Introducing the CTHI 2019

The Corporate Tax Haven Index ranks the world’s most important tax havens for multinational corporations, according to how aggressively and how extensively each jurisdiction contributes to helping the world’s multinational enterprises escape paying tax, and erodes the tax revenues of other countries around the world. It also indicates how much each place contributes to a global ”race to the bottom” on corporate taxes.

This index was launched on 28 May, 2019 and it will be published every two years.

The Corporate Tax Haven Index complements our Financial Secrecy Index, which ranks tax havens according to financial secrecy.

The menu on the left provides more information on how the index works, and provides context.

Click here for the full 2019 ranking.

2019 Haven Ranking
See full index here

1. BVI*
2. Bermuda*
3. Cayman Islands*
4. Netherlands
5. Switzerland
6. Luxembourg
7. Jersey*
8. Singapore
9. Bahamas
10. Hong Kong 
* British overseas territory or crown dependency. If Britain's network were assessed together, it would be at the top. 

 Background

What is the problem?

In rich and poor countries, multinational corporations rely on a wide range of public services to support their activities: the health and education systems that underpin their workforces and their intellectual property; the roads and other infrastructure that they use to ship their goods and services; or the public courts and police forces that protect their property and their rights. All these things need to be paid for — largely through raising tax. When multinationals use corporate tax havens to escape paying their contributions to these public goods and services, they are free-riding off the taxes paid by other people — you and me. When Amazon, arguably the world’s biggest monopolist, pays minus one percent in US federal corporate taxes, it’s clear that the international tax rules are rigged. Corporate tax havens are the heart of the problem.

This cheating, whether “legal” or not, generates great harm. First, it undermines support for democracy and for markets, by fostering a widespread (and correct) sense that there is one set of light, low-tax rules for large and powerful corporations and wealthy individuals, and a harsher set of rules for everyone else. Second, it generates enormous economic and political inequalities, by shifting the burden of tax away from the wealthy shareholders of corporations and onto the backs of ordinary people, who must either suffer higher taxes themselves or reduced public services. In this sense, corporate tax cuts are best viewed as a burden — a burden that falls most heavily on women and on disadvantaged minorities. Third, by helping large players to out-compete and kill their smaller, more locally based rivals on a factor — tax cheating — that has nothing to do with genuine productivity or innovation or wealth creation, this distorts markets and contributes to the rapid rise of monopoly and market powerFourth, it damages innovation, by rewarding corporate managers for turning their attention away from building better products and services, and towards tax minimisation and financial engineering.  Fifth, it worsens financial instability by boosting too-big-to-fail banks and disproportionately rewarding highly profitable risk-taking at taxpayers' expense, over more mundane industrial and other wealth-creating activities. Sixth, for all these reasons and more, it creates “Robber Baron” recessions, and reduces economic growth.

Race to the bottom

Corporate tax havens also foster a worldwide race to the bottom. As one jurisdiction introduces a new tax loophole or incentive or tax cut to attract mobile capital, others will try to put in place an even more attractive offering, triggering others in turn to join in, resulting in an unseemly race to the bottom that steadily shifts the tax burden away from wealthy shareholders of multinational corporations, who are mostly wealthy people, and towards lower-income groups. That is why, in many countries, corporate taxes are falling while corporate profits are rising. As a result of this race, tax cuts and incentives don't stop at zero: they turn negative. There is no limit to multinationals’ appetite for free-riding off public goods and subsidies paid for and provided by others. This race to the bottom gets called "competition" but it is a completely different beast from the market competition we are familiar with, and for the reasons given above it is always pernicious.

 

Corporate profits are way up, corporate taxes are way down

After-tax corporate profits versus corporate tax revenue, as a share of GDP, 1952–2015 (USA)

 

Amazon’s profits rapidly outpace its tax burden

From 2009 to 2018, Amazon paid an effective tax federal tax rate of 3.0 percent on profits totaling $26.5 billion

All these factors feed a rise in political extremism and even authoritarianism in many countries.  Tackling corporate tax havens is one of the great political and economic challenges of our age.

How big is the problem?

Current data and research suggests that governments around the world lose over US$ 500 billion — half a trillion dollars — in tax each year due to corporate tax havens. The IMF,  for instance, recently estimated that rich countries lose some $450 billion annually to tax-haven related corporate tax dodging, while lower-income countries lose $200 billion (which represents a bigger share relative to their smaller economies).  But remember: tax losses are just one dimension of the damage. The harm that corporate tax havens inflict on democracy, on society, and on our trust in politics and markets, is incalculable.

The scale of corporate tax haven activity has been growing remarkably fast, especially since the 1990s: a Tax Justice Network study in 2018 found that US-headquartered multinationals alone used tax havens to escape paying $130 billion in corporate taxes in 2012 — up from just $12 billion in 1994.  This reflects a general trend, as this graph compiled by the New York Times illustrates.  (original source here).

