Globalization, Taxes& Inequality

Gabriel Zucman (UC Berkeley)

CopenhagenJune 13th, 2019

Introduction

Globalization has created new ways to avoid taxes:

. Multinational firms shift profits to low-tax places

. Countries compete by cutting their tax rates

. Wealthy households can move assets to tax havens

How does this tax avoidance redistribute income betweennations and between social groups?

→ Key question to think about about the economic andpolitical sustainability of globalization

This talk is based on 4 papers

. “The Missing Profits of Nations” (w. Tørsløv, Wier)

. “The Exorbitant Tax Privilege” (w. Wright)

. “Tax Evasion & Inequality” (w. Alstadsæter,Johannesen)

. “Global Wealth Inequality”

Two goals of this research agenda:

. Positive macro-distributional analysis ofglobalization (data: http://gabriel-zucman.eu)

. Design policies to make globalization more sustainable

The Missing Profits of Nations

How much profits move across countries because ofdifferences in corporate tax rates?

. Firms move capital to low-tax countries

. Firms shift paper profits to tax havens

If there was a perfect international tax coordination:

. Which countries would gain/lose profits?

. How? Relocation of capital, or reduced profit shifting?

How we estimate the amount of profitsshifted to tax havens

We compute capital shares α in foreign vs. localfirms across the world. Striking global pattern:

. Foreign firms have lower α than local firms...

. ... Except in tax havens: hugely higher α

Benchmark estimate: set profitability of foreign firms inhavens equal to profitability of local firms in havens

. Transparent

. Robust

In non-havens, foreign firms are lessprofitable than local firms

0%

10%

20%

30%

40%

50%

60%

German

y Ita

ly

United

King

dom

Spain

Japan

Austra

lia

United

State

s

France

Pre-tax corporate profits (% of compensation of employees)

Foreign firms Local firms

Average: 36%

In tax havens, foreign firms are muchmore profitable than local firms

1675%

0%

200%

400%

600%

800%

Puerto

Rico

Irelan

d

Luxem

bourg

Switz

erlan

d

Singa

pore

Hong K

ong

Netherl

ands

Belgium

United

State

s

Austra

lia

United

King

dom

Spain

Japan

France

German

y Ita

ly

Pre-tax corporate profits (% of compensation of employees)

Foreign firms

Local firms

Main results

40% of multinat’l profits (≈ $600bn) shifted to havens

. Main winners: Ireland, Luxembourg, Singapore, etc.(impose low rates but on big $600bn base)

. Main losers: non-haven EU countries

. Profit shifting swamps tax-driven tangible capitalmobility (different welfare implications)

. Rise of capital share is higher than in official data →provide corrected estimates of α, GDP, trade

Why should we care?

Whatever one’s view about efficiency costs of capitaltaxation, global profit shifting raises policy issues:

. Distorted competition

. Inequality

. Loss of tax revenue

To study who loses profits, follow themoney in balances of payments of havens

-80% -60% -40% -20% 0% 20% 40% 60% 80% 100%

Luxembourg

Ireland

Puerto Rico

Singapore

Netherlands

Germany

Belgium

Italy

Spain

Japan

France

Canada

Australia

United States

Current account balance (% of national income)

Net trade surplus

Net intra-group interest received

Net intra-group profits received

Who loses most? The EU.

0%

5%

10%

15%

20%

25%

30%

35%

40%

EU US Developing countries Rest of OECD

% o

f to

tal p

rofit

s sh

ifted

to ta

x ha

vens

Where do the shifted profits come from?

Who loses most? The EU.Who shifts most? The US.

0%

10%

20%

30%

40%

50%

EU US Developing countries Rest of OECD

% o

f to

tal p

rofit

s sh

ifted

to ta

x ha

vens

Allocating the profits shifted to tax havens

Where the shifted profits come from

To whom the shifted profits accrue

Who loses most? The EU.Who shifts most? The US.

Profit Shifting by

U.S. Multinationals

The Exorbitant Tax Privilege

Study profits, wage, capital, rates of returns, and taxes ofUS multinationals back to 1966

Key source: BEA survey of activities of US multinat’l

. Annual since 1982, every 5 years back to 1966

Supplement with IRS tabulations (form 5471)

. Main advantage: annual back to early 1960s

→ First long-run series on effective tax rate paid byUS firms on their foreign operations

Where do US multinationals operate?

