Tax avoidance is higher on the global political agenda than it ever has been before, largely as a result of civil society’s hard work. However, we have a long way to go to include developing countries, increase transparency and tackle tax havens. Furthermore, we need to make a positive case for paying tax to halt a global race to the bottom on rates.
Tax avoidance is probably not the most obvious candidate for dinner party conversation but, as every tax justice campaigner knows, there is far more to the topic than technical terms and boring men in suits. Global tax avoidance is a story of multinational companies getting one over on developing and developed countries alike; the nefarious schemes of a greedy rich elite; and even corrupt politicians and arms dealers hiding ill-gotten gains. Believe it or not, global tax avoidance is more of a bestselling mystery thriller novel than a school textbook.
Recently, the plot has thickened. It has become increasingly obvious that this is not simply a David and Goliath story about big business or rich individuals and the public: it is also about rich states versus poor, and between the citizen and government. As such we have reached a critical juncture in the tax story and the next encounter could be the bloodiest yet.Politicians across Europe have clearly changed gears on the issue of tax avoidance, from nonchalance to strong rhetoric and real action. However, alongside celebrating successes we need to admit four oversights which include: developing countries being left out of the decision-making process; limited public access to new beneficial ownership registries, which state exactly who the owner of a company is; insufficient clamp down on crown dependencies and overseas territories (better known as tax havens); and, failing to make the positive case for tax more generally, allowing ‘a race to the bottom’ on corporate taxes.
Below we take stock of progress and consider these four challenges as we prepare for the next stage in the battle for global tax justice.
Where are we in the journey towards tax justice?
We cannot overstate the importance of civil society in getting us to this point. The issue of tax avoidance has been championed by think tanks and civil society organisations at the highest levels for the past decade. Reports such as Christian Aid’s Hidden Profits: The EU’s role in supporting an unjust global tax system have highlighted the EU’s role in implicitly almost institutionalising tax avoidance and how, in an ever globalised world, the issue increasingly transcends actions within national borders. This work, alongside media attraction to scandal and WikiLeaks revelations, has led to a public outcry forcing governments to take action.
As tax justice has moved up the political agenda we have seen countries taking both unilateral and multilateral action. The OECD has played a leading role and its Global Forum is a place where countries can work together to increase tax transparency. One of the most important things it has done is to look at the information that countries exchange about tax in order to help governments enforce their own domestic tax laws. However, there are clear biases in the work of the OECD towards rich countries, a point we will address in the next section.
A clear high point in the tax justice timeline was when the UK government used its recent presidency of the G8 in 2013 to focus on ensuring tax compliance and promoting greater tax transparency. This championing of tax justice firmly placed it on the G8/7 and the G20 agenda for the longer term.
Another milestone was the recent announcement of a European tax transparency package. This package of measures demonstrates the commitment to tax justice at EU level. Their plans to introduce the automatic exchange of information between member states on their tax rulings are both welcome and feasible and will encourage greater country co-ordination.
Overall, we can conclude that it hasn’t been a case of ‘all talk and no action.’ New policies have been introduced and there is increasing recognition that tax is not purely an issue of national sovereignty but a policy area with significant repercussions beyond country borders. However, the preceding era of action on tax justice is equivalent to picking the low hanging fruit. The next era will require structural shifts in global politics and