The European Union Tax Observatory recently published the ‘Global Tax Evasion Report 2024.’ The report emphasizes several significant concerns related to tax evasion, the Global Minimum Tax (GMT) on billionaires, and measures to tackle tax evasion. It delves into the effects of international reforms initiated in the past decade, such as automated international exchange of bank information, and a global minimum tax for multinational corporations (MNCs), among others.
Understanding Tax Evasion
Tax evasion is an illegal act of avoiding taxes owed to the government. This can be done by underreporting income, inflating deductions, hiding money in offshore accounts, or using other fraudulent means to decrease one’s tax liability. It involves deliberate attempts to decrease tax obligations by misrepresenting or concealing financial data.
International Reforms to Combat Tax Evasion
One significant reform is the Global Minimum Tax (GMT). This sets a standard minimum tax rate for a specified corporate income base internationally. In October 2021, a group of 136 countries agreed to a minimum global tax rate of 15% for MNCs to deter them from tax evasion. Another effective reform is the automatic exchange of information, introduced in 2017, to combat offshore tax evasion by wealthy individuals.
Key Highlights of the Report
The report points out that while offshore tax evasion has decreased over the past decade, significant challenges persist, including noncompliance by offshore financial institutions and limitations in the automatic exchange of bank information. It also highlights how global billionaires often leverage shell companies to avoid income taxation, effectively paying tax rates equivalent to 0% to 0.5% of their wealth.
Profit Shifting by MNCs
Multinational corporations have shifted around USD 1 trillion to tax havens in 2022, equal to 35% of their profits earned outside their home countries. The report brings attention to “Greenwashing the Global Minimum Tax,” a strategy where MNCs use ‘green’ tax credits for low-carbon transition to reduce their tax rates below the minimum of 15%.
The Role of Policy in Tax Evasion
Tax evasion, wealth concealment, and profit shifting to tax havens are outcomes of policy choices or failures to make necessary ones. Evaluating tax policies’ consequences and making improvements for sustainable tax systems is crucial.
Recommendations of the Report
The report recommends a global minimum tax on billionaires, suggesting a rate of 2% of their wealth. It also encourages mechanisms to tax wealthy individuals choosing to move to low-tax countries after being long-term residents in another. These measures are seen as critical for governments worldwide to increase revenue, address wealth inequality, and fund vital services like education and healthcare.
Income vs. Wealth Taxes
While wealth taxes are assessed on the total amount of net wealth owned by a taxpayer, income taxes are levied on the flow from that wealth. Estate taxes, gift taxes, and inheritance taxes are examples of one-time or infrequently assessed wealth taxes.
Government Measures Against Tax Evasion
To curb tax evasion, governments have implemented measures such as e-Invoicing, the Fugitive Economic Offenders Act, 2018, the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, and the Prevention of Money Laundering Act, 2002.
Base Erosion and Profit Shifting (BEPS)
The term ‘Base Erosion and Profit Shifting’ is often seen in the news in connection with curbing of the tax evasion by multinational companies. It refers to tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity.
