– One problem with the way that globalization is proceeding is that the very winners of globalization, let's say these bigmultinational companies or very mobile individuals, because of globalization they see their tax rates fall.
As of those who gainmost from globalization who see their pretaxincome increase the most, also those who see their taxes fall a lot.
And on the contrary, the many groups of the population who have not benefited a lot, or not at all, or even in some cases, have suffered from globalization.
Retirees or small businesses, or low wage workers, see their taxes rise.
And so you see the tension, it's very unlikely that globalization has a future, if it means ever lower taxesfor those who benefit from it and ever higher taxes forthose who suffer from it, it's not sustainable.
I'm Gabriel Zucman, I'ma professor of economics at the university of California Berkeley.
We know that there is alarge amount of profits that multinational companies shift to low tax countries every year.
So, take a striking example for instance, in 2017, Google Alphabet, one of the largestcompanies on the planet, reported more than $20billion of revenue in Bermuda.
And so in that research, themissing profits of nations, we try to quantify the extent of suchprofit shifting globally.
Imagine that all countries had the same corporate income tax rates today, and the same rules for depreciation, for defending the amountof taxable profits.
So, imagine we had a perfectinternational tax coordination.
In such a world, how muchmore profits would be booked in countries like the US, or in Germany, or in Japan? And how much less incountries like Bermuda, like Ireland that today attract a lot ofartificially shifted profits? So that's the questionthat we're interested in.
And what we find is that there's about $600 billionin profits each year that are shifted to tax havens.
So, these are profits that are made in the main developedand developing countries, but that end up being booked in a number of low or zero tax countries, primarily Ireland, Caribbeantax havens, Luxembourg, Singapore and places like that.
$600 billion just to fix ideas, that's the equivalent of 40%of multinational profits, okay? So you should think ofa multinational company like Apple for instance.
What we call multinational profits, these are all the profits made by Apple outside of the US, okay? And so out of this total for all multinationalcompanies globally combined, we estimate that 40% ofthis total amount of profits are shifted to tax havens every year.
So, there are three ways in which multinational companiescan use to shift profits.
So, one is manipulatingintragroup transactions, exports and imports.
So for instance, a US company is going to export stuffat artificially low prices to its Irish subsidiary.
That's going to generate alot of profits in Ireland, that's going to increase the amount of taxable profits in Ireland, to reduce the amount oftaxable profits in the US.
And so it shifts profitsout of the US to Ireland.
So that's the manipulation of what is known as transfer pricing, these intragroup transaction prices.
The second thing is the useof intragroup borrowing.
So, let's take again theexample of a US company.
It can borrow money from a related party an affiliated firm in Luxembourg.
And so it's going to pay interest to that Luxembourg affiliate, and because interestpayments are deductible from the corporate income tax, that reduces the amount of taxes that are paid in the US, and that shifts profits to Luxembourg.
And the third and maybethe most important aspect is the location of intangibles in tax havens.
And so to take again, the example of Google, Google a few months before being listed as a public company in 2003, moved some of it's intellectual property, it's search and advertisement technology for the non US market, moved it to its Bermuda subsidiary.
So, this intellectual property, on paper belongs to a company in Bermuda.
And so this company in Bermuda then licenses the rights to use this IP to all the Google affiliatesall over the world.
And so, then you have royalty payments from France to Google Bermuda, royalty payments fromGermany to Google Bermuda.
These royalty payments which are payments for theright to use Google's IP, they reduce profits all over the world, the tax base in Germany, in France, and they increase the tax base in Bermuda where the corporate income tax rate is a whole activity models tax rate of 0%.
I think what's striking is themagnitude of this phenomenon.
So everybody agrees thatthere is a profit shifting, there is tax avoidance.
What we found, 40% ofall multinational profits shifted to tax havens, that's a big number.
That's typically a significantly larger than what is found inother studies that use microeconomic data.
So we use macro data, many studies use firm level data to try to estimate how much profits are shifted to tax havens.
The problem with micro data is that there's no micro dataabout those subsidiaries located in low tax countries, okay? And so there's noinformation, for instance, about the affiliatesthat Apple has in Ireland or in Jersey.
There is no data, at leastno publicly available data about that.
