Tax evasion in the face of global poverty.

For decades, multinational corporations, especially those based in core countries, have funneled billions of dollars in profits to tax havens, making even more money for their shareholders.

That's why a global deal negotiated in 2021 by the Organization for Economic Co-operation and Development (OECD) was a big deal: It set a global minimum tax of 15% and included some ways countries could collect that tax even if tax havens and companies were not cooperating.

But corporations are already finding new ways to get around that agreement; a development that will end up reducing the amount of corporate taxes that countries can collect by about half of what was originally expected: $135 billion annually instead of $270 billion, according to a report published by the EU Tax Observatory on October 23.

This finding is a big problem because tax evasion exacerbates global inequality, taking money that could have been used by governments for policies that improve the lives of their citizens and instead giving it to the shareholders of giant corporations.

The 2021 agreement made it difficult for companies to shift their profits to low-tax countries, says Gabriel Zucman, director of the EU Tax Observatory and one of the report's coordinators. But instead, companies will now shift their profits to countries that offer large tax credits or subsidies, including some in the EU. Governments are increasingly using refundable tax credits, like the Inflation Reduction Act, as their new way to structure corporate tax policy, Zucman says.

Avoiding taxes is an art that companies have perfected in recent decades. In the 1970s and 1980s, according to data from the EU Tax Observatory, hardly any profits were shifted to tax havens, countries like Bermuda and Ireland, where companies based in relatively high-tax places like the United States and Europe could shift their profits. trades on paper and only pay minimal (or in some cases zero) taxes on their profits. But that changed in the 1990s and 2000s, when about a third of American multinational corporations' foreign profits moved to tax havens. In 2010, companies based in core countries began generating even more profits, around 50%, and the level has remained high since then, according to the Fiscal Observatory report. Around $1 trillion in profits were shifted to tax havens in 2022, according to the report.

A common method of corporate profit shifting works like this: a company like Microsoft sells its intellectual property to a subsidiary in a low-tax country and then pays that subsidiary for the use of that intellectual property. The foreign subsidiary makes huge profits that would normally appear on Microsoft's US or UK profit book, but instead appear offshore and are therefore taxed at a very low rate. This is actually a strategy Microsoft used, selling its intellectual property to an 85-person factory in Puerto Rico, where its tax rate was close to 0%, according to ProPublica. The Internal Revenue Service (IRS) says Microsoft owes it $29 billion in back taxes. In response to ProPublica's questions on the issue, the company declined to discuss details, saying only that it "follows the law and has always fully paid the taxes it owes."

In some of the most widely used tax havens, such as Bermuda, the Cayman Islands and Ireland, U.S. companies reported tens of billions of dollars in profits despite having few employees, according to an analysis by the Institute on Taxation and Economic Policy. In 2019, for example, American companies reported $30.7 billion in profits in Bermuda, which works out to about $36 million per employee there. The status quo allows multinationals to "use accounting tricks to report complete nonsense to their tax authorities," says Steve Wamhoff, director of federal tax policy at the Institute on Taxation and Economic Policy.

Both the EU and the United States have tried to stop profit shifting, knowing it was costing them billions of dollars, but no significant progress was made until the global minimum tax agreement in 2021. At that time, the OECD He praised the agreement as "groundbreaking" because it made it much easier for countries to force companies to comply. Essentially, the signatory countries agreed to set a floor for multinational corporations to pay a tax of at least 15% in each jurisdiction where they operate. If a jurisdiction in which a multinational company is located does not tax that company at 15%, the agreement makes it possible for other countries to collect that revenue.

"It's a very well-designed mousetrap," says Mike Kaercher, senior counsel at New York University's Tax Law Center.

There are some obstacles to the effective implementation of the agreement, the main one being that all participating countries have to ratify it and the United States, one of the biggest promoters of the agreement, has not yet announced any plans to do so.

Additionally, the rule allowing participating countries to collect minimum taxes not collected by non-participating countries is temporarily suspended until at least 2026 to make room for adoption, and according to Zucman, there is some concern that this suspension will be extended indefinitely. Additionally, in July 2023, the OECD clarified that the global minimum agreement does not apply to certain tax credits, such as those offered by the Inflation Reduction Act. Part of the Inflation Reduction Act allows tax credits to be transferable, meaning a green energy company can receive a tax credit and then sell it to another company. allowing the green energy company to get much-needed cash and a multinational company to get a significant discount on its minimum 15% tax rate.

While for decades there was a race to the bottom among the many countries that lowered their tax rates to invite foreign companies to shift their profits there, there will now be a global subsidy race aimed at green energy producers, Zucman argues.

“It is concerning that the global corporate minimum tax agreement does not address this form of tax competition and, in fact, legitimizes it,” Zucman and his co-authors write.

Of course, there is a positive aspect to this new form of tax avoidance; Encourages companies to invest in green energy. However, it risks exacerbating inequality in the countries where companies operate. It could help increase shareholders' after-tax profits at the expense of everyone else.

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