Profit-shifting by multinationals costs Australia $6bn a year, research shows

Australia is losing US$6bn a year from profit-shifting by multinational corporations, despite attempts by regulators to crack down on the practice.

A new paper titled Global distribution of revenue loss from tax avoidance shows the yearly tax loss is equivalent to 0.4% of Australia’s gross domestic product, more than double the amount lost by Canada.

It is the most detailed country-by-country analysis yet of global profit-shifting, produced by researchers at the United Nations University World Institute for Development Economics Research in Helsinki.

It has reinterpreted a peer-reviewed study published by researchers at the International Monetary Fund in 2016, using a more robust source of national tax revenue data.

The paper estimates global revenue losses of US$500bn annually from profit-shifting, which is more cautious than last year’s IMF paper, which estimated US$600bn.

But its more granular analysis reveals that, while the biggest losses occurred in rich economies such as the United States, lower-income countries are the biggest victims of profit-shifting.

Losses are now estimated to be even more intense in lower-income countries in relation to GDP and as a proportion of total tax revenues.

It warns the economic development of lower-income countries may be “significantly undermined” by the activities of multinationals, particularly in sub-Saharan Africa, Latin America, the Caribbean and south Asia.

In Chad, the estimated tax loss to profit-shifting is US$1bn a year, equivalent to 6.97% of GDP, according to the report.

In the United States, while the annual tax loss is much larger (US$188bn), the impact is much smaller, equivalent to just 1.13% of GDP.

Malta (4.49%), Argentina (4.42%), Namibia (3.96%), Mozambique (3.11%) and Guatemala (2.72%) are losing a significant proportion of their GDP to profit-shifting.

The report defines “profit-shifting” as the process whereby companies move profits from their subsidiaries in higher tax countries, where the real economic activity takes place, to other subsidiaries in ‘tax havens’.

It says profit-shifting is typically achieved by multinational companies setting up internal trades that exploit international tax rules to move taxable profits from one jurisdiction to another.

The report is the latest in a series to be published since the 2014 “LuxLeaks” scandal transformed the debate on international tax reform.

The Guardian and other media outlets, working with the International Consortium of Investigative Journalists in 2014, used an unprecedented leak of controversial tax deals to expose controversial tax practices rubber-stamped by Luxembourg.

The documents revealed Luxembourg’s authorities had helped 340 big companies to minimise their tax payments, in some cases to 1% or less.

A former employee of PricewaterhouseCoopers, who was convicted of theft for his role in the leak of confidential corporate tax deals, last year received a 12-month suspended sentence.

Subsequent scandals at companies like Apple and Amazon, and the Panama Papers revelations in 2016, have revealed further the scale of global tax distortions.

Alex Cobham from the Tax Justice Network, who co-authored Thursday’s report, says the global scale of profit-shifting will only truly be known once governments decide to require that multinationals’ country-by-country reporting must be made public.

“These findings support the long-held view that it is lower-income countries that suffer the most intensive losses due to tax dodging by multinational companies,” Cobham said.

“The current status quo, in which international tax rules are set at the OECD where lower-income countries lack any effective voice, is simply untenable.

“We need political progress to challenge profit-shifting. Governments around the world can legislate today for the publication of multinational companies’ country-by-country reporting – revealing the precise pattern of profit-shifting to citizens and giving tax authorities the power to curtail it.”