What is Tax Avoidance? 

Tax avoidance costs our health and education systems millions every year, but the price is even higher in the poorest countries.

The world loses the equivalent of a nurse’s annual salary to a tax haven every second, and will lose nearly $5 trillion in the next 10 years, according to the Tax Justice Network.

Tax avoidance usually involves shifting profits so you have to pay a lower rate of taxes. It involves using loopholes in tax systems so that you can reduce rates in a way that lawmakers never intended but which is entirely legal. 

Often, this means registering sales that took place in one country with a company based in another, where tax-rates are lower. For example, Amazon was accused of shifting up to £8.2billion of its revenues to Luxembourg – a tax haven –  in 2020 (an allegation it denies).

Tax evasion is hiding profits or fiddling accounts in order to avoid taxes, and is definitely illegal.

What is the problem with tax avoidance?

Governments worldwide are losing an estimated $300 billion every year from cross-border corporate tax abuse by multinational corporations. 

Tax avoidance de-funds public services

In the UK, tax avoidance is channelling much needed money away from the NHS, housing and other vital forms of public infrastructure. 

The government estimates that in 2019-20, the financial loss from tax avoidance was £1.5 billion – a figure that could fund for example an extra 2 million NHS appointments per year in the UK.

Tax avoidance hits poor countries hardest

The cost of tax avoidance is even greater in poor nations. In countries where wages – and accordingly individual income taxes – are low, governments depend much more heavily on corporation tax.

The countries that lose the most from tax shifting are consistently the poorest, if you look at amounts lost as a proportion of GDP. Losses for low income countries amounted to $46 billion in 2022, equivalent to over half of their public health budgets. 

Governments in these countries face a catch-22: charge a high rate of tax and watch profits generated in their own country channelled abroad; or liberalise their own tax laws, cutting government income and adding to the issue.

Many of these countries have a vast wealth in natural resources. Tax havens allow companies to plunder these resources whilst paying very little to the country in return.

No justification for tax havens

Leading economists agree that there is no economic justification for tax havens. In 2016, over 300 economists wrote to the world’s leaders saying that havens “served no useful economic purpose” and “are distorting the working of the global economy.”

What should governments do about tax avoidance?

Governments decide tax rates, tax credits and accounting laws. 

Rich countries should be plugging their own loopholes. Ireland, the Netherlands, Luxembourg and Switzerland all remain on our list of tax havens. The UK would be on there if we weren’t specifically looking for companies that operate in the UK. (If we included the UK all companies – whether using the UK for legitimate or tax haven purposes – would get marked down). 

Such countries cost themselves and others important revenue for public services, and desperately need to address the problem.

These countries should also be pursuing international agreements to address the issue as a whole. Without this kind of agreement, change will be incremental and poor countries will continue to have limited chances to respond.

There has been some progress in recent years – from agreeing a minimum global tax rate in 2021 to changing the process by which international tax laws are made in 2023, to shift from a closed door discussion involving predominantly richer nations to a more transparent process under the UN including those from the Global South. 

What should companies do about tax avoidance?

Governments can only control tax regulations within their own countries – while companies will continue to exploit laxer tax regulations abroad. This means that tax avoidance is also an issue for corporations and consumers. 

By demonstrating a willingness to pay fair taxes, companies can allow countries to charge fair rates as well as contribute to the national infrastructure and resources that they benefit from.

Companies have not only avoided paying taxes, they have pushed for the kind of tax liberalisations that only make the problem worse. In 2017, Amazon asked cities across the US to bid for hosting its second headquarters, and made clear that tax breaks would be a major factor. 

As a result, Chicago offered to pay between 50% and 100% of its workers’ income taxes back to the company. Amazon employees would pay tax on their wages, but the revenue would go straight back to the multinational. New Jersey offered $5 billion in tax incentives. And Fresno in California promised to redirect 85% of the company’s taxes into the ‘Amazon Community Fund’ for the next 100 years – a pot that would be jointly managed by Amazon executives.

If governments should not be making these kinds of offers, companies should not be asking them to make such an unsustainable trade-off between generating jobs and funding public services. 

What can consumers do about tax avoidance?

For over a decade, tax avoidance has consistently been the number one ethical priority for British consumers, according to an annual survey by Institute of Business Ethics.

Some companies already refuse to engage in tax avoidance. The Fair Tax Mark was established in 2014 (with the support of Ethical Consumer) in order to accredit those paying their fair share. As of summer 2023, there were almost 100 accredited companies.

Our own rating system also looks at whether companies are likely to be involved in tax avoidance or not. Those that receive our best rating do not have more than one subsidiary registered in tax havens. Those with a middle have two or more normal risk (i.e. trading) subsidiaries in tax havens. And those that received a worst have two or more high-risk subsidiaries registered in tax havens.

By choosing these companies, consumers not only reward good practices, they refuse to fund a huge systemic problem that is disadvantaging governments around the world.

Another option is buying local. If companies do not have subsidiaries abroad, they cannot channel profits away.

In the UK there are also lots of campaigns looking to tackle tax avoidance at a government level. Councils across the UK have demanded a change to laws so that they can make tax avoidance a factor in deciding whether to award procurement contracts to companies. Fair Tax Foundation, the organisation behind this campaign, lists over 50 councils pursuing fairer tax practices. Tax Justice Network and Tax Justice UK are also calling for change.