The Caribbean is globe’s second largest tax haven, harboring $97 billion annually

22 August 2018 Consultancy.lat

Despite the growing global outrage in response to the Panama Papers, the use of corporate tax havens seems to be as prolific as ever. A new study shows that just 11 countries soak up some $616 billion in profits, as conglomerates continue to leverage legal loopholes to move profits away from domestic tax regimes. Ireland is the top destination for tax avoidance, and in close second place is the collective Caribbean.

The Panama Papers were an unprecedented leak of 11.5 million files from the database of the world’s fourth biggest offshore law firm, Mossack Fonseca. After the records were handed to German newspaper Süddeutsche Zeitung by an anonymous source, the paper then shared the information with the International Consortium of Investigative Journalists (ICIJ). 

The documents revealed a web of secretive offshore tax regimes, which wealthy individuals and companies exploit to avoid paying domestic tax. The news came after a decade of austerity had seen many developed nations selling off aspects of their public services in order to pay for the failure of the global financial sector, while explaining to citizens that there was no money to maintain such institutions.

As a result, the Panama Papers caused a wave of indignation that swept the globe; their release, however, ultimately did little to persuade legislators to take action, particularly as many lawmakers were themselves implicated. New research released has reconfirmed that, for many multinationals, tax evasion practices are a common practice.

$616 billion of profits shifted to tax havens

According to analysis by three economists affiliated with the University of Copenhagen, UC Berkeley and the National Bureau of Economic Research (NBER), an American platform for economic research, corporates globally make $11,515 billion in profit in a single year. Of that amount, 85 percent is made by local corporations, the remainder (15 percent) is made by foreign-controlled corporations. 

However, of the $1,703 billion profit made by foreign companies, nearly 40 percent – precisely $616 billion – was shifted to other tax jurisdictions outside their home country. Of that amount, 92 percent went to just 11 countries – earning these countries the infamous title of ‘tax havens’. Perhaps unsurprisingly, the US saw the most profits shifted, with $142 billion finding its way offshore, followed by the UK, at $61 billion, and Germany at $55 billion. The trio were among those prominently mentioned in Panama Papers.

Strikingly, the Caribbean as a collective brings in $97 billion annually which according to the study is 95 percent of local organic profit. Whilst this shows the region is still one of the globe’s hotspots for tax avoidance, it also demonstrates the enormous amount being moved onshore compared to the relatively small level of domestic profits. Beyond the usual Caribbean suspects, Bermuda sees 96 percent of its annual profits and Puerto Rico 79 percent arrive from abroad.

The Caribbean’s ten largest tax havens are the Cayman Islands, Panama, The Bahamas, The British Virgin Islands, Dominica, Nevis, Anguilla, Costa Rica, Belize and Barbados. Each of these countries has set in place favourable tax concessions with stringent financial privacy laws. Together, the average effective tax rate across the region is 2 percent which is only eclipsed by Bermuda which takes nothing whatsoever.

The 11 most important tax havens of the worldTo become a pure tax haven, a nation’s government must put in place either very low or no income tax, corporate tax, estate or inheritance tax, gift tax or capital gains tax. Examples of this are both Panama and the Cayman Islands, where besides being pure tax havens, both have strict banking secrecy laws designed to protect the privacy of account holders and have limited tax treaties with other nations. 

The recent revelations raise questions with a number of Caribbean nations being under attack for tax avoidance by the EU. In the wake of the Panama Papers, the EU set up a blacklist for tax-havens which would see tax-havens face reputational damage and stricter controls on their financial transactions (i.e., sanctions). On the blacklist are the Bahamas, U.S. Virgin Islands, Dominica, Antigua, and Barbuda as well as Trinidad and Tobago among others scattered around the globe. 

However, the Caribbean as a whole receives fundamentally less tax avoidance than the EU itself, which accumulatively brings in $235 billion per annum. The report states that the EU is also the main loser in the overall corporate tax avoidance issue. Ireland, the Netherlands and Luxembourg are the three biggest EU tax haven culprits with Switzerland being fourth overall. “High losses for the EU can be explained by failure of enforcement due to perverse incentives.” 

The divide in the EU between tax havens and high-tax countries is an issue which the region is grappling to deal with. The authors add that countries with higher taxes that lower their rates also actually steal income from each other, with the result that capital is being taxed less and less, benefitting usually well-to-do shareholders and few others.

Digitization could add $240 billion to Mexico’s GDP by 2025

22 January 2019 Consultancy.lat

New in-depth analysis by McKinsey & Company ranks Mexico 55th in digital maturity out of 151 countries. When compared to countries with similar economic output, Mexico is in good shape, but the country has “yet to achieve the kind of world-class digital transformation that fuels productivity and economic growth.”

Countries that have adequately transformed, such as Estonia and Malaysia, have incomes close to Mexico, but punch “above their weight” when it comes to digital maturity. Mexico is about halfway there. Taking steps to improve its global digital position, however, could increase the country’s GDP by  7-15% (approximately $155-240 billion) by 2025. Such an increase would be powered by increased productivity and employment in existing industries, new digital businesses, a broadened expanded information-and-communication-technology (ICT) sector, as well as the successful labor force transition into the digital world.

Mexico is the second-largest economy in Latin America, meaning it is in the unique position to set the regional standard for a “digitally enabled” government.

For their analysis, McKinsey & Company researchers Alberto Chaia, Gonzalo Garcia-Muñoz, Philipp Haugwitz, Max Cesar, and Andre de Oliveira Vaz defined digital maturity using four categories: government, foundations, economy, and society. The study also laid out steps that Mexico could take to improve its digital maturity. Of these four factors, Mexico has the most work to do in digital economy and digital foundations, categories in which its scores are just below average – and which are highly correlated.