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

% o

f tot

al (h

aven

+ n

on-h

aven

affi

liate

s)

Affiliates in non-havens

Affiliates in havens

Wages

Wages

Wages

Wages

Where do US multinationals operate?

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

% o

f tot

al (h

aven

+ n

on-h

aven

affi

liate

s)

Affiliates in non-havens

Affiliates in tax havens

Wages

Tangible capital

Wages

Tangible capital

Where do US multinationals book theirprofits?

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

% o

f tot

al (h

aven

+ n

on-h

aven

affi

liate

s)

Affiliates in non-havens

Affiliates in tax havens

Pre-tax profits

Wages

Tangible capital

Pre-tax profits

Wages

Tangible capital

Where do US multinationals produceintangibles?

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

% o

f tot

al (h

aven

+ n

on-h

aven

affi

liate

s)

Affiliates in non-havens

Affiliates in tax havens

Pre-tax profits

Wages

Tangible capital

Pre-tax profits

Wages

Tangible capital

Employees engaged in R&D

Employees engaged in R&D

In 2016: 50% of profits in havens (taxedat 7%), 50% elsewhere (taxed at 27%)

0%

100%

200%

300%

400%

500%

600%

700%

800%

900%

0% 10% 20% 30% 40% 50% 60% 70%

Pre

-tax

prof

its /

wag

e pa

id

Taxes paid / pre-tax profits

Where do US multinationals book their profits? (majority-owned affiliates of US multinationals, 2016)

Ireland

Bermuda & Caribbean

France

Brazil

China

Singapore

Netherl.

Switzerland

Bel. Germany India

Japan

UK

Mex. Ita.

Half of all the foreign profits of US multinationals were booked in these tax havens in 2016

Why do US multinationals shift so muchprofits to tax havens?

Perceived national interest of the US: good to let USmultinationals shift out of foreign high-tax countries

. Until 2017, US taxed worldwide profits, with creditsgiven for foreign taxes paid

. If foreign profits booked in 0 tax places: no creditsgiven → more tax revenue in US upon repatriation

. 1996: US Treasury facilitates shifting to tax havens(check-the-box regulations) 6= other countries

Did profit shifting enhance US taxcollection?

It did not:

. Haven profits perpetually retained → avoided U.S. tax

. Rising untaxed profits → rising lobbying for amnesty

. 2017 law: mandatory one-time tax at low rate (<8%)of past untaxed profits

→ Very low effective tax rate on foreign operationsof US multinationals

Total tax rate on foreign profits, includingeffect of 2017 mandatory repatriation

0%

10%

20%

30%

40%

50%

60%

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Tax rate paid by U.S. multinationals on foreign profits (All sectors excluding oil)

Rate including U.S. amnesty

Statutory U.S. rate

Rate paid to foreign countries

The redistributive effects of profit shifting

1) Redistribution across income groups:

. Rise of global after-tax profits ↗ income forshareholders

. Ongoing work (with C. Gaubert & W. Sandholtz) toestimate how much various income/wealth groupsgain/lose in each country

2) International redistribution of tax revenues:

. For small countries, revenue-max. rate 0 < τ ∗ <5%:havens with τ ≈ τ ∗ generate very large tax revenue

. Can explain the rise of the supply of tax avoidanceschemes (e.g., tax rulings: Apple – Ireland)

Many havens collect a lot of taxrevenue...

0%

1%

2%

3%

4%

5%

6%

7%

8%

Malt

a

Luxem

bourg

Hong K

ong

Cypru

s

Japan

Austra

lia

Irelan

d

Switz

erlan

d

Canad

a

Belgium

Korea

Singa

pore

Mex

ico

United

King

dom

Netherl

ands

France

Puerto

Rico

Spain

German

y

United

State

s Ita

ly

Polan

d

Corporate income tax revenue (% of national income)

Average among non-havens: 3.5%

... By applying low rates to the huge taxbase they attract

0%

20%

40%

60%

80%

100%

Malt

a

Puerto

Rico

Irelan

d

Luxem

bourg

Cypru

s

Hong K

ong

Singa

pore

Netherl

ands

Switz

erlan

d

Corporate tax revenue collected & tax rate on shifted profits

Revenue collected on shifted profits, % of total revenue

Tax rate on shifted profits

As profit shifting rose...

