Tax evasion by multinational companies halts development in Mexico

Mexico has become a tax haven for multinational companies, resulting in a loss of USD$197 billion a year

Tax evasion by multinational companies halts development in Mexico
The amount of taxes that were not collected in 2015 equaled the budget of Mexico’s Ministry of Social Development and National Defense - Photo: Gary Cameron/REUTERS
English 13/10/2018 14:06 Leonor Flores Mexico City Actualizada 14:07

Mexico ranks among the countries that have been most affected by tax evasion from multinational companies, which have grown accustomed to taking their profits out of the country to avoid taxes, according to the World Bank (WB).

Their report on “The Changing Nature of Labor,” which was released at the annual meeting between the International Monetary Fund (IMF) and the World Bank, noted that substantial revenue flows were not being collected by governments, making it harder for countries to invest in social development and inclusion for their citizens and guarantee a quality social protection system.

The institution acknowledged that in order to reach a full social inclusion, reforms were needed to regulate the job market and establish a long-term revision of tax policy, however costly it may be. The report found that Mexico, Australia, Brazil, France, India, Japan, and most countries in Africa were most affected by tax evasion, adding that, according to the Organisation for Economic Co-operation and Development (OECD), tax evasion by large multinational companies was equivalent to between 100 and 240 billion dollars a year, which represents between 4 and 10% of their revenue.

However, other calculations suggest that multinational firms move around 40% of their revenues to offshore accounts, which results in corporate tax-losses of 12% globally.

Mexico’s Tax Administration Service (SAT) requested the Universidad de las Américas in Puebla to assess the magnitude of tax evasion in the country. Their results showed that private companies avoided the payment of 197.15 billion pesos worth of taxes in 2015. This number represents a personal income tax evasion rate of 29.97%, which is equivalent to 1.09 of the country’s GDP.

The amount of taxes that were not collected said year equaled the budget of Mexico’s Ministry of Social Development and National Defense.

The World Bank’s report on tax evasion among multinational companies illustrates the worrying number of legal loopholes, mostly passed through corporate lobbying, that allow firms to reduce their tax burdens. Most companies use these legal vacuums to increase their tax reductions and move their profits to offshore accounts.

Digital Economy

According to the WB report, this phenomenon is neither new nor illegal, but it has recently been facilitated by digital economy. The study shows that in 2016, nearly 60% of all 500 companies that appeared in the Fortune magazine’s global ranking had at least one affiliate in Bermuda or the Caiman islands, both of which have a 0% corporate taxation rate.

The Paradise Papers leaked in 2017 revealed many examples of tax evasion.

In order to address the global tax evasion issue, the report suggests that countries should agree to a single formula for profit allocation based on tangible assets, such as the sales volume to third parties, utilities, payroll, or staff headcount in each jurisdiction as is the case in Canada and Switzerland.

Governments around the world have begun to take steps towards a standardization. In the United Kingdom, anti-tax evasion policies were implemented in 2015, allowing companies to pay taxes in advance, with rules designed to promote fiscal compliance among multinational firms.