One of the chicaneries that multinationals use to increase their profits is the so-called “tax optimization;” one aspect of it is formally implanting their headquarters in a country with very low rates of taxes on profits so as to elude paying such levy in their countries of origin or where those profits were obtained.
Certain countries such as Ireland, Luxemburg, Switzerland or Uruguay, among others, have elaborated tax regulations to take advantage of this vein to obtain “given” fiscal resources thus transforming themselves into “almost” tax heavens. The nine tax-free zones (privately owned) in Uruguay and the reticence of this country in providing tax information that lead it to be included some years ago in OECD’s “gray” list of tax havens are some of the close examples of this type of chicanery. Janet Yellen’s proposal is that the State of the country where multinationals make their profits collects the taxes that they should have paid.
Let us see some examples. If Google has clients and makes profits in Argentina, it is fair that profit taxes be paid in Argentina at the Argentine rate and not in Ireland at 12.5% as it happens today. In this same situation is USA or France, where Google makes huge profits. The same reasoning can be made with Mercado Libre whose clients are Argentineans but his owner lives in Uruguay. For exporters the situation is identical: Cargill’s office in Argentina buys soy and cereals at vile prices from farmers, cedes what was bought to its headquarters at ridiculous prices without profit, and Cargill pays profit taxes made in Argentina to another country, thus Argentina loses large amounts of tax resources.
Once paid those much lower taxes in those serious countries, already formalized profits are “legally” transferred to tax heavens from OECD black list, mainly former British or American colonies Anguilla, Cayman, Dominica, Fiji, Guam, Palau, Panama, Samoa, Trinidad and Tobago, US Virgin Islands, Vanuatu and Seychelles, that Mario Rapaport called “fiscal havens” in an article in Cash. This mechanism of tax evasion is one of the most notorious and controversial aspects of globalization. Although the media has exemplified this way of operating by quoting GAFAM acronym of Google, Amazon, Facebook, Apple and Microsoft, this method is used by many multinational corporations and not only those from the most modern sector of the economy. Magnitude of profits that multinationals have in tax havens is reaching dizzying heights: somewhere around 1.5 trillion dollars.
Massive tax evasion using this operating strategy concerned all governments for a long time. Finally the G7, group built by main world economies, has reached an agreement to propose in their July meeting of ministers of finance and directors of central banks in Venice the imposition of a minimum global tax rate of “at least 15%” to profits of largest multinationals. The levy collected would be distributed among countries where those profits were obtained. The level of tax rate is not yet definitive as Janet Yellen, USA economic minister, proposed 21%. A collecting and redistributive entity must be created, probably associated with OECD and the way of distributing the proceeds is not known in detailed, as it has to be accepted by the rest of the countries.
The first initiatives regarding this new tax normative were proposed by France five years ago to prevent tax evasion in platforms of tourist lodging rentals, publicity in internet over which it was neither possible to apply the sale tax nor collect profit taxes from corporations operating in these sectors. Not only platforms did not pay taxes in the countries where service was provided but also these companies promoted tax evasion by individuals that put their houses in the market for tourists who pay directly to the platforms. A similar situation occurred in New York where its Major accused Airbnb of causing an increase in rentals in the city. Faced with Trump’s blockade within OECD where an eventual normative was been discussed, France decided in 2019 to apply a specific tax unilaterally.
The fact of creating a world tax is not only an unknown but also extraordinary event and the decision of main world economies of starting to combat tax evasion globally is a Copernican change. It also implies a transcendental change in the concept of property right and clearly reaffirms the principle of tax sovereignty as it states that profit taxes must be paid where enterprises have the production and consumption of their goods and services.
The implications are multiple. First, the measure aims at unravelling one of the bases of globalization: those who defended this way of organization of world economy promoted a tax competition between countries to reduce corporate taxes with the objective of establishing these lower taxes in their own countries. The result was that 40 years ago the average of corporate profit tax was 50% and started to decrease until reaching today 25% although in certain countries such as Paraguay the nominal tax rate is 10%.
Paradoxically, Janet Yellen’s proposal is incredibly banal, as countries where production and sale of goods and services are made will recover a large part of tax evasion from their own companies. Countries such as Argentina where extractivist economy prevails will benefit as they will be able to recover part of the tax evasion done by foreign companies that export cereals and tax exiled that practice tax evasion through the system of tax platforms.
Second, it is important to define how the distribution of the global amount collected will be made. If the distribution key point is a simple rule of three, then it will preserve a relative equality but advanced countries will be favored. However, we can imagine other methods such as each country receives according to the magnitude of sales done in each country imposing as part of the calculations a weighting coefficient that increases as GDP per capita decreases weighted in such a way that emergent countries see their participation reimbursed.
Third, this normative will facilitate a change in tax structure. In the last 40 years, pressure of multinationals allowed them to obtain a decrease in rates of profit taxes with the argument of settling where the tax was lowest. Concomitantly, there was pressure for lowering income tax rates and generally direct taxes; as a result, Macri lowered personal assets tax. This made indirect taxes increase, such as VAT, tax on transactions, ABL tax to cover State expenditure and made tax structure even more regressive.
Fourth, Janet Yellen has as strategic perspective making tax heavens disappear form black list and weaken decisively the “almost tax heavens,” Switzerland, Luxemburg, Monaco, Andorra, Liechtenstein, Jersey Islands, Guernsey, Man, San Marino but also Costa Rica, Hong Kong, Singapore, Macao, Delaware State in USA. In these places, financial criminals proliferate with legal coverage for asset laundering as result of illegal activities with which some banks are associated. It is no coincidence that in some world financial scandals over the past years some first-line Argentine political characters appear such as Macri and Prat Gay who have been included in Falcini’s list and Panama Papers.
Article first published in Cash, June 27, 2021
 . Spanish acronyms for Municipal tax for Lighting, Sweeping, and Cleaning
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