0%

50%

100%

150%

200%

250%

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Pre-tax corporate profits (% of compensation of employees)

Ireland

United States

...Tax revenue rose in many havens, whilethey ↓ or stagnated in high-tax countries

0%

1%

2%

3%

4%

5%

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Corporate income tax revenue (% net national income)

Ireland

United States

The lower the rate, the higher the revenue

0

10

20

30

40

50

0%

1%

2%

3%

4%

5%

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Corporate income tax revenue vs. tax rate in Ireland

Tax revenue (left) (% of national income) Nominal tax rate (right)

Tax Evasion in a Globalized World:Evidence from Leaks

Tax Evasion and Inequality

Anecdotal evidence that wealthy conceal assets abroad(UBS, Credit Suisse, Panama Papers, ...)

. How important is this form of tax evasion?

. How concentrated is it?

. How does it change what we know about inequality?

We analyze new data capturing evasionby the wealthy

Massive leaks from HSBC Switzerland andMossack Fonseca (“Panama Papers”)

. Leaks random & from big offshore wealth managers

. Match to tax records in Norway, Sweden, Denmark(ongoing work in US with D. Reck et al.)

. Combine with macro stats on wealth hidden in havens

Two key findings:

. Offshore evasion very concentrated

. At the top, way larger than evasion detected inrandom audits

The HSBC leak

Key strengths:

. Large bank (among top 10 Swiss banks)

. Representative

. Recorded identity of beneficial owners

. Clear-cut way to identify evasion

The proba to have an unreported HSBCaccount rises sharply within the top 1%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

P90-P95 [0.6 – 0.9]

P95-P99 [0.9 – 2.0]

P99-P99.5 [2.0 – 3.0]

P99.5-P99.9 [3.0 – 9.1]

P99.9-P99.95 [9.1 – 14.6]

P99.95-P99.99 [14.6 – 44.5]

Top 0.01% [> 44.5]

Net wealth group [millions of US$]

Probability to own an unreported HSBC account, by wealth group (HSBC leak)

HSBC evaders hide close to half of theirwealth at HSBC

0%

10%

20%

30%

40%

50%

P90-P95 [0.6 – 0.9]

P95-P99 [0.9 – 2.0]

P99-P99.5 [2.0 – 3.0]

P99.5-P99.9 [3.0 – 9.1]

P99.9-P99.95 [9.1 – 14.6]

P99.95-P99.99 [14.6 – 44.5]

Top 0.01% [> 44.5]

Net wealth group [millions of US$]

Average wealth hidden at HSBC, by wealth group (%oftotalwealth(includingheldatHSBC))

Other samples

Panama Papers:

. Another large intermediary

. But not possible (yet) to identify evasion v avoidance

Amnesty participants:

. Big samples (1,422 hholds Norway; 6,811 Sweden)

. Tax evasion by definition involved

. But self-selection

The Panama Papers confirm that the useof tax havens rises sharply with wealth

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

P90-P95 [0.6 – 0.8]

P95-P99 [0.8 – 1.8]

P99-P99.5 [1.8 – 2.7]

P99.5-P99.9 [2.7 – 8.1]

P99.9-P99.95 [8.1 – 13.3]

P99.95-P99.99 [13.3 – 41.4]

Top 0.01% [> 41.4]

Net wealth group [millions of US$]

Probability to appear in the "Panama Papers", by wealth group (Shareholders of shell companies created by Mossack Fonseca)

Amnesty data show widespread evasion atthe top

0%

2%

4%

6%

8%

10%

12%

14%

P90-P95 [0.6 – 0.8]

P95-P99 [0.8 – 1.8]

P99-P99.5 [1.8 – 2.7]

P99.5-P99.9 [2.7 – 8.1]

P99.9-P99.95 [8.1 – 13.3]

P99.95-P99.99 [13.3 – 41.4]

Top 0.01% [> 41.4]

Net wealth group [millions of US$]

Probability to voluntarily disclose hidden wealth, by wealth group (Swedish and Norwegian tax amnesties)

