Half-True
UK
"Tax dodging costs developing countries $200 billion every year."  

ActionAid UK on Thursday, April 7th, 2016 in a website post

Do tax dodgers really cost developing countries $200 billion? Maybe

British Prime Minister David Cameron faces calls for him to resign after the "Panama Papers" revealed his father used an offshore fund to avoid paying taxes. (Getty)

The massive leak of financial and legal files known collectively as the Panama Papers has fueled demands for new rules to govern international taxation. While we still don’t know how many of the secretive deals actually broke any laws, ActionAid UK, an anti-poverty advocacy group, argued that these maneuvers starve struggling nations of much needed tax revenues.

It asked the public to demand action from British lawmakers. "Tax dodging costs developing countries $200 billion every year," it posted on its website.

We were curious where ActionAid got that number. The source was a 2015 report written by three researchers at the International Monetary Fund. Titled "Base Erosion, Profit Shifting and Developing Countries," it used data from 120 countries to estimate the impact of lost revenues due to a couple of factors.

One driver was companies shifting profits to avoid taxes. If a multinational corporation creates a paper trail that leaves more profits in a low-tax rate country, it trims its overall tax bill.The authors noted that aggressive tax strategies involving tax haven nations have grown over the past two decades.

The other factor was competition among nations. That happens when Country A lowers its corporate tax rate because it saw Country B do the same. You can see this dynamic as setting up the conditions that make profit shifting more likely.

If you invest in a multinational corporation, the trends on tax rates work in your favor. If you are in a country that needs tax revenues, your view might be different.

The report assessed three kinds of countries: members of the Organization for Economic Cooperation and Development, non-OECD members, and tax haven nations. In general, OECD members are advanced industrialized economies. This chart from the report shows how tax rates have fallen over the years.

Corporate Income Tax Rates, 1980–2013

When companies pay less taxes because nations aim to attract investment by reducing their corporate tax rates, that isn’t precisely tax dodging.

But the IMF team was able to tease out the impact of aggressive tax avoidance by itself.

They came up with two estimates, short and long run. The first captures the hit on tax revenues at some hypothetical point when a country changes its tax rates. The immediate loss would be in the neighborhood of $28 billion across the non-OECD group.

But over a span of several years, researchers say corporations adapt and work the angles more. They start setting up subsidiaries in certain places not because it makes sense for reasons of production, distribution or sales, but simply because it’s a way to funnel profits into a lower tax jurisdiction. Over time, the total tax loss balloons to $200 billion each year, in line with the number ActionAid UK cited.

Vetting the IMF study

We asked a number of international tax experts what they thought about the IMF estimate. To be sure, the IMF authors themselves called their approach "highly speculative" and presented their long-run estimate as the midpoint between a low of about $100 billion and a high of $300 billion.

Kimberly Clausing, an economist at Reed College, has written extensively on how companies shift profits to cut their tax obligations.

"I think that IMF study is about as good as we are going to get," Clausing said. "They are using the best data we have available and pretty careful methods. I've read their paper quite carefully."

Dhammika Dharmapala, a law professor at the University of Chicago, called the report "a helpful step forward," but added, "I don’t know of an estimate of the tax revenue losses from base erosion and profit shifting for developing countries that has achieved wide consensus in the scholarly community."

Nadine Riedel, an economist in public finance at  Ruhr University-Bochum in Germany, said the IMF work was a valuable addition to the research, but she emphasized that the words of caution from the authors "should be taken very seriously by the reader."

"There is considerable uncertainty related to the revenue loss estimate the authors present, which they make very clear themselves," Riedel told PolitiFact.

In particular, Riedel noted that the IMF economists used a high-end estimate to calculate how quickly corporations would move to exploit lower tax rates. (The technical term is elasticity.)

The combination of the cautionary words from the IMF researchers themselves and the weight of opinion from outside experts puts the $200 billion estimate on shaky ground. Analytically, it is a tenuous figure.

But there’s another wrinkle. Many of the countries ActionAid focuses on, the poorer nations in Africa, Asia and Latin America, are lumped in with much more affluent nations in the IMF analysis.

Defining a developing country

The IMF study had data on 74 non-OECD nations. That group included many low-income countries, such as Malawi, Cambodia and Uganda. But it also included those that the World Bank considers just one step below high-income, such as China, Mexico and Brazil.

The IMF report called all of them developing countries, and with some justification. For the most part, that is the category the United Nations applies to them.

Still, it is important to note that some very large economies, such as those of China and India, would account for many of the dollars in that $200 billion estimate.

Alex Cobham is a board member of ActionAid UK and director of research at a related advocacy group, the Tax Justice Network. Cobham agreed that a country like Brazil is not in the same boat as one like Malawi. But Cobham said the IMF results suggest that the impact of tax avoidance is even greater for a place like Malawi.

"In low income countries, the GDP is low, but so are their tax revenues," Cobham said. "If you take Malawi, it starts with such a low tax base, that even if it loses money at the same rate as all the others based on its GDP, the relative hit on revenues is probably even harder to absorb."

The IMF report supports that point. It notes that the ratio of tax revenue to GDP in low income countries is around 15 percent, compared to about 35 percent in the OECD.

Our ruling

ActionAid UK said "tax dodging costs developing countries $200 billion every year."

Even the IMF report that provided the figure called the estimate "highly speculative." For the most part, the outside experts we reached were even more cautious. ActionAid didn’t reflect any of that uncertainty. In addition, the total includes taxes lost by countries that are doing much better than low income nations.

The statement is partially correct but the core figure comes with many caveats. We rate this claim Half True.

Update, April 20, 2016: After we published, Charlie Matthews who spearheads ActionAid UK's global tax advocacy work sent us this note: "We use 'estimated' in reports etc, but it seems that's been lost as report text is turned into website copy. We're changing the website today, and it's a good reminder to keep a closer eye in the future."

https://www.sharethefacts.co/share/3aa8762d-8afc-44f7-bfaa-3cda0dc9bcde