By Ashok V Desai
When Captain Juan de Bermùdez left a dozen pigs on Bermuda in 1615, just in case his countrymen got stranded there without food, he could hardly have imagined that it would become the Mecca of tax haters. When tax haters flocked to Appleby, a Bermuda-founded legal services provider, they could hardly have known that Frederik Obermaier and his team in the German daily, Süddeutsche Zeitung (SDZ), would go after them with messianic zeal.
Why did they do so? It has much to do with Germany’s moment in history and geography. It has created a prosperous economy, and used high taxes on its magnates to finance one of the world’s most comprehensive income redistribution systems — better than Russian or Chinese communists ever managed to.
It lives in a world where many countries do not have tycoons, or do not believe in taxing them. Those are perfect conditions for the flight of the rich to tax havens, and perfect grounds for indignation among those who think that it is the duty of the rich to make the poor rich.
Among them are Obermaier and his team. Their revelations have caused so many little earthquakes. They are enjoying the ride as if they were sliding down Kilimanjaro — not the peak but the Schlitterbahn water slide at the Águas Quentes Country Club in Rodovia, Brazil.
The SDZ divulgers have been flooded with messages from supporters across the world. Most of them are full of outrage, which is easy, costless and boring. But I did learn some interesting things: for instance, the response of Gabriel Zucman, the Berkeley professor who wrote The Hidden Wealth of Nations.
According to Zucman, MNCs made less than a 20th of their profits abroad in 1975-79; 95% were made in the corporations’ home country. This proportion fell to 83% in 2010-15; profits made abroad rose from 5% to 17%. European MNCs moved 45% of their profits abroad — almost a half to tax havens within Europe such as Ireland, the Netherlands and Luxembourg, and the rest farther away to Hong Kong, Singapore, Puerto Rico, Switzerland and the Caribbean.
The share of US corporate profits made abroad rose from less than a quarter in 1980 to over a half in 2015.
Their favourite tax havens were the Netherlands, the Caribbean, Luxembourg, Ireland and Singapore. The nominal US corporation tax rate fell from over 50% in the 1950s to 35% now. But the effective rate paid by MNCs (to any government) fell from 45% to 20%.
Everyone is shocked by Donald Trump’s declared intention to reduce the rate to 15%. But it does not seem so crazy if his government is collecting only 20%. The Barack Obama regime decided in 2015 to impose a one-time 14% tax on US companies’ profits abroad, irrespective of what tax they had paid abroad. But then it got cold feet and failed to implement the proposal.
So what can one do? The perfect solution would be to equalise corporate tax rates everywhere. But that would be extremely uncomfortable not only for the tax havens, but the businesses from industrial countries — especially the US and Britain —that either use tax havens or have subsidiaries there.
The other solution, which Zucman favours, is that MNCs’ profits should be apportioned between countries in proportion to their sales in those countries. In effect, to assume that their profit margin is the same in all countries.
To do this, all countries would have to agree. There is no reason why tax havens should. And as long as they are sovereign countries, no one can compel them to agree.
Actually, it would be enough if the big industrial countries agreed. But that, too, is politically impractical. Even the US and the EU find it difficult to agree. With the arrival of China among global powers, there is no chance any more. Every country is on its own.
Our government is already very active on this front. It appointed the Pasayat Commission, which claimed to have uncovered Rs 70,000 crore of black money. Unappeased by this achievement, GoI went on to demonetise large notes, and froze the accounts of 200,000 companies it called shell.
If there was any doubt about its effectiveness, the construction industry has removed them by its extreme slump. It is to be hoped that its woes will convince GoI of its success, scintillate it in a glow of self-satisfaction, and dissuade it from more disruptive measures.
Such a hope may well be misplaced, for a government brimming with a missionary spirit and devoid of analytical skills may think of even less considered punishments. But it is better to hope than to despair, for in bleak times, nothing else can bring cheer.
And if nothing at home raises our spirits, we can look at the blight that Obermaier and his colleagues have spread in other countries. We have been lucky.
The writer is former chief economist, ministry of finance, GoI
DISCLAIMER : Views expressed above are the author's own.
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