Hidden wealth is extremely concentrated

0%

10%

20%

30%

40%

50%

60%

P0-50 P50-P90 P90-P99 P99-P99.9 P99.9-99.99 P.99.99-P100

% o

f tot

al re

cord

ed o

r hid

den

wea

lth

Position in the wealth distribution

Distribution of wealth: recorded vs. hidden

Hidden wealth disclosed in amnesty

Hidden wealth held at HSBC

All recorded wealth

Estimating tax evasion through offshoreintermediaries

Five steps:

. Macro stock of offshore wealth

. What fraction hidden v declared

. Distribute like in HSBC and amnesties

. Apply rate of return

. Use tax simulator to estimate evaded tax

Offshore tax evasion vs. tax evasiondetected in random audits

0%

5%

10%

15%

20%

25%

30% P

0-10

P10

-20

P20

-30

P30

-40

P40

-50

P50

-60

P60

-70

P70

-80

P80

-90

P90

-95

P95

-99

P99

-99.

5

P99

.5-9

9.9

P99

.9-P

99.9

5

P99

.95-

P99

.99

P99

.99-

P10

0

% o

f tax

es o

wed

that

are

not

pai

d

Position in the wealth distribution

Taxes evaded, % of taxes owed

Offshore evasion (leaks)

Tax evasion other than offshore (random audits)

Factoring in offshore wealth is importantto measure inequality at the top

0%

2%

4%

6%

8%

10%

12%

Spain UK Scandinavia France USA Russia

% o

f tot

al h

ouse

hold

wea

lth

The top 0.01% wealth share and its composition

Offshore wealth

All wealth excluding offshore

Conclusion

The redistributive effects of globalization

Much attention has been paid to redistributive effects ofinternational trade:

. Large academic literature

. Major effort to coordinate trade policies post-WW2

Less attention has been paid to challenges raisedby tax competition, profit shifting, financial opacity:

. Major redistribution of revenue both across countriesand social groups

. Need to design policies to address these challenges

Supplementary slides

Only 17% of multinationals’ profits arevisible in financial accounts micro-data

Note: This graph shows the imperfect coverage in Orbis. For each multinational firm we take the sum of profits made by all subsidiaries registered in Orbis and divide by the global profits of the same multinal firm. Whenever the share is lower than 1 this means that we only see part of the global profits in Orbis. .

Weighted average = 0.172

0.1

.2.3

0 .2 .4 .6 .8 1Share of profits found in 2012

Fraction of firms

Weighted average: 0.17

Share of global profits found in 2012

The missing profits in Orbis

0% 20% 40% 60% 80% 100%

30%

20%

10%

0%

Weighted average: 17%

A new global database on profits (2015)

Billions of current US$

% of net corporate

profitsGlobal gross output (GDP) 75,038

Depreciation 11,940

Net output 63,098

Net corporate output 34,083 296%

Net corporate profits 11,515 100%

Net profits of foreign-controlled corp. 1,703 15%

Of which: shifted to tax havens 616 5%

Net profits of local corporations 9,812 85%

Corporate income taxes paid 2,154 19%

Imputation of profits in foreign firmswhen no FATS exist

Compute profits in foreign firms using direct investmentincome flows

. 10% vs. 50% ownership threshold; pre-tax vs.post-tax → impute taxes

. Assume profits / wage same as for US affiliates

Imputation when no direct investment income data exist:

. Estimate direct investment income paid such thatworld DI income balances to 0

. Two reasons why global DI income > 0: missing USprofits in Ireland etc.; missing BoP → we impute both

back

Shifted profits: robustness

πl in havens inflated by inward shifting?

. Robustness test: vary πl → little difference

Foreign firms different than local firms?

. Sectoral composition → find πf >> πl within sector

. Capital intensity → decompose πf into shifting effectsvs. movements of capital

Estimated profits shifted in each haven

Reported pre-tax profits

Of which: Local firms

Of which: Foreign firms

Shifted profits

Belgium 80 48 32 -13Ireland 174 58 116 -106Luxembourg 91 40 51 -47Malta 14 1 13 -12Netherlands 195 106 89 -57Caribbean 102 4 98 -97Bermuda 25 1 25 -24Singapore 120 30 90 -70Puerto Rico 53 10 43 -42Hong Kong 95 45 50 -39Switzerland 95 35 60 -58Other -51

Tax haven firms are abnormally profitablewithin each sector

0%

100%

200%

300%

400%

500%

600%

700%

800%

Chemical Computers Wholesale trade

Information Finance Professional services

Other

Pre-tax corporate profits (% of compensation of employees) (Foreign affiliates of US multinationals, 2015)

