Shining a Light on $5 Trillion in Tax Avoidance in Wake of Global Tax Deal

Multinational corporations and wealthy individuals deny global governments $483 billion in lost revenue each year due to tax avoidance according to the 2021 “State of Tax Justice” report.  The U.S. alone loses $113.5 billion each year according to the report. These numbers are consistent with other economists relying on varied methodologies.

How do we tackle this $5 trillion global problem over the next decade when governments desperately need revenues to combat a global pandemic and to fend off climate change?

Recent progress achieved through creating a global minimum corporate tax must be complemented by greater tax transparency and enforcement. As the saying goes, “sunlight is the best disinfectant.”

Taking a step back, the historic international agreement to create a global minimum corporate tax furthered by President Biden through the OECD represents an important first step in ending tax avoidance strategies by multinational corporations. U.S. international tax reforms in the Build Back Better Act that partially implement this agreement must pass to begin dismantling the U.S. tax code’s incentives for profit-shifting—the process through which multinationals move profits from one jurisdiction to another to avoid taxes—as well as to further global adoption of the OECD agreement.

Yet, governments must do more to shut down the “offshore” playground where only the mega-rich and multinational corporations can play. A global minimum corporate tax may raise an additional $150 billion annually for governments, but that’s less than half the total global revenue lost due to multinational tax-dodging. Build Back Better international tax reforms also leave meaningful amounts on the table.

Moreover, these numbers don’t speak at all to tax-dodging by wealthy individuals. So how do we clean up the rest?

A more comprehensive solution requires the “ABC’s” of tax transparency—that is, requiring the automatic exchange of information among competent authorities; beneficial ownership registration for legal entities; and public country-by-country reporting by multinational corporations. As the recent Pandora Papers demonstrate, it’s imperative that the U.S. lead—not just on the international stage—but by shining light on its own financial and tax markets.  

The U.S. was an early leader in automatic exchange of information, requiring that foreign banks report offshore U.S. customer holdings to the IRS; however, the U.S. has not kept up with best practices. By failing to join the OECD’s “Common Reporting Standard” (CRS), the U.S. has positioned itself as a financial secrecy jurisdiction—an incongruous position for the current Administration and its stated fight against corruption and illicit financial flows.

It’s time for the U.S. to join and help improve the CRS or otherwise work to implement more comprehensive information sharing among competent authorities globally.

Now to the B’s: beneficial ownership. Earlier this year, Congress passed the Corporate Transparency Act, and for the first time U.S. law will require corporations and similar entities to disclose their true beneficial owners, which will add more transparency to shell companies. It is essential that forthcoming rules implementing the law don’t diminish its broad intention, and that beneficial ownership information is shared automatically with the IRS pursuant to the law’s plain language. 

Additionally, Congress could adopt well-tailored trust reporting requirements proposed by Senator Chris Van Hollen and others to explicitly end perverse secrecy benefits available to trusts and other entities that may seek to avoid government filings. Corporations, partnerships, LLCs, trusts, and similar entities should exist to promote legitimate economic growth for honest taxpayers, not to enrich foreign criminals.  

Which gets us to our C’s and the importance of public country-by-country reporting by multinational corporations.   

In June, the House passed the Disclosure of Tax-Havens and Offshoring Act, which would require very large, public multinational corporations to disclose information tying their operations and profits to taxes paid worldwide on a country-by-country basis. While relevant corporations already prepare this information for the IRS, investors and the public have no access to it. This leaves investors in the dark regarding risky tax strategies that might inappropriately attract capital, and policy-makers speculating as to whether our tax laws work as intended. 

The Senate should pass this law; alternatively, both the Securities and Exchange Commission and the Financial Accounting Standards Board could require this information be made public. They should heed investors and do so. 

The existence of separate, secretive financial and tax systems that encourage corruption and tax-dodging—highlighted in the 2021 “State of Tax Justice” and Pandora Papers—acts as a singular parasite on open societies.

Ending the corporate tax race to the bottom through a minimum tax can help dismantle the “offshore” system, but alone it is not enough. Taken together with the Build Back Better Act’s overdue investment in the IRS and the ABC’s of tax transparency, these reforms can help illuminate and quash systems of financial and tax secrecy, restore public accountability, and fund global responses to pressing challenges like COVID-19 and climate change.