Highways, schools and law enforcement. Firefighters, courts and national security. These are just some of the many, essential public services that are funded by our tax dollars, and it is because we cherish these services that we head to the post office every April to send Uncle Sam our tax returns -- at least, most of us do.
A recent column in The Baltimore Sun detailed how major American corporations like Apple make use of offshore tax havens and creative accounting techniques to legally avoid paying taxes in the United States, while still racking up record profits. An accounting technique called abusive transfer pricing, allows multinationals to artificially move profits out of high-tax jurisdictions like the United States, and into low- and no-tax countries like the Cayman Islands, Ireland and Switzerland.
A July 2010 Congressional report from the Joint Committee on Taxation found that one unnamed, multinational American tech company generated up to 55 percent of its revenue within the United States while only reporting that 10 percent of its pre-tax income was generated domestically -- reducing its tax bill and increasing its net profits. In fact, abusive transfer pricing enabled Google to avoid $3.1 billion in taxes from 2007 to 2009 and enabled Pfizer to dodge roughly $1 billion in taxes in 2009 according to Bloomberg News.
Indeed, Bloomberg News reports that abusive transfer pricing costs the U.S. government up to $60 billion per year, with a U.S. Senate report estimating that broader tax haven abuses cost the I.R.S. some $100 billion annually. And that's simply the toll tax havens take on Uncle Sam.
One need only look to the revenue-starved governments of Greece, Italy and Spain to see the horrific problems that tax evasion and avoidance -- facilitated by tax havens -- can have on major, industrialized, western economies. Years of unabated tax dodging contributed significantly to the debt crisis roiling Eurozone economies today. Public services are being slashed, public employees are losing their pensions and jobs by the boatload, and we are all becoming accustomed to the television footage of riots in the streets of Athens, Rome, Madrid and elsewhere.
Yet, less talked about is the cost of tax haven abuses on the developing world. The specific techniques, which allow multinational corporations to dodge taxes in the United States and Europe, allow those same companies to do likewise in the global south. A recent report from ActionAid UK revealed that SABMiller, the brewer of Coors and Miller, uses abusive transfer pricing to avoid paying an estimated £20 million (or $31.8 million) in taxes in Africa and India each year.
Global Financial Integrity estimates that tax haven secrecy facilitates the outflow of roughly $1 trillion per year from developing and emerging economies, with illegal tax evasion due to trade mispricing alone costing poor countries $100 billion annually in lost revenue. The tax revenue lost to legal tax avoidance is almost certainly much higher.
The seriousness of the problem cannot be overstated: very often it is a matter of life and death. In the developing world, this means that children will go hungry, hospitals will not be funded, schools will not open and clean water will not be available to many people. In the developed world public services will be cut, roads and bridges will fall into disrepair, firefighters will be laid-off, and the middle class will be asked to pay more.
Tax dodging shifts the burden of public financing off the shoulders of multinational corporations and off the shoulders of the wealthy, increasing the tax burden on small and medium size enterprises as well as on middle and working class citizens.
But we are not helpless. We can pass into law the Stop Tax Haven Abuse Act which would require -- among other things -- all companies registered with the SEC to report data on employees, sales, financing, tax obligations and tax payments on a country-by-country basis, making it readily apparent to public observers which companies are abusing transfer pricing to avoid paying taxes in both developed and developing nations.
As the largest economy in the world, we could also demand that the G20 adopt a global system of automatic tax information exchange between jurisdictions, making it nearly impossible for wealthy tax evaders to hide behind tax haven secrecy laws in offshore locations.
Oliver Wendell Holmes once famously wrote that "taxes are the price we pay for a civilized society" -- a notion implicitly acknowledged by each of us when we file our tax returns with the IRS every April. Yet civilized society, at home and abroad, is precariously at risk today unless we do something to stem the rampant tax dodging facilitated by tax havens.
Heather A. Lowe, Esq., a graduate of the University of Chicago, is legal counsel and director of government affairs at Global Financial Integrity, a research and advocacy organization in Washington, DC. Clark Gascoigne is the organization's communications director.