term and a shift to unitary taxation of MNE in the long term. With regard to personal wealth, TJN demands improvements of transparency rules to make the automatic exchange of information and beneficial ownership registries more effective and suggests wealth taxes to increase the progressivity of tax systems. To better represent the interest of poorer countries, the negotiations about new international tax rules should take place at the UN.

Data

OECD CbCR data, BEA CbCR data, Orbis, BIS Locational Banking Statistics, Financial Secrecy Index, Corporate Tax Haven Index, and other economic data sources.

Methodology

The report combines information from many different data sources in descriptive statistics, regressions and extrapolations.

Go to the original document

The original report can be downloaded from the website of the Tax Justice Network.