One of the benefits of globalization from a business perspective is the ability to move operations from one jurisdiction to another to take advantage of better tax treaties. Some countries, such as Ireland and Hungary, consider themselves a haven for companies willing to pay as little tax as possible.
At the invitation of the United States, the Organization for Economic Co-operation and Development (OECD) has pushed a minimum corporate tax rate of 15%. It will also tax digital businesses in the locations where they operate, even if they don’t have offices there.
All this is less than what the US originally paid – an average of 21 percent. If the measure is approved, it will have a transition period of 10 years. It’s not entirely clear whether the United States will ratify the deal itself, given the expected opposition from Republicans. But hey, that’s a thing.
These efforts could slightly reduce the overall sales of the world’s wealthy, such as Jeff Bezos of Amazon and Mark Zuckerberg of Facebook. But even a simple regression brings a lot of returns. Tax haven expert Nicholas Chaxon wrote, “Tax havens cost governments between $500 billion and $600 billion annually in lost corporate tax revenue.” “Of this lost revenue, about $200 billion is in low-income economies — a larger percentage of GDP than advanced economies and more than $150 billion in foreign aid they receive each year.”
Businesses don’t just hide their profits from the tax office. Individuals continue to reap huge profits from the global economy and, with the help of accountants, avoid paying as much to their governments as possible. Shaxson offers a range between $8.7 trillion and $36 trillion, adding at least another $200 billion in lost government tax revenue annually.
In order to take advantage of low to non-existent tax rates, the rich store their money sometimes in places like the Bahamas and the Cayman Islands. But the real surprise of Pandora’s Papers is South Dakota’s reputation as a huge magnet. Like these paradise islands, South Dakota has no income, inheritance, or capital gains taxes. And like old Switzerland, it protects the money of the rich behind walls of secrecy.
Plus, South Dakota’s sovereign wealth funds offer something else the rich crave: deniability. Felix Salmon explains: “Three parties – settlor, trustee, and beneficiary – can legally claim that the money does not belong to them. Settlor and beneficiary can say they don’t own the money, anything in a trust fund managed by someone else, and the trustee can say they take care of the money. I just don’t. I own it.”
In other words, the wealthy often want to be as inconspicuous as possible – to avoid the tax inspector, these perennial believers, and the wrath of the masses.
The first step in clearing this highly profitable mess is sunlight. One of the global tools is the Common Reporting Standard, according to which participating countries provide basic information about foreign assets in their territory.
Excerpt: Embarrassment of the Rich
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