The European Union Tax Observatory has released its ‘Global Tax Evasion Report 2024’ which highlights the issue of tax evasion among billionaires. According to the report, billionaires are able to enjoy effective tax rates as low as 0% to 0.5% of their wealth. To address this problem, the report suggests implementing a global minimum tax of 2% on the wealth of billionaires. This measure is expected to generate around $250 billion from less than 3,000 individuals.
The report justifies this proposal by stating that even though the number of taxpayers affected by the tax would be very small, the rate of 2% is still considered modest. This is because billionaires have seen their wealth grow at an average rate of 7% per year since 1995 (adjusted for inflation).
In terms of international efforts to combat tax evasion, the report highlights the success of one measure in particular – the automatic exchange of bank information. This measure has significantly reduced offshore tax evasion by three times over the past decade. Prior to its implementation, a substantial amount of financial wealth held in tax havens worldwide, equivalent to 10% of global GDP, remained undeclared to tax authorities and belonged to high net worth individuals.
However, despite significant progress, there is still a substantial amount of offshore household financial wealth equivalent to 10% of global GDP. The report acknowledges that only 25% of this wealth evades taxation, which indicates a significant reduction in non-compliance. The report also emphasizes that this reduction is a notable achievement that demonstrates the potential for rapid progress against tax evasion when there is political determination.
Nevertheless, offshore tax evasion persists, and the report identifies two main reasons for this ongoing issue. Firstly, some offshore financial institutions do not comply with the requirement of automatic exchange of bank information. They may fear losing their customer base but face no real threat or penalty from foreign tax authorities for their non-compliance.
Secondly, wealthy individuals who previously concealed their financial assets in offshore banks have now begun shifting their holdings to asset classes that are not covered under the current agreement, particularly real estate.
To address these challenges, the report recommends expanding the scope of assets that are subject to the automatic exchange of information system. By including a wider range of assets, authorities can enhance their ability to combat offshore tax evasion effectively.
The global minimum tax of 15% on multinational corporations (MNCs), which was implemented in 2012 by 140 countries and territories, has proven to be disappointing. Initially expected to increase global tax revenues by 10%, the actual revenues have been reduced by half due to a growing number of loopholes. The report raises concerns about the practice of “greenwashing the global minimum tax,” whereby MNCs can utilize ‘green’ tax credits related to low carbon transition to significantly lower their tax rates below the minimum of 15%.
As an example, the report highlights that U.S. green-energy tax credits will result in an amount equivalent to approximately 15% of U.S. corporate tax.
Furthermore, the report highlights the emergence of aggressive tax competition that significantly impacts government revenues. It expresses concern about the proliferation of preferential tax regimes specifically targeting wealthy foreign individuals, with the number of such regimes increasing from five to 28 in the European Union and the United Kingdom.
These regimes offer tax exemptions or reductions to incoming residents while maintaining the regular income tax rates applicable to domestic taxpayers. The report emphasizes the detrimental effects caused by these regimes, including the overall weakening of tax collection as adopting governments voluntarily forego tax revenues and the negative spillover effects they impose on other countries.