Trade, Tax & Transparency summit on the 'Isle of Shady', a pop-up tax haven on the South Bank of the Thames at Gabriel's Wharf in London ahead of the Open for Growth: Tax, Trade & Transparency event in June 2013. Photo: David Parry / Enough Food IF via Flickr (CC BY-NC-ND).
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End transnationals' $212 billion tax dodge on poorest countries
5th June 2015
Coroprate tax dodging is costing developing countries $212 billion a year, writes Toby Quantrill, and promised action by the OECD has been a damp squib. Now independent experts have come up with their own answers to the problem - beginning with an end to the 'separate entity' fiction that allows profits to be siphoned to shell companies in zero-tax jurisdictions.
Multinational corporations act - and therefore should likewise be taxed - as single firms doing business across international borders.
When rich countries tasked the Organization for Economic Cooperation and Development (OECD) with tackling multinational tax dodging two years ago, campaigners had mixed feelings.
We agreed that the plan was a significant step forward, in terms of acknowledging the multi-billion tax crisis and being reasonably ambitious about tackling it. But we were equally agreed that the OECD's proposed actions would only ever be a partial solution, especially from the poorest countries' perspective.
New estimates, from International Monetary Fund researchers, suggest that developing countries lose up to $212 billion a year to multinational tax avoidance alone. The IMF researchers also reckon that corporate tax avoidance is a far worse problem for poor countries than for rich countries, relative to the size of their economies.
That's a sum that could transform the lives of untold numbers of people living in poverty. A recent study published in the medical journal The Lancet demonstrates that when governments in poor countries increase their income from tax it leads directly to greater spending on vital healthcare.
Back in the room of tax campaigners, it was also clear to us that the OECD plan to catch up with multinationals would only tackle some of the symptoms, not the causes of global tax avoidance. Furthermore, we knew the reform process would be influenced by powerful vested interests, including accountancy giants and other multinationals with huge stakes in the status quo.
An alternative look at multinational tax dodging
We - a group of people representing organisations from across the globe- decided to initiate a second investigation of the same problem, but from a different perspective. We agreed to bring together a group of senior figures with a range of experience and expertise from across the globe, and especially from developing countries.
This became the Independent Commission on the Reform of International Corporate Taxation and we asked the commissioners to consider reforms of the global tax system, from the perspective of the global public interest rather than national advantage.
The Commissioners' brief was to ask the simple questions that get to the heart of how the system 'works' and to suggest fair, effective and sustainable changes to help solve the core problems.
This week the Commission launched its landmark report at an economics event in Trento, Italy, just ahead of the G7 summit in Bavaria. The document, while only 11 pages long, delivers a devastating critique of the tax system and demands sweeping changes to the existing international rules and governing institutions.
"Tax abuse by multinational corporations increases the tax burden on other taxpayers, violates the corporations' civic obligations, robs developed and developing countries of critical resources to fight poverty and fund public services, exacerbates income inequality, and increases developing country reliance on foreign assistance", it argues.
"Every individual and country is affected by corporate tax abuse, and therefore the debate over multinational corporate tax avoidance should be widened and made more accessible to the public."
End the 'separate entity' fiction that multinationals use to dodge tax
The Commission's central demand is for an end to the legal fiction of treating companies which operate in different countries as part of the same multinational as though they were completely independent from each other (the 'separate entity principle').
The problem with this is that it enables companies within a multinational group to contrive to do business with each other in ways that shift their profits to 'tax haven' countries with low or zero tax rates - and their losses to countries with normal tax rates. Thus they ensure their global tax bill is far lower than it would be, were they were paying their fair share of tax in every country in which they do business.
In the words of the new report: "Multinational corporations act - and therefore should likewise be taxed - as single firms doing business across international borders. The commissioners see this as essential because multinational corporations often structure transfer pricing and other financial arrangements to allocate profits to shell operations in low tax jurisdictions."
Despite the painfully evident problems caused by the fiction that multinationals' subsidiaries are independent of each another, it remains an undisputed assumption at the heart of the global tax system and acts as a block to any truly effective reform.
The OECD meanwhile is already starting to claim that its tax reform project is working. But as a number of reports and analyses are showing, its work so far will have a limited impact in richer countries and simply not deal with the fundamental problem for poor countries.
As an organization often described as a 'rich countries club' it is hardly surprising that the OECD has not prioritized the problems faced by the poorest countries. Now we are calling on the G7 to show global leadership and ensure timely and effective action.
In addition to dropping the fiction of the separate entity principle, the Commission recommends curbing tax competition between countries to prevent the race to the bottom, as well as increasing transparency in the financial system and establishing an intergovernmental tax body within the United Nations.
These ideas will be seen by many as radical. Such changes will not be easy to implement and will not happen overnight. But as many people know, acknowledging the reality and severity of a problem can be the first step to recovery.
Toby Quantrill is Principal Advisor on Economic Justice at Christian Aid. Toby has worked in international development for more than twenty years, on issues including the environment, health, disability and trade, with organizations including WWF-UK, VSO, the Fairtrade Foundation and Action AId. At Christian Aid, Toby leads the organisation's work on tax justice and also looks more widely at the economic system and its impact on poverty and inequality.
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