Digital maturity of Mexico according to McKiney

The bad news first

Digital foundations essentially encompass the ability of citizens to participate in a digital society. This means internet access, mobile networks, and so forth. “In 2016, Mexico had just 13 fixed-line broadband subscriptions for every 100 inhabitants” the analysis found. “The rate of subscription to mobile broadband is higher, at 61%, but this still leaves a sizeable portion of the population unconnected and thus spending additional time and money getting to physical centers to access government services.” This lack of access causes Mexico to rank 93rd overall in the digital foundations category. 

Mexico’s digital economy, in turn, is hindered by its “shaky” digital foundations. It sits in 92nd place of all countries surveyed. There is a lack of access to high-speed internet, as stated, as well as an unreliable postal service and a lack of bank accounts among the population, with just 40% of citizens aged over 15 having an account. These factors decrease the country’s potential to develop an e-commerce industry that is widely and conveniently used. Exports of ICT goods, as well, account for an astonishing less than 1% of all exported goods and services.

And now for the good news

Mexico’s digital government, which ranks 39th overall, has made great strides in recent years. The creation of gob.mx, for example, provides "a one-stop portal that consolidates 34,000 databases from 250 government institutions and 5,400 public services. The platform is described as the “centerpiece” of Mexico’s digitization efforts, allowing citizens easy access to important legal documents such as birth certificates, as well as automating internal processes, making workplaces tasks run more smoothly for government employees.

Despite this – and the appointment of a national digital strategy coordinator who sits on the president’s staff - Mexico “receives low scores from its citizens on their overall satisfaction with the convenience and accessibility of government services.” Citizen experience was the worst-rated of those group countries surveyed (Canada, France, Germany, Mexico, the United Kingdom and the United States). There was also a largest perception gap between the private and public sector.

How digital can boost Mexico’s GDP

A digital society, according to the report, “can improve the quality of life for citizens by fostering greater civic participation, providing access to information, and offering new tools for health and education.” As previously shown, Mexico is pushing such platforms, including several subsections of gob.mx, on which citizens can participate in public polls and discussions, and present potential digital solutions to serious societal problems such as earthquake detection systems.

Mexico is well on its way to achieving a “good” or “very good” digital maturity rating (right now, the country is “acceptable”). According to McKinsey, “There are three basic initiatives Mexican government leaders could consider putting on top of their priority lists [to speed the transition into the upper echelons of digitization].”

First, the Mexican government must define a digital vision and strategy. Second, it must link that vision to policymaking. Entwining the two ensures that digitization acts as a “lever” to a policy’s success. “To establish a clear link between its digital vision and public value, Mexico’s incoming administration may want to consider revisiting the country’s "National Digital Strategy" for 2013 and aligning it with Mexico’s current and future needs, as well as with the new government’s priorities,” the report states. A “test and learn” attitude toward linking digital vision and policy will also be necessary, as the only way to avoid repeated mistakes is by closely evaluating those that have been made, then planning accordingly. Adopting this attitude, according to the report, will necessitate more flexible budgetary strategies.   

The third suggested initiative is all about power to the people. Successful digital transformations are those that are centered around the citizens, rather than the institutions that serve and govern them. This means service delivery is key, and centralization of digitalization efforts – initially, perhaps, in the form of a council that would oversee governmental transformation – could greatly aid government agencies in getting the people what they desire. As Mexico transforms, so would the ways in which ideas are generated and put into action. For instance, the United States has the US Digital Service, which works with the White House, and Singapore relies greatly on the Government Technology Agency, which reports to the country’s president and implements digital strategies.

Digital maturity benchmark

Filling in the cracks

Because Mexico ranks on the low end of the “digital foundations” category, it is obvious that the other four categories, which by nature fall under the “foundations” umbrella, are potentially negatively affected. As such, McKinsey offers five steps that could be taken to strengthen the country’s digital infrastructure. 

Private companies, for one, could be offered incentives to provide broadband internet to “marginalized” communities, such as those in Oaxaca and Chiapas. The study points to India as an example, where the government-created National Optical Fibre Network (BharatNet) “successfully brought broadband services to approximately 115,000 villages, aiming to deliver broadband connectivity to 250,000 villages overall.” 

Talent is also an issue. “In recent years, Mexico has made significant strides to boost the number of college graduates with degrees in science, technology, engineering, and mathematics (STEM),” the report states. In 2016, 25% of university graduates with a STEM degree. 

But degrees aren’t so much the problem as education in general. “Only 17% of Mexicans graduate from college, making the talent pool small.” Programs that keep primary and secondary school teachers in the loop are a must – as are “reskilling” programs meant to train a percentage of the workforce that is soon to be displaced by technology such as automation. 

Rounding out the five suggestions are a system that easily and simply explains new regulations regarding technology - an invaluable resource for startups; the development of cybersecurity units required to monitor the security of such a large, overarching transformation; and a streamlined, interoperable model for data sharing across multiple government agencies. 

It’s an investment

The challenges and obstacles in Mexico’s path to digital transformation are not inconsiderable, but are neither without long-term reward. “Going digital will require an investment of financial resources, extensive coordination among the multiple stakeholders and levels of government, and new regulations governing the growing e-commerce and fintech sectors. It most likely would entail participation incentives for the private sector, since governments should not attempt to 'go it alone.' In the end, both sectors of society stand to reap the value digitization will sow.” 

Related: Mexico leads Latin America in robotization, followed by Brazil and Argentina.