And so, that's I thinkone of the key reasons where the micro studies have tended to under estimate the magnitudeof global profit shifting, and why, by contrast, our macro approach gives a more accurate number and one that's again, typically larger than whathad been found before.
To think about who benefits and who loses, you need to define your kind of benchmark.
And so the benchmark wehave in this research is, imagine all countries atthe same corporate tax rate.
Imagine there is this perfect international tax coordination.
So now, compared to that, which are the countries thatlose profits and tax revenue, what we find is that these are primarily Continental European countries for whom the losses are particularly large compared to their tax revenue.
So, for countries like Germany or France, what we find is that these countries lose about 20% of theircorporate income tax revenue because of profit shifting to tax havens.
The US loses about 15% of itscorporate income tax revenue.
Developing countries also losea sizable amount of revenue.
But in collective term that is compared to the amount of tax that's collected today, the Continental European countries appear to be the prime losers.
And who wins where theseare the tax haven countries that attract such alarge amount of profits, and in which sense do they win? They win because these $600 billion that are shifted out of high tax places and that end up in Ireland and Luxembourg, it's a huge amount of money compared to the size of the economy of Ireland or Luxembourg.
And so what happens is that by imposing only very, very low tax rates of 5% or even less than 5% onthis huge base of profits, these tax havens managed tocollect a lot of tax revenue.
So that's something that alsostruck me in this research and that I found particularly interesting, is that it turns outthat tax havens globally collect more corporate income tax revenues as a fraction of their national income than high tax countries.
And they do that despite the fact that theyimpose tiny 10 year rates.
And the reason is, yes, when you attract, let's say like Ireland, $100 billion in profits that have been made abroad, and you impose tax rates of 5% let's say, that's going to generate$5 billion in revenue for a country like Ireland.
I think clearly the ideal solution would be to have much moreinternational coordination when it comes to taxingmultinational companies.
So, multinationalcompanies that make profits at the global level, it would make sense to say we are going to takethese profits globally so to have a global corporate income tax for taxig multinational companies.
Somewhat more realistically, you could do that at the EU level.
So the European Union could say instead of having 27 or28 corporate income taxes for the 27 or 28 EU memberStates as we have today, the EU could say, “Weonly have one EU wide “corporate income tax.
” okay? So, international coordination is the most sensible wayto address that problem.
Now, it's very hard in practice and there has been extremely too low, in fact no progress on that subject.
And so if we can't coordinatefor whatever reason, I think they are still a lot that individual countriescould do unilaterally to protect themselvesagainst profit shifting.
And so let me give youone striking example.
Let's take the case of France.
If Apple makes 10% of theirglobal sales in France, then France could say “We're going to consider that10% of Apple's global profits “have been made in France.
“And that's what we France, we are going to tax.
” Irrespective of whereApple's employees are located or intellectual property, or irrespective of intragroup bowing, all of that would become irrelevant.
And so a reform like that which would economies to calla formulary apportionment because you will portionthe global profits using some formula.
Here, the formula is youwill portion global profits proportionally to where sales are made.
Formulary apportionmentis a very powerful way to curb profit shifting.
In the system that I described where you will portion global profits based on where sales are made, you remove any incentivefor firms to shift profits, it becomes impossible for them.
'Cause in practice what happens is that, France or any country decideswhere the profits are taxable.
Today, we let multinationalcompanies basically decide and if you let them decide they'll decide to puttheir profits in Bermuda.
If you decide for them by saying, “We're going to look atwhere you make your sales.
” Which is not something thatmultinational companies can manipulate, then it becomes possibleto tax multinational firms.
And let me add one final thing, the beauty with thistype of approach is that you don't need anyinternational coordination.
That is, any country unilaterally, could say, “Tomorrow, “that's how we're going totax multinational companies.
“We're going to look athow profitable they are “as an integrated constellatedgroup at the global level.
“We're going to look atwhere they made their sales “and we're going to use that information “to compute how much profitsare taxable in our country.
” If we want to preserve openness, if we want to preservean open globalized world in the 21st century, we need to find a way to make sure that those who benefit most from it are going to pay not less, but more.
Otherwise, it's not going anywhere.