To curb evasion, EU report calls for 2% global wealth tax on billionaires

EU Tax Observatory calls for global minimum tax of 2% on billionaires to address tax evasion and generate $250B. Automatic exchange of bank info has reduced offshore tax evasion by a factor of 3. However, loopholes in global min. tax of 15% on MNCs and preferential tax regimes for wealthy individuals have weakened overall tax collection.

Pointing out that tax evasion is enabling billionaires to enjoy effective tax rates equivalent to 0% to 0.5% of their wealth, the European Union Tax Observatory in its ‘Global Tax Evasion Report 2024’ has called for a global minimum tax on billionaires equal to 2% of their wealth. This would both address evasion and “generate nearly $250 billion from less than 3,000 individuals,” the report stated.

The report justified the proposal by noting that while the number of taxpayers affected by it would be miniscule, the tax rate for them (2%) “would still be very modest” given that the wealth of billionaires has grown at 7% a year annually on average since 1995 (net of inflation).

Assessing the impact of international efforts made so far to curb tax evasion, the report highlighted the success of one measure — the automatic exchange of bank information — in reducing offshore tax evasion by a factor of three over the past 10 years. The report observed that before this measure came into effect, “households owned the equivalent of 10% of world GDP in financial wealth in tax havens globally, the bulk of which was undeclared to tax authorities and belonged to high net worth individuals.”

But today, there is still the equivalent of 10% of world GDP in offshore household financial wealth, but only 25% of it evades taxation. “This reduction in non-compliance is a major success that shows that rapid progress can be made against tax evasion if there is the political will to do so,” the report stated. Despite this progress, offshore tax evasion continues, and the report identifies two reasons for it.

First, it is still possible to own financial assets that escape being reported on because not all offshore financial institutions comply with the requirement of automatic exchange of bank information — for fear of losing their customer base while facing no real threat or penalty from foreign tax authorities for non-compliance.

Secondly, wealthy individuals who used to hide financial assets in offshore banks have started shifting their holdings to asset classes not covered under this agreement, especially real estate. The report, therefore, calls for expanding the range of assets brought under the system of automatic exchange of information.

The other major measure — the global minimum tax of 15% on MNCs, adopted in 2012 by 140 countries and territories — has been a disappointment. While it was expected to increase global tax revenues by 10%, a growing list of loopholes has reduced expected revenues by a factor of 2. The report red-flagged the trend of “greenwashing the global minimum tax” wherein MNCs can use ‘green’ tax credits for low carbon transition to reduce their tax rates way below the minimum of 15%. “U.S. green-energy tax credits will amount to the equivalent of about 15% of U.S. corporate tax,” the report noted.