At the same time as tax avoidance has been soaring, headline corporate tax rates have been falling fast: the opposite of what one might expect, as the graph below shows (the graph refers to US multinationals, because a lack of robust data prevent similar analyses for non-US headquartered multinationals).

Source: https://www.imf.org/external/np/exr/consult/2018/corptaxation/pdf/2018commentscorptaxation.pdf

 

How is the international tax system rigged?

Multinationals are taxed under an international architecture of tax that was set up a century ago, and which has utterly failed to keep pace with technology, secret banking, and the high-speed modern world.

Every multinational has many subsidiaries and affiliates festooned across tax havens and other countries around the world. These affiliates trade with each other, and over a third of all world trade is reckoned to happen inside multinationals like this.  The generally-agreed international tax system treats each multinational as if it were simply a loose collection of separate entities trading with each other in a fair market on an “arm’s length” basis (that is, at normal market prices.)  But the core problem with this system is that it encourages multinationals to shift large profits into low-tax or zero-tax havens, where they pay little tax and to shift their costs into high-tax countries to deduct against their tax bills there.

How do they do this? The most common technique is “transfer pricing,” where a multinational adjusts the internal prices at which its affiliates trade with each other across borders, to minimise profits that the accountants recognise in the high-tax countries, and to maximise profits recognised in corporate tax havens. The CTHI points to where these profits are going, and which havens are most aggressively facilitating these practices. The Box provides an example.

Example: Transfer Pricing between Malawi and Poland

For example, it costs the food multinational Gigafruit $100 to produce and package a crate of fruit in Malawi. Gigafruit’s subsidiary, MalawiCo, sells that crate to another affiliate of Gigafruit in a tax haven, HavenCo, also for $100. Here MalawiCo earned $100 in sales but had $100 costs, so it had zero profits that Malawi could tax. Next, HavenCo sells the crate to a Gigafruit affiliate in Poland, PolandCo, for $300, leaving $200 profit ($300 sales minus $100 costs) in the tax haven. But it pays zero tax on HavenCo’s profits, because the relevant tax rate in the Haven is zero. Finally, PolandCo sells the crate to a Polish supermarket (which isn’t related to Gigafruit,) for $300. PolandCo bought the crate for $300 then sold it for $300, so again there are zero profits for Poland to tax.   

Hey presto! No tax bill! By tweaking these internal ‘transfer prices,’ Gigafruit’s accountants have sucked all their profits out of the high-tax countries into a tax haven.

The fruit crate itself never goes anywhere near the tax haven: these are just paper transactions in accountants’ workbooks. These games do nothing to increase productivity or entrepreneurship: they simply transfer resources away from taxpayers (in Malawi and Poland, in this example) to the shareholders of multinational companies, who are mostly wealthy and mostly based in rich countries. In the real world it is far more complex than this, and countries put in place defences against these profit-shifting shenanigans. But corporate tax havens are constantly figuring out new loopholes to outwit these defences, generating a race to the bottom in which the system becomes steadily more complex, as the next section suggests.

What is a tax haven? What is a corporate tax haven?

A corporate tax haven is pretty much what most people would imagine it to be: a jurisdiction that provides facilities to help multinationals escape taxes elsewhere.  More formally, we define it as

“A jurisdiction that seeks to attract multinational companies by offering facilities that enable them to escape or undermine the tax laws, rules and regulations of other jurisdictions, reducing their tax payments in these jurisdictions. 

This tax payment reduction result from tax base spillovers (shifting profits, tax avoidance) and/or strategic spillovers (race to the bottom effects which prompt jurisdictions to lower their tax rates or tax base in response)." 

(To see how we define, identify and measure corporate tax havens, look at the “Methodology” section).

Don’t be misled by a country’s headline tax rate: this rate might be bypassed through sweetheart deals between the tax administration and multinationals, and its tax system may well contain gaps and loopholes. Luxembourg, for instance, claims to tax corporate income at 26 percent. Yet LuxLeaks revealed that some multinationals were taxed at less than 1 percent.

The world of offshore tax havens is a global ecosystem, where different jurisdictions offer different mixes of facilities to mobile forms of financial capital. Corporate tax havens are among the most important players in this system, but others exist. For example, our Financial Secrecy Index ranks ”secrecy jurisdictions” which attract illicit financial flows by providing laws and other facilities to hide that capital and its ownership from the public, or from the forces of law and order. There are also “regulatory havens” which provide facilities to help multinational corporations escape financial (and other) regulations. And so on.  

Ireland, for instance, is a very large corporate tax haven which is near the top of the CTHI, yet it is a relatively transparent jurisdiction with a fairly low ranking on the Financial Secrecy Index. Switzerland and Luxembourg, by contrast, are major secrecy jurisdictions and also very large corporate tax havens, so they rank high in both indexes.


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