Tax spillover: the way to assess a country’s tax risk

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I gave a talk in  Vienna last night. These were the slides: I hope the logic flows. I will do more posts on tax spillover very soon:

  1. Austria has a problem with tax
  • That Austria has a problem with tax is not a surprise to anyone
  • But in this talk I’ll show that the problem may not be the one that you think it is
  • And that the solution may be much closer to home than you expect
What 15 years of tax justice have taught us
  • It’s more than fifteen years ago that I co-founded the Tax Justice Network
  • Since then the message has been
    • Multinational companies are not paying their taxes
    • Tax havens are a major cause of this problem
    • And so is transfer pricing abuse
    • Whilst the accountants and lawyers who support these places are the creators of much of the problem
    • And that was all true
    • And its what many in tax justice are still saying
But things have moved on
  • We’ve made massive wins
    • Country-by-country reporting - the idea I had in 2003 - is now the law for tax reporting in 70 countries around the world. No one is more surprised than me
    • Automatic information exchange from tax havens is happening and I think it’s having an effect
    • Some advance on beneficial ownership data is being made
  • And we expect to win more
    • Country-by-country is going to be a public accounting standard - it’s just a matter of when
    • The tax havens will be ground down to deliver yet more transparency
  • And one day EU countries might catch up with them
We are winning
  • For example
    • The IMF thinks that corporate tax abuse costs the world $600bn and tax justice academics Alex Cobham and Petr Jasky think it’s $500bn
    • The IMF estimate is that this costs Austria US$0.8bn, 1.19% of GDP
    • The Cobham / Jansky estimate is $0.54bn or 0.13% of Austrian GDP.
  • And I have just estimated the cost of banks shifting profits in the EU - this is unpublished as yet
    • I make the total tax cost to the EU from bank profit shifting just €3.2bn in total a year
    • And for Austria just €46 million
  • I suspect these estimates broadly reconcile
In other words
  • We’re beating corporate tax abuse
  • Country-by-country reporting is working
  • Pressure is yielding results
  • And full public country-by-country reporting should have a massive impact on solving this issue — because no one wants to be the next Google, Amazon or Starbucks
  • Real reform of digital tax would help
  • So too would unitary corporation tax — but I think that will happen
  • We have things to celebrate then, but we have to keep the pressure up to make sure they’re all really delivered
But don’t get carried away
  • This is corporate tax avoidance
  • Individuals do tax avoidance as well
  • And tax evasion is a vastly bigger problem than tax avoidance - and that has always been true
  • What is more the problem is not fundamentally one of tax havens now - important as ending their abuse for good is
  • The real issue in Europe now is domestic tax evasion
  • But don’t forget that the corporate tax abuse of developing countries is continuing too — and the SDGs mean was have to still tackle this as well
  1. To put this in context
  • Earlier this year I presented a report to the S&D Group in the EU Parliament on the cost of tax abuse in Europe.
  • The key findings were:
    • EU wide tax evasion is not less than €825bn a year
    • Tax avoidance is between €50bn and €190bn a year
    • Total losses could exceed €1 trillion a year then
  • Of this sum Austria is likely to be losing at least €13 billion to evasion a year
  • This is much higher than the cost of corporate tax avoidance already noted
  1. How do we know Austria is losing?

  • Austria has a substantial shadow economy
  • The EU estimate it at about €31 billion a year
  • Two peer-reviewed estimates by economists - one for the IMF - strongly supported that estimate - the average of all three was €31bn as well
  • And Austria has an average tax rate across all taxes of 43.2%
  • This suggests tax evasion costs more than €13 billion a year
Austrians are very law-abiding
  • Shadow economy estimates for Austria average 8.25% of GDP
  • Only Luxembourg (7.98%) Sweden (8.07%) and The Netherlands (8.29%) do better in the EU
  • The worst are Romania (29.51%) Greece (26.11%) and Malta (25.42%).
  • The average is 16.53%
  • Germany is 10.10% and Italy 23.28%
Is €13bn worth ignoring?
  • I suggest not
  • You have a problem with tax
  • But not the one you thought you’d got, I suspect
  • So what can be done?
  • The answer is a tax spillover analysis
Tax spillover analysis
  • A new idea
  • A tax spillover analysis measures the impact, whether favourable or unfavourable, one part of a tax system has on another part of the tax system
  • A new methodology to appraise this risk has been developed by Prof Andrew Baker of Sheffield University and myself
  • Search our names and journal name Global Policy to find it
  • What we propose is a qualitative appraisal of eight high risk parts of the tax system
  • The aim is to find the biggest problems that are easiest to put right with the greatest chance of getting more tax
  1. Doing a spillover appraisal
  • The spillover checks risks created by at last four taxes:
    • Income tax
    • Corporation tax
    • Capital gains tax
    • Social security
  • And four areas of tax administration:
    • Tax policy / politics
    • Tax administration
    • Company and trust law administration
    • International tax laws
  • And fills in a grid with marks on a scale of one to 5 — with 5 being the biggest risk
  1. This is the UK domestic spillover risk table:


  1. The UK tax system is in deep trouble
  • From politicians who seek to undermine its effectiveness
  • For a tax administration that hasn’t got the resources to enforce the law
  • And a company and trust administration system that lets tax evaders hide their money from tax authorities — and get away with it
  • That’s why the right hand side of the table is so red and the left hand side not so much so
  • It’s really not good
  • So we lose vastly more tax than you do
  1. But internationally, we’re not so bad

  1. The UK’s a threat to the world
  • The chart is very red — still — especially because we form companies for less than €20 euros with no anti-money laundering questions asked
  • But the point is — what this chart shows is we could massively improve our tax spillover situation by taking some simple actions
  • And I strongly suspect it’s the same in Austria
  1. You can solve your tax problems
  • But you’ll need to do a tax spillover analysis to get best value for money from doing so