Tax havens

Non havens

The huge profits of foreign firms maketax havens abnormally profitable overall

0%

50%

100%

150%

200%

250%

300%

Luxem

bourg

Irelan

d

Puerto

Rico

Singa

pore

Hong K

ong

Netherl

ands

Belgium

German

y Ita

ly

United

King

dom

Japan

Spain

Austra

lia

United

State

s

Switz

erlan

d

Canad

a

France

Pre-tax corporate profits (% of compensation of employees )

Average among non-havens: 36%

Anomalies in the world balance ofpayments

-400

-200

0

200

400

600

800

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Bill

ions

of

curr

ent U

.S. d

olla

rs

The world current account discrepancies

Direct investment income balance (missing income of US affiliates; Caribbean)

Portfolio & other income balance (offshore household wealth)

Trade balance (missing service imports from tax havens; missing goods imports in China)

The unrecorded profits of U.S. affiliates intax havens

0%

50%

100%

150%

200%

250%

300%

Luxem

bourg

Irelan

d

Puerto

Rico

Singa

pore

Hong K

ong

Netherl

ands

Belgium

German

y Ita

ly

United

King

dom

Japan

Spain

Austra

lia

United

State

s

Switz

erlan

d

Canad

a

France

Pre-tax corporate profits (% of compensation of employees )

Missing profits of other multinationals

Missing profits of U.S. multinationals

As reported in the national accounts

Average among non-havens: 36%

Tax haven affiliates of U.S. multinationalsare abnormally profitable

0%

100%

200%

300%

400%

500%

600%

700%

800%

Irelan

d

Bermud

a & C

ar.

Luxem

bourg

Switz

erlan

d

Singa

pore

Netherl

ands

China

Japan

Mex

ico

Belgium

Canad

a In

dia

United

King

dom

Italy

German

y

France

Brazil

Pre-tax profits of affiliates of U.S. multinationals in 2015 (% of compensation of employees)

Average among non-haven affiliates: 49%

Tax haven affiliates of US multinationalsare abnormally profitable

0%

50%

100%

150%

200%

250%

300%

350%

1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016

Pre-tax profits of affiliates of U.S. multinationals (% of compensation of employees)

Tax haven affiliates

Non-haven affiliates

Decomposing the abnormally highprofitability of U.S. affiliates

0%

100%

200%

300%

400%

500%

1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016

The profitability π of the affiliates of US multinationals (ratio of Haven affiliates / Non-haven affiliates)

Physical capital / wage (K/wL)

Operating surplus / physical capital (r)

Net interest received (1-p)

π = (K/wL).r.(1-p)

Corporate tax revenue losses

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

EU US Developing countries Rest of OECD

Tax revenue lost due to profit shifting (% of corporate tax revenue collected)

Global average: 10%

Service imports from tax havens areunder-estimated by importers (B2C sales)

-

10

20

30

40

50

60

70

Luxembourg Ireland Belgium Netherlands Malta Cyprus

€ Bn. The missing service exports of the six EU tax havens

Exports to EU22 recorded by exporter

Imports recorded by EU22

At least 30% of the services exported byEU havens go unreported by the importer

-10%

0%

10%

20%

30%

40%

50%

60%

EU22 EU6 Luxembourg Ireland Belgium Netherlands Malta Cyprus

Missing service exports, % of total service exports

Note: Service exports include exports to all EU22 countries (EU26 minus Luxembourg, Ireland, Belgium, Netherlands, Malta, Cyprus).

Explaining the rise of

profit shifting

Beggar-thy-neighbor pays off

Incentives of havens can explain the rise of shifting:

. With source taxation & no coordinato or sanction,havens can earn revenue by attracting paper profits

. For small countries, revenue-max. rate 0 < τ ∗ <5%:havens with τ ≈ τ ∗ generate very large tax revenue

. Can explain the rise of the supply of tax avoidanceschemes (e.g., tax rulings: Apple – Ireland)

Explaining the persistence of

profit shifting

The policy failure of high-tax countries

Why haven’t high-tax countries protected their base?

