I guess that, by now, most people in Malta have heard about the Panama and Paradise Papers and how certain individuals were planning, or managed, to enrich themselves at our expense. We all know that rich people and global companies have many ways of avoiding tax. For sure, there has been public outrage and some half-hearted attempts by tax authorities to deal with this problem, but tax evasion remains an insidious issue.
With the billions of euros being quoted worldwide, the common man might find it difficult to understand what it is all about. Let me make it simple. According to ‘The State of Tax Justice’, a 2020 report by the Global Alliance for Tax Justice, the equivalent of one nurse’s annual salary is lost to a tax haven every second.
If this does not strike you as outrageous, consider that, if the $3.39 billion in tax that South Africa loses every year to tax abuse were instead given as direct cash transfers of $85 per month to people living in poverty, over 3 million people – nearly half of South Africa’s adult population – could be lifted out of it. Or think about Greece’s annual loss of nearly $1.36 billion to tax abuse – that is equivalent to over a quarter of Greece’s scheduled debt repayments for 2020.
As a cherry on the cake, I offer you the information that the UK spider’s web is responsible for over a third of global tax losses, costing countries over $160 billion in lost tax every year. The UK’s network of jurisdictions – Cayman, British Virgin Islands, Bermuda, and others — operate as a web of tax havens facilitating corporate and private tax abuse, at the centre of which sits the City of London.
Confirmation about how the world’s richest people are using shell companies to whittle down their tax bills comes from a new report by the EU Tax Observatory. The research group, based at the Paris School of Economics, found that billionaires worldwide have effective personal tax rates of between 0% and 0.5% — well below those of ordinary taxpayers.
It is no wonder that, in the foreword of the report, titled ‘Global Tax Evasion Report 2024’, economist and Nobel Prize laureate Joseph Stiglitz said that “if citizens don’t believe that everyone is paying their fair share of taxes — and especially if they see the rich and rich corporations not paying their fair share — then they will begin to reject taxation.”
In 2021, nearly 140 countries reached a landmark global tax agreement, which included a commitment by governments to set a minimum tax rate of 15% for multinationals — much lower than the 25% median of global rates and close to that in some tax havens. The effort, sponsored by the OECD, no doubt also had in mind that, in addition to the many multi-nationals like Google and Microsoft, the world’s richest people were depriving governments of funds which they could invest in services and infrastructure. It is calculated that, if 2,700 billionaires were to be taxed on just 2% of their wealth annually, countries could raise the revenue needed to respond to global crises, from soaring income inequality to climate change. A global minimum tax rate for billionaires could raise $250 billion per year.
Multinationals and billionaires employ an army of tax accountants and advisers who help them use the tax rules to pay less tax. But it is well known that there are some clearly illegal practices, such as concealing income from offshore bank accounts, as well as grey-zone tax-saving practices – such as profit-shifting to foreign shell companies and creating holding companies or trusts to manage personal wealth and void individual income taxes.
Thank God, the sharing of information across countries has been a breakthrough. The United States’ Foreign Account Tax Compliance Act, implemented in 2014, requires all banks everywhere to report on the account holdings of US taxpayers, under threat of penalties. And the Common Reporting Standard of the OECD, which began in 2017 and involves more than 110 jurisdictions, also involves automatic exchange of banking information.
Before 2013, households owned the equivalent of 10% of world GDP in financial wealth in tax havens globally, the bulk of which was undeclared to tax authorities and belonged to high-net-worth individuals. In 2022 alone, around $12.6 trillion in offshore wealth was reported to foreign tax authorities through the new OECD mechanism. Today there is still the equivalent of 10% of world GDP in offshore household financial wealth, but only about 25% of it evades taxation.
Not all offshore financial institutions comply with the reporting requirements and, wonder of wonders, the US with several tax-haven states, does not participate in the OECD exchange. Also, the very rich can choose to hold non-financial assets, such as property (in Dubai, for example, foreign owners hold 27% of property).
Of course, in this world nothing is certain except death and taxes, as Benjamin Franklin famously said. Billionaires have certainly become more agile at avoiding the taxman. Over the last decades, globalisation has opened new evasion possibilities. The loopholes for tax evasion within countries themselves remain large.
The loopholes include references to ‘economic substance’, which have enabled multinationals to continue benefiting from reporting profits in tax havens by investing some capital and hiring some workers there, like they do in Malta. As a result, the gains from this measure have been very limited, adding only three per cent to global corporate-tax revenue rather than the projected nine per cent. And profit-shifting has continued unabated – the country-by-country reporting of profits by multinationals shows that about 35% of foreign profits, amounting to $1 trillion, were shifted to tax havens in 2022 — around the same as before.
US multinationals are responsible for about 40% of global profit shifting, and continental European countries appear to be the most affected by this evasion. Though some Maltese love labelling Malta as a den of thieves for tax evaders, in reality its role is minor compared to UK and US jurisdictions when profit-shifting is measured in terms of profits per employee.
Early in September, politicians and economists launched an appeal to tax extreme wealth in the name of tax justice at the G20 summit in New Delhi. The appeal was co-signed by 139 American and British millionaires ready to contribute without delay. Then, the Greens and European Free Alliance group in the European Parliament published a study urging a move “from slogan to reality” on wealth tax.
The study showed that Malta could have an additional revenue of €43 million, or 0.25% of the GDP, if it introduced a moderate, progressive wealth tax, in addition to which it could recover €301m in tax revenue from foreign wealthy individuals. This would equate to 2.04% of Malta’s GDP, enough to cover 72% of the energy affordability measures introduced by Malta’s government recently or a refund of €1,689 to every household.
Minister for Finance Clyde Caruana, however, made it clear that Malta “could not copy measures adopted by other countries lock, stock, and barrel”. He poured cold water on the suggestion. In fact, he went further than that by announcing that Malta will not be immediately introducing a new minimum tax rate for companies with a global income of more than €750m.
Minister Caruana also said that Malta will exercise a derogation to delay the introduction of the tax by six years. Given that the operations of some 660 multinationals and an estimated 22,000 jobs could be at risk, it would be hard to find fault with this. Considering that there are at least another 14 EU Member States that have preferential tax regimes, the Maltese government is quite right in not giving in to certain crusaders who regularly censor it in The Times.
However, tackling tax evasion and harmful tax competition is a worthy objective. The revenues that would be collected from the dent on evasion and avoidance would be critical to the effort to fight climate change and inequality, giving governments all over the world additional resources for essential investments in education, health, infrastructure and technology.
Malta is still committed to introducing better transparency and anti-tax evasion measures in the future. But the reality is that a certain amount of tax avoidance will always remain, and therefore it is quite legitimate if Malta tries to get a share of it. In fact, according to informed sources, the government is already shifting its foreign direct investment focus towards attracting international companies that fall below the €750 million revenue threshold set by the OECD.