This article is more than 2 years old

This article is more than 2 years old

A landmark study has found multinational corporations are shifting roughly $16bn in profits out of Australia into tax havens every year.

It has also found the steady decline in corporate tax rates globally since the 1980s has not been driven by countries competing harder for productive capital and pushing corporate tax rates down, despite what politicians say.

• Sign up to receive the top stories every morning

Instead, it says corporate tax rates have been driven lower by multinational corporations shifting profits into tax havens, and governments’ failure to curb the practice.

The finding undermines the argument that countries such as Australia are being forced to cut their tax rates because economic integration has made capital location more sensitive to differences in taxes.

The Turnbull government has relied on such an argument when calling on the senate to support a cut in Australia’s corporate tax rate from 30% to 25%.

It has said lower company taxes will encourage companies to invest in Australia which will boost productive capital and make workers more productive, helping to lift wages.

But the new study shows that textbook model of tax competition doesn’t capture the behaviour of today’s largest multinational corporations. The study says countries with higher corporate tax rates give multinationals more incentive to shift profits overseas, and countries experience smaller revenue losses if they lower their tax rates.

“Machines don’t move to low-tax places: paper profits do,” the paper says.

“For wages to rise, productive capital needs to increase, which can happen fast if capital flows from abroad, much less so if paper profits – not productive capital – is what moves across countries.

“By our estimates, close to 40% of multinational profits [were] artificially shifted to tax havens in 2015. This tax avoidance and the failure to curb it are the main reason why corporate tax rates are falling globally, not tax competition for productive capital.”

Overall, the study estimates more than $600bn in profits were shifted to low tax jurisdictions in 2015, with US multinationals being the main “shifters.”

It found about half of all shifted profits accrue to US parent companies, while about 30% accrue to European parent companies.

It has used new data to produce the first comprehensive map of where corporate profits are booked globally, showing the volume of profits being shifted out of OECD countries.

“By our estimate, corporate tax avoidance by multinationals reduces the corporate tax revenue of the European Union by around 20%. For the world as a whole, that tax revenue loss is around 10%,” the paper says.

It estimates in 2015, corporate tax avoidance by multinationals reduced the corporate tax revenue of Germany by 28%, France and Hungary by 21%, Spain and the United States by 14%, and Norway and Poland by 8%.

Australia’s corporate tax revenue was reduced by about 7%, which equates to roughly $5.4bn in forgone revenue in 2017.

Non-haven countries steal revenue from each other while letting tax havens flourish

The study, called The Missing Profits of Nations, was written by economists from the University of California, Berkeley, and the University of Copenhagen, and published by the National Bureau of Economic Research.

It says governments have been unable to stop profit-shifting in recent decades because they have lacked the incentive to do so.

It says higher-tax countries, like Australia, have been more willing to focus their enforcement efforts on relocating profits booked by multinationals in other high-tax countries because the tax information has been easier to find, and cheaper and quicker to pursue.

It says enforcement on tax havens has been neglected because it is has been harder (since little data exists), costlier (because multinationals spend large resources defending their shifting to low-tax locales), and lengthier (due to lack of cooperation between haven and non-haven countries).

“Our analysis shows, consistent with theory, that the vast majority of high-tax countries’ enforcement efforts are directed at other high-tax countries,” the paper says.

“In effect, non-haven countries steal revenue from each other while letting tax havens flourish.”

British overseas territories in talks to keep tax haven secrecy Read more

The paper highlights how the rise of multinational corporations such as Google, Apple, and Facebook have changed the global tax system.

“These firms don’t seem to move much tangible capital to low-tax places – they don’t even have much tangible capital to start with. Instead, they avoid taxes by shifting accounting profits,” the paper says.

“In 2016 for instance, Google Alphabet made $19.2bn in revenue in Bermuda, a small island in the Atlantic where it barely employs any workers nor owns any tangible assets, and where the corporate tax rate is 0%.

Offshore secrecy: inside the movement to crack it open Read more

The Coalition government has gone some way to cracking down on corporate tax avoidance in recent years.



It introduced the Multinational Anti-Avoidance Law (MAAL) in late 2015, increasing penalties for significant global entities that enter into tax avoidance and profit shifting schemes

It also introduced the Diverted Profits Tax, which came into effect in mid-2017, in a bid to prevent the diversion of profits offshore through arrangements involving related parties.