by Dr Ikramul Haq
The EU Tax Observatory, serving as an autonomous research hub affiliated with the Paris School of Economics, is committed to advancing knowledge and tackling contemporary tax and inequality issues. Its primary objectives encompass conducting pioneering research on tax-related matters, fostering open and inclusive dialogues about the evolution of taxation, and promoting conversations that engage communities, societies, and policymakers both within the European Union and on a global scale.
The EU Tax Observatory has released its Global Tax Evasion Report 2024 [“the Report”] highlighting the import and scope of global operation of multinational corporations (MNCs). It underscores the fact that over the past decade, governments worldwide have launched efforts to curtail international tax evasion. One such initiative is the automatic, multilateral exchange of banking information, which has been in effect since 2017.
It has garnered participation from over 100 countries by 2023. Encouragingly, the Report reveals that this automatic exchange of banking data has led to a substantial reduction in offshore tax evasion. Nearly a decade ago, prior to 2013, approximately 10% of the world’s GDP was concealed in tax havens by high-net-worth individuals. While the overall percentage of wealth held in this manner has remained consistent, currently only about 25% manage to evade taxation.
Despite this progress, the issue of offshore tax evasion continues to pose a challenge for the global economy. In some cases, financial institutions are diligent in adhering to reporting requirements. However, there are situations where reporting and information exchange do not meet the necessary standards. This can be attributed to several factors. Financial institutions may not have adequately trained their staff on recognizing red flags and reporting obligations. They might also be apprehensive about losing business and their customer base. Additionally, regulatory bodies responsible for enforcing reporting requirements may lack the necessary vigilance or capabilities.
Another crucial element to consider is the emergence of new methods for concealing hidden assets. With the escalation of reporting requirements, individuals with undisclosed offshore wealth seek out alternative sources or jurisdictions where reporting obligations are more lenient, or enforcement is less stringent. Given that financial institutions are legally obligated to exchange information, investors are increasingly inclined to transfer their holdings to alternative assets such as real estate and digital currencies. The Report states:
“….total close to $500 billion are owned by foreigners in six cities and areas worldwide (London, Paris, Singapore, Dubai, Cote d’Azur, and Oslo – which are those for which data is available at the moment). This is equivalent to more than 10% of total real estate in these areas. The Atlas of the Offshore World provides a first attempt at systematically collecting evidence on the size and ownership of offshore real estate, with the goal of ultimately providing a global estimate. Recent research sheds light on substantial inflows of foreign real estate investments in major cities in the UK, France, Norway, or in offshore financial centers like Dubai. Evidence from the UK documents a substantial offshore ownership share that constitutes 1.25% for residential properties and increases to 15% when zooming in on top-end properties.”
The Report further reveals: “…a recent study uses unique leaked property data covering the full Dubai property market (more than 800,000 properties) to shed light on offshore real estate and the potential tax evasion involved. Dubai is one of seven emirates in the United Arab Emirates (UAE) and a popular tourist and investor destination, with a property market boom, stable consumption prices and government, and no public ownership register. Foreign owned real-estate in Dubai is large in 2020, amounting to USD 136 billion, which constitutes 27% of the value of total Dubai real estate”.
While this does not automatically implicate them in tax evasion or any financial wrongdoing, enhanced information exchange with the owners’ countries of origin can significantly advance the overarching goals of accountability and transparency. Moreover, should these properties remain undisclosed or be linked to illicit income sources, such discrepancies can be exposed and addressed.
The Report offers a compelling perspective on the remarkably low effective tax rates of billionaires, which typically fall within the range of 0% to 0.5% of their total wealth. The category of “Personal taxes” encompasses pertinent individual taxes such as income taxes and, where applicable, wealth taxes.
To illustrate these astonishing statistics, the Report cites examples like the United States of America, where billionaires face an effective personal tax rate of just 0.5%, and France, where it is even closer to 0%. This starkly contrasts with the concept of progressive tax rates, where the aim is to lessen tax burden on individuals with lower incomes, providing them with a greater portion of their earnings for personal use. Moreover, effective tax rates for this extremely affluent demographic appear notably lower when compared to all other segments of the population.
In order to deter high-net-worth individuals from capitalizing on legal system loopholes and exploiting the ambiguous boundary between tax avoidance and tax evasion, the Report proposes imposition of a 2% wealth tax. According to estimates, this tax could potentially yield approximately US$ 250 billion from fewer than 3,000 individuals. Given the concentration of wealth and the presently low tax rates applied to billionaires, this tax has substantial revenue potential, which could significantly boost economies worldwide without adversely affecting any major economic stakeholders.
Wealthy Pakistani people are also named in various leaks and involved in tax evasion. The State of Tax Justice Report 2023 reveals that Pakistan’s share in total tax losses incurred during 2023 is US$ 126.9 million that is around 0.04% of the Gross Domestic Product, which is close to 3.13% of the total health expenditure. Share of the corporate sector in tax abuse in Pakistan is 93.3% whereas the share of offshore wealth is 33.6%. Although Pakistan possesses significant revenue-generation potential, its primary tax collection agency has been unable to expand the tax base or effectively combat tax evasion.
In recent years, the federal government of Pakistan has resorted to imposing additional taxes and raising the prices of petroleum products and electricity to achieve fiscal stability, instead of developing new methods for tax collection for bridging the huge revenue gap. The most viable path towards addressing these challenges and curbing tax losses is by implementing stringent controls, emphasizing financial inclusion, and enforcing beneficial ownership regulations and interagency cooperation. These measures would not only reduce instances of tax evasion but also enhance overall revenue collection.