Our explanation: failure of tax enforcement

. In current international tax system, tax authoritieshave perverse incentives

. Higher expected gain of relocating base booked inother high-tax countries than base shifted to havens

. Rational outcome: chase profits booked in otherhigh-tax countries, not those shifted to havens

The incentive problem of tax authorities

e1 re-located to Denmark is worth the same to Denmarkwhether it comes from Germany or Bermuda

But much easier to relocate e1 booked in Germany:

. Feasible: information exists (Orbis)

. More likely to succeed: no push-back from firms

. Quick: cooperation via dispute settlement agreements

Crowds out enforcement on havens: hard (no data), costly(legal defense by firms), lengthy (lack of cooperation)

Most transfer price enforcement is againstother high-tax countries

0%

10%

20%

30%

40%

50%

60%

70%

Non tax havens Tax havens Counterpart unknown

Pct. of total

Distribution of Danish transfer price corrections (value)

Non-EU

EU

Note: The graph plots the distribution of the value of transfer price corrections by counterpart. Transfer price corrections are cases in which the Danish tax authority have corrected an intra-group cross-border transfer price and as a result raised the taxable profits of firms operating in Denmark. The counterpart is the country that the Danish tax authority argue have received excessive taxable profits. The graph shows that 65% of the value of transfer pricing corrections concerns a high tax country (Non tax haven).

Most transfer price enforcement is againstother high-tax countries

0

2

4

6

8

10

12

14

Uni

ted

Stat

es

Ger

man

y

Switz

erla

nd

Net

herla

nds

Japa

n

UK

Fran

ce

Kor

ea

Aus

tral

ia

Aus

tria

Nor

way

Chi

na

Cay

man

I.

Sing

apor

e

Den

mar

k

Can

ada

Cze

ch

Taiw

an

Finl

and

Pola

nd

BV

I

Hon

g K

ong

Pana

ma

Swed

en

Bar

bado

s

# of times country is among top 3 targets

Countries most often targeted in transfer price disputes

Can more cooperation and betterinformation solve the problem?

Facilitating dispute settlement can backfire:

. Ongoing initiative to ↑ cooperation within OECD

. Problem: crowds out enforcement on non-OECDhavens, where bulk of shifting takes place

Better information can help, but not enough:

. Even with perfect info, firms will always fight more toprotect profits they book in low-tax places

. Internalizing this, tax authorities will keep going afterhigh-tax places

Even when tax havens cooperate,tax authorities do not target them

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

EU high tax country EU tax haven

% of total Counterpart in Mutual Agreement Procedures in the EU

As settlement is facilitated, high-tax tohigh-tax disputes are growing

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Number of cases Number of mutual agreement procedures in the OECD

Inventory of mutual agreement procedures

New mutual agreement procedures

Multinationals outspend tax authorities

2.4

231.9

0

50

100

150

200

250

Government Private

1000' employees Governments vs. corporate transfer pricing specialists

Source is LinkedIn, but the government count is corroborated by the EY Transfer Pricing Tax Authority Survey (2014). The wage bill is estimated by applying the average salary of an EY Transfer Pricing Specialist (Source: Glassdoor).

Wage bill ≈ €15 Billion

Implications of profit shifting for the US“exorbitant privilege”

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

The net foreign assets and income of the United States (% of U.S. national income)

Net assets (left)

Net income (right)

Explaining the income puzzle

Striking direct investment yield differential:

. 1966–2016 after-tax yield on US direct equityinvestment abroad: 9.1%

. Foreign direct equity investment in US: 4.6%

Why are U.S. multinationals so profitable?

. Standard explanato: bc they are older, take more risks

. Our explanation: because pay little foreign taxes

. Can explain about half of the U.S. yield differential

Taxes levied by oil producers vary a lotover time and fell after the first Gulf War

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Foreign tax rate of US multinationals on foreign profits (Oil sector)

First gulf war

70%

45%

As foreign tax rates fell, after-taxprofitability in the oil sector surged

0%

200%

400%

600%

800%

1000%

1200%

1400%

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Profits of foreign affiliates of US oil multinationals (% of compensation of employees paid)

Post-tax

Pre-tax

Taxes

Explaining the yield differential on USdirect investment

. Tax avoidance by US multinationals: 30%

. Key role of 1996 check-the-box regulations

. Low taxes levied by oil-producing states: 20%

. Return on military protection granted by US tooil-producing states?

. Tax competition among oil producing countries?

→ Key role of policies and geopolitics in explaining“exorbitant privilege” of the US

Main result: tax evasion is small overallbut high at the top

0%

10%

20%

30%

P0-

10

P10

-20

P20

-30

P30

-40

P40

-50

P50

-60

P60

-70

P70

-80

P80

-90

P90

-95

P95

-99

P99

-99.

5

P99

.5-9

9.9

P99

.9-P

99.9

5

P99

.95-

P99

.99

P99

.99-

P10

0

% o

f tax

es o

wed

Position in the wealth distribution

Taxes evaded, % of taxes owed (stratified random audits + leaks)

Average: 2.8%

HSBC vs. other Swiss banks

UAEArgentBelgiu

Brazil

Canada

German

EgyptSpain

UK

GreeceIndia

Israel

Italy

MexicoRussia

Saudi

Turkey

USA

Venezu

DenmarNorway

Sweden

0.0

2.0

4.0

6.0

8.1

Shar

e of

HSB

C w

ealth

0 .02 .04 .06 .08 .1Share of wealth in all Swiss banks

Data source: ICIJ and SNB.Note: In the full sample excluding tax havens (134 countries), a regression of the share of HSBCwealth on the share of Swiss deposits has slope b= 0.90 (se = 0.04) and R-square of 0.75.

HSBC wealth vs. wealth in all Swiss banks

Tax evasion detected in random audits

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0% P

0-10

P10

-20

P20

-30

P30

-40

P40

-50

P50

-60

P60

-70

P70

-80

P80

-90

P90

-95

P95

-99

P99

-99.

5

P99

.5-1

00

% o

f tax

es o

wed

that

are

not

pai

d

Position in the wealth distribution

Taxes evaded, % of taxes owed (stratified random audits)

Macro average: 2.3%

Random audits detect a lot of errors ontax returns

0%

10%

20%

30%

40%

P0-

10

P10

-20

P20

-30

P30

-40

P40

-50

P50

-60

P60

-70

P70

-80

P80

-90

P90

-95

P95

-99

P99

-99.

5

P99

.5-1

00

Position in the wealth distribution

Fraction of households evading taxes, by wealth group (stratified random audits)

But random audits fail to capturesophisticated evasion at the top

0%

5%

10%

15%

20%

25%

30% P

0-10

P10

-20

P20

-30

P30

-40

P40

-50

P50

-60

P60

-70

P70

-80

P80

-90

P90

-95

P95

-99

P99

-99.

5

P99

.5-1

00

% o

f tot

al in

com

e (r

epor

ted

+ ev

aded

)

Position in the wealth distribution

Fraction of income undeclared, conditional on evading (stratified random audits)

Accounting for hidden wealth increasestop wealth shares substantially

0%

2%

4%

6%

8%

10%

12%

14%

1930 1940 1950 1960 1970 1980 1990 2000 2010

Top 0.1% wealth share in Norway

Excluding hidden wealth

Including hidden wealth

Tax evasion on hidden wealth: bounds

0%

10%

20%

30%

40%

50%

P90

-95

P95

-99

P99

-99.

5

P99

.5-9

9.9

P99

.9-P

99.9

5

P99

.95-

P99

.99

P99

.99-

P10

0

% o

f tot

al ta

xes

owed

that

are

not

pai

d

Position in the wealth distribution

Offshore tax evasion, by wealth group

Lower-bound scenario

High scenario

On aggregate, Scandinavian countriesown relatively little offshore wealth

0%

10%

20%

30%

40%

50%

60%

70%

Kor

ea

Pol

and

Chi

na

Den

mar

k Fi

nlan

d Ja

pan

Indi

a N

orw

ay

Indo

nesi

a C

anad

a Ira

n S

wed

en

Net

herla

nds

Bra

zil

Aus

tralia

M

exic

o U

SA

Aus

tria

Thai

land

C

olom

bia

Irela

nd

Spa

in

Sou

th A

frica

Ita

ly

Fran

ce

Ger

man

y U

K

Bel

gium

Tu

rkey

P

ortu

gal

Taiw

an

Gre

ece

Arg

entin

a R

ussi

a S

audi

Ara

bia

Vene

zuel

a U

AE

Offshore wealth / GDP (All countries with GDP > $200 billion in 2007)

World average: 9.8%