Tax evasion remains a global problem and South African multinationals are no saints, claims new report

9 Mar 2021

The Organisation for Economic Cooperation and Development has failed to deliver meaningful change when it comes to the battle to combat aggressive global tax evasion by multinationals. A new report from the Global Alliance for Tax Justice shows that if anything, countries are competing to become tax havens and South African multinationals may be making hay.

It’s no secret that times are tough in South Africa and the people are suffering. As was evidenced in Tito Mboweni’s recent Budget, the country’s debt swallows 21c in every rand, while the wage bill consumes another 43c, leaving precious little for social services and infrastructure investment.

The way out of this trap is to grow government revenue, but prospects to increase state income are also dire. The majority of gross income, about 80%, comes from personal income tax, VAT and corporate tax, with personal income tax generating the most income.

The decision to reduce SA’s corporate tax rate to 27% from 28% came as a surprise, but was welcomed given that the figure is high by global standards. While incentivising global trade was not Mboweni’s objective, it is a tiny step in the right direction if multinationals are to be persuaded to pay their fair share of tax in the jurisdiction in which the costs are incurred.

The Organisation for Economic Cooperation and Development (OECD) has been trying to develop a global tax regulatory system that would help to ensure this happens and level the playing fields between developed and developing economies.

In particular, its base erosion and profit shifting (Beps) project is supposed to spur jurisdictions around the world to adopt wide-ranging tax reforms to address Beps and transparency issues, including country-by-country reporting and tax treaty changes.

Instead, many countries have taken steps to ensure that they would not lose out on tax revenues due to Beps-related legislative changes around the world.

A report, the Corporate Tax Haven Index 2021, released on Tuesday by the Global Alliance for Tax Justice, shows that despite the efforts of the OECD, its member countries are responsible for more than two-thirds of global corporate tax abuse.

This index ranks the countries most complicit in helping multinational corporations pay less tax than they are expected to.

It notes that the OECD, the world’s leading rule-maker on international tax, failed to detect and prevent corporate tax abuse enabled by its member countries — and in some cases, pushed countries to roll back their tax transparency.

“To trust the OECD in light of the index’s findings today is like trusting a pack of wolves to build a fence around your chicken coop,” says Dr Dereje Alemayehu, executive coordinator of the Global Alliance for Tax Justice.

The world’s greatest enablers of corporate tax abuse are, in descending order, the British Virgin Islands, the Cayman Islands and Bermuda (three territories where the UK government has full powers to impose or veto lawmaking), the Netherlands, Switzerland, Luxembourg, Hong Kong, Jersey (also a British Crown Dependency), Singapore and the United Arab Emirates.

Investigative work by the Tax Justice Network attributes the likely source of the injection to a multibillion-dollar game of “hot potato” where $200-billion in foreign direct investment was routed into the Netherlands from the US and South Africa in 2019. This large injection into the Netherlands seems to have then been rerouted into the UAE.

The index ranks each country based on how intensely its tax and financial systems allow multinational corporations to shift profit out of the countries where they do business and consequently pay less tax than they should there.

A higher rank on the index does not necessarily mean a jurisdiction’s corporate tax laws are more aggressive, but rather that the jurisdiction in practice plays a bigger role globally in enabling the profit shifting that costs countries billions in lost tax every year.

The Tax Network estimates that global corporate tax abuse costs the world $245-billion in lost corporate tax a year. Numbers from South Africa are difficult to come by, but the SA Tied Network has previously estimated that the country was losing about R7-billion a year in 2018. If anything this figure is conservative.

Despite the Caymans continuing to grow into the world’s single greatest threat of global tax abuse, it was removed from the EU tax haven blacklist in 2020 after a major public relations campaign. A bid by a handful of members of the European Parliament to re-blacklist the Caymans in February 2021 failed.

What is notable about the list is the emergence of the United Arab Emirates (UAE) into the ranks of the world’s top 10 greatest enablers of corporate tax abuse. This was after multinational corporations rerouted more than $218-billion foreign direct investment through the Netherlands and into the UAE’s economy.

This injection from the Netherlands — which was equivalent to more than half of the UAE’s GDP — skyrocketed the volume of financial activity the UAE hosts from multinational corporations by nearly 180%. As a result, the UAE jumped from 12th to 10th on the ranking.

Investigative work by the Tax Justice Network attributes the likely source of the injection to a multibillion-dollar game of “hot potato” where $200-billion in foreign direct investment was routed into the Netherlands from the US and South Africa in 2019. This large injection into the Netherlands seems to have then been rerouted into the UAE.

The substantial increase of foreign direct investment from South Africa into the Netherlands coincides with a decrease of similar magnitude in foreign direct investment going from South Africa to China. This suggests that the UAE replaced China as a favoured destination of foreign direct investment leaving South Africa. However, since data is aggregated at the country level, it does not show which individual companies are responsible for these shifts.

The idea of shifting the responsibility of setting global tax rules away from the OECD, which has held the seat of power on global tax for 60 years, to the United Nations became a more concrete possibility in February 2021. This was as a group of heads of states launched a blueprint for global tax reform prepared by the UN High-Level Panel on International Financial Accountability, Transparency and Integrity calling for a UN tax convention to set global standards, and a new intergovernmental body at the UN to set tax rules.

Calls to shift tax rule-setting to the UN gained momentum in 2020 after the OECD received wide criticism for its failure to deliver meaningful change in its long-awaited tax reform proposals. Today’s findings from the Corporate Tax Haven Index 2021 have simply spurred those efforts. DM/BM

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