Tag Archives: Tax avoidance

Tax Federalism

In the NZZ, Marius Brülhart and Kurt Schmidheiny discuss the Swiss experience with a federalist tax system. Cantonal and municipal taxes average roughly 40 percent of the total tax take in Switzerland, see the first figure.

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The decentralized tax system, tax competition between cantons and communities as well as mobility of high income tax payers imply that the effective average income tax rate substantially falls short of the unweighted average tax rate on high incomes. In fact, the effective average tax rate is degressive for high incomes, see the second figure (which the authors reproduce from an article by Roller and Schmidheiny (2015)).

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Corporate Taxes: Difficult International Coordination

The Economist discusses proposals for improved consistency of international company taxation with the aim to counter firms’ “profit shifting.” Harmonization does not seem to constitute a Nash equilibrium. Tax rates on “patent boxes” typically are much lower than the headline rates.

Swiss Withholding Tax Refunds Subject to Restrictions

Katharina Fontana reports in the NZZ about a decision by Switzerland’s highest court concerning the refund of withholding tax on dividends to foreign investors. According to the ruling such refunds may be denied if the investors are found to have engaged in financial engineering with the purpose to help clients circumvent the Swiss withholding tax.

Corporate Taxation, Profit Shifting and Cross-Border Tax Avoidance and Evasion

Matthew Klein discusses corporate and personal income tax evasion and avoidance in the FT (part 1, part 2), with reference to a JEP article by Gabriel Zucman. Klein makes several points:

  • Profit taxes were introduced as complements to income taxes, in order to make it more difficult to evade taxes by routing profits through fabricated corporate structures rather than distributing them. To avoid double taxation, capital gains and dividends typically are taxed at lower rates than labor income.
  • Whether corporate taxation should be coordinated internationally is not a new question. The League of Nations already debated it. The issue regained importance as international trade and cross-border profit flows rose.
  • Today, a third of US corporate profits are generated outside of the US. Of those, more than half are generated in Ireland, Luxembourg, the Netherlands, Singapore, Switzerland and the Carribean. Both shares have increased over recent decades (see the figure below which is taken from Zucman’s article). This might have contributed towards lowering the effective corporate tax rate of US corporations in the US.
    Zucman-tax-haven-share-of-foreign-profits-590x437
  • If the objective is to (i) avoid double taxation and (ii) render cross-border profit shifting irrelevant, an easy way forward could be to credit a corporation’s taxes paid worldwide against the personal income taxes owed by the corporations shareholders. This would imply that higher corporate taxes abroad could lead to lower domestic income tax revenue, a difficult political sell. It would also imply that unrealised capital gains may go untaxed.
  • Based on discrepancies between national balance of payments statistics, Zucman estimates that 8% of global household financial wealth is not reported to tax authorities (see the table below which is taken from Zucman’s article).
    Zucman-offshore-wealth-propensity-590x432
  • He proposes to impose high tariffs on exports originating from “tax havens” to force these countries to exchange information about bank accounts and, in the medium term, to create an “international financial registry.”

Luxembourg’s Tax Agreements with International Companies

The International Consortium of Investigative Journalists reports about the tax agreements between Luxembourg and major international companies that helped these companies avoid taxes. The Consortium’s key findings:

Pepsi, IKEA, AIG, Coach, Deutsche Bank, Abbott Laboratories and nearly 340 other companies have secured secret deals from Luxembourg that allowed many of them to slash their global tax bills.

PricewaterhouseCoopers has helped multinational companies obtain at least 548 tax rulings in Luxembourg from 2002 to 2010. These legal secret deals feature complex financial structures designed to create drastic tax reductions. The rulings provide written assurance that companies’ tax-saving plans will be viewed favorably by Luxembourg authorities.

Companies have channeled hundreds of billions of dollars through Luxembourg and saved billions of dollars in taxes. Some firms have enjoyed effective tax rates of less than 1 percent on the profits they’ve shuffled into Luxembourg.

Many of the tax deals exploited international tax mismatches that allowed companies to avoid taxes both in Luxembourg and elsewhere through the use of so-called hybrid loans.

In many cases Luxembourg subsidiaries handling hundreds of millions of dollars in business maintain little presence and conduct little economic activity in Luxembourg. One popular address – 5, rue Guillaume Kroll – is home to more than 1,600 companies.

Hybrid loans combine the advantages of interest bearing debt and dividend paying stock. Profits are treated as interest payments (deductible for tax purposes) in Luxembourg and as profits (eligible for tax exemption) in the parent company’s country.