LAUSANNE, Switzerland – September 23, 2016 – At the onset of the financial crisis in 2009, the members of the largest economies in the world launched a crusade against tax havens and banking secrecy.
Eight years later, IMD business school Professor Arturo Bris says the Swiss private banking industry has been unfairly treated and abused using questionable arguments extraterritoriality – KPMG reports that the number of private banks in Switzerland has declined 24% between 2008 and 2015. The US and the European Union have signed exchange-of-information treaties with many countries, and the list of tax havens has been reduced.
“What has probably been one of the most successful battles fought after the financial crisis – the elimination of tax advantages to individuals – has pursued the wrong target,” said Professor Bris.
He points out that US, British and other taxpayers were actually defrauding in their home countries, not in Switzerland or the Cayman islands.
“In many cases, as was the case with Switzerland, banking secrecy was massively confused with tax advantages that are gained by charging lower rates to individuals. Tax competition may be considered unfair and undesirable when capital is movable and the wealthier can chose, by means of residency or through shell companies, the lowest possible income and wealth tax rates,” he said. “However, this argument does not seem to hold for corporations.”
Bris’s point being made with the recent letter sent to leaders of the EU members from the Business Roundtable, a group of CEOs who account for $7 trillion in annual revenues and nearly 16 million employees. The letter expresses discontent about the recent decision of the European Commission that ordered Ireland to recover up to €13 billion from Apple, plus interest, for alleged tax savings that were unfairly granted by the government of Ireland. The letter was sent on behalf of CEOs from companies such as General Electric, JP Morgan Chase, Exxon Mobile and Johnson & Johnson.
“The letter makes two essential points,” Bris said. “First, that the rule of law must prevail and that the Commission’s demand on Apple is illegal; and second, that the US-based CEOs have the power to threaten the European Union with financial harm and pain by significantly reducing their investment.”
Mr. John Engler, a former Michigan governor and signer of the letter as President of the Business Roundtable, makes no claim regarding the fairness of the European Commission’s demands.
“I find it outrageous that Apple’s tax rate in 2015 was 0.005% as the Commission has alleged. Yet I find it even more insulting in the disparity of the world that this shows, knowing that the demand comes from the US. How can those who have fought against personal tax havens in the last years now be so complacent with corporations such as Apple and other multinationals? These companies are clearly avoiding taxes to increase their competitiveness all at the expense of the countries where they operate,” Bris said
Bris believes that in the coming years, tax policy will be one of the most effective tools that countries will use to ease income and wealth inequality. But the starting point has to be corporate – not personal taxes. Apple’s tax rate is infinitesimal compared to the personal tax rates faced by any of its customers or employees. Bris says this is detrimental to world prosperity and competitiveness for three reasons:
First, because the vast majority of Apple’s shareholders, who benefit the most from low taxes, are based in the US. Through globalization Apple is increasing the gap between rich countries (like the US) and the rest. What Nobel prize winner Angus Deaton has called “the Great Escape,” will only be more difficult as nations that need tax revenues, especially those coming from large corporations, are deprived from them.
Second, because tax advantages to companies widen the gap between capital and labor income, they increase income inequalities within countries. Corporate taxes are taxes on capital income for individuals.
Third, because pre-defined advantages make the world less competitive. While these unpaid taxes in the European Union are probably benefitting Ireland (at the expense of other members of the EU), they are overall making the EU less competitive vis-a-vis the US and UK. It is therefore perfectly legitimate – I would even argue highly desirable – that the European Commission gets the unpaid taxes back.
Professor Arturo Bris is Director of the IMD World Competitiveness Center.
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