In part 3 of our new mini-series on financial secrecy, we focus on the Corporate Tax Haven Index (CTHI), published by the Tax Justice Network (TJN) – the 2021 edition, released in March, is the second since 2019. Part 1 of the series looked at the definition of and gave information on secrecy jurisdictions and financial secrecy, and part 2 covered the Financial Secrecy Index, also a TJN project.
Wealthy corporates and individuals need look no further than the many equally wealthy tax havens operating around the world for help in stashing as much as possible of their money. The latest CTHI shows that these crooks are competently assisted by a “club of rich countries determining global rules on corporate tax” and that, collectively, are responsible for over two-thirds of global corporate tax abuse.
These are the countries of the Organisation for Economic Cooperation and Development (OECD), and the CTHI 2021 shows that OECD countries and their dependencies are responsible for 68.3% of global corporate tax abuse risks. The breakdown shows that OECD countries are responsible for 39%, and their dependencies – like the UK’s Jersey and the Netherlands’ Aruba – are responsible for 29%.
This is the very OECD who sets global corporate tax rules, whose motto is Better policies for better lives, and who claims to “shape policies that foster prosperity, equality, opportunity, and well-being for all”, all the while doing the most to help firms bend the tax rules.
Tax revenue is a major source of income for governments, and growing revenue – or at least maintaining it – is crucial to regular building and upkeep of infrastructure, a steady supply of basic services, and the achievement of economic equality, among other government imperatives.
But tax havens help to erode countries’ tax revenue by undermining their ability to gather tax from multinationals. They do this by encouraging clients to register operations in their jurisdictions, offering these foreign investors – both individuals and businesses – attractive packages with low or no taxation rates.
Wolves guarding the chickens
Billions of dollars are parked in offshore financial centres, held by shell companies that exist only on paper. They are the vehicles through which multinationals shirk their tax responsibilities.
TJN’s Liz Nelson, director of tax justice and human rights, said: “The world’s richest countries are depriving the rest of the world of $166-billion in corporate tax every year by enabling the biggest multinational corporations to pay less tax than they should.”
Meanwhile, Dr Dereje Alemayehu, executive coordinator of the Global Alliance for Tax Justice, commented that “trusting the OECD in light of the index’s findings is like trusting a pack of wolves to build a fence around your chicken coop.”
Nelson too was scathing of the OECD, describing its tax rules as “window dressing” and saying these same rules are depriving poorer countries of the equivalent of 26-million nurses’ annual salaries every year, or 50 nurses’ annual salaries every minute.
But as staggering as this figure is, it is far more conservative than the International Monetary Fund’s estimate of the cost to governments, in lost revenue, at more than $800-billion a year – money that could alleviate many humanitarian and developmental challenges around the world.
Nelson is one of many economists and activists calling for these faulty OECD policies to be superseded by a more robust and globally inclusive process at the UN. “It’s time our global tax rules are set by the UN, where democracy and people’s human rights come before plutocracy and super yachts.”
And minimising global corporate tax abuse will facilitate the accumulation of public funding urgently needed to address the economic and humanitarian toll of the Covid-19 pandemic, which is entering its second year with no respite in sight.
Helping criminals get away with the loot
The CTHI uses two primary measurements: a corporate tax haven score and a global scale weight. The haven score represents the country’s scope for corporate tax abuse, where 0 is no scope and 100 is unrestrained scope. It is assembled from 20 haven indicators falling into five categories – lowest available corporate income tax rate, loopholes and gaps, transparency, anti-avoidance, and double tax treaty aggressiveness – which reflect the many different rules, laws and mechanisms that multinationals can use to escape tax.
The global scale weight represents the volume of financial activity conducted in the country by multinational corporations. These two measurements are combined with a mathematical formula to create a final CTHI score for each jurisdiction, which is the basis for the final ranking according to how much cross-border corporate tax abuse the country facilitates.
This year, the top 10 culprits were:
- British Virgin Islands (British overseas territory)
- Cayman Islands (British overseas territory)
- Bermuda (British overseas territory)
- Hong Kong
- Jersey (British crown dependency)
- United Arab Emirates
The top six are OECD countries or their dependencies. These names will be familiar to those who perused the Financial Secrecy Index – there is a strong overlap, with only Japan and the US appearing on that list in place of Jersey and Bermuda.
Overall, the UK and its network of overseas territories and crown dependencies are the biggest culprits. This network is responsible for 31% of the world’s corporate tax abuse risks – and it must be noted that, regarding its overseas territories, the UK has full powers to impose or veto law-making while the British Crown holds the power to appoint key government officials.
South Africa sits in the bottom half of the index at a relatively respectable rank of 45 out of 70 countries, with a CTHI value of 198 made up of a haven score of 49.4 and a global scale weight of 0.44%. It is determined to be responsible for 0.45% of the world’s corporate tax abuse risk. In contrast, the same results for the top-ranking British Virgin Islands are 2 854, 100 and 2.3%, and the territory is responsible for 6.45% of the world’s corporate tax abuse risk.
Another British territory, the Cayman Islands, was fingered as an increasingly severe threat. While it had already achieved the dubious honour of a maximum haven score of 100 in 2019, it increased the volume of financial activity conducted by multinational corporations by nearly 15%, thus increasing the global role it plays in enabling profit shifting. This territory also jumped from third to first on the 2020 Financial Secrecy Index 2020.