Global Tax Evasion by Multinational Corporations and High-Net-Worth Individuals

The issue of tax evasion and avoidance by multinational corporations and high-net-worth individuals (HNIs) has become a significant global concern, especially for developing countries. These practices hinder resource mobilization necessary for infrastructure and human development, addressing environmental challenges, and maintaining economic stability in the aftermath of global economic disruptions.

Mechanisms of Tax Evasion

• Transfer Pricing: Multinationals manipulate the transfer pricing mechanism by overpricing services purchased by subsidiaries in high-tax countries from related entities in low-tax countries. 
• Interest Payments: Profits are shifted through high-interest loans taken by companies in high-tax jurisdictions from related entities in low-tax regions. 
• Intangible Assets: Headquarters are placed in tax havens, and profits are extracted through royalties on trademarks and intellectual properties. 

The impact is more pronounced in digital companies that can effortlessly move their headquarters to low-tax jurisdictions.

Shifts due to Globalization and Technology

With globalization and technological advancement, new tax evasion avenues have surfaced. The mandatory multilateral exchange of financial information since 2017 has seen a shift from cash holdings abroad to real estate investments, often used for money laundering. It is estimated that 25% of offshore wealth in financial assets may have been converted into real estate.

Global Initiatives Against Tax Evasion

• Base Erosion and Profit Shifting (BEPS): Initiated by G20 and OECD, this framework involves 140 countries working on a 15-point action plan to tackle tax avoidance. 
• Global Minimum Tax: A 2021 agreement endorsed by over 140 countries to impose a global minimum tax, though loopholes remain a challenge. 

Findings from the Global Tax Evasion Report

• Offshore financial wealth has remained stable, but tax evasion has decreased by nearly a third due to automatic bank information exchanges.
• The global minimum tax initiative aims to increase revenue by 10%, but actual collections have been lower due to loopholes and tax incentives.
• Global billionaires reduce tax liabilities using shell companies, paying less than 0.5% of their wealth as taxes.
• A significant portion of profits (almost 40%) continues to be shifted to tax havens, particularly by US corporations.

Recommendations for Improvement

• Revise the international agreement to increase the minimum tax to 25% and close existing loopholes.
• Propose a new global minimum tax of 2% on the wealth of billionaires.
• Consider unilateral measures by countries if global agreements fail.

The challenges remain in forming a global consensus and enforcement, especially with powerful multinational entities involved. The struggle against tax evasion continues, with no straightforward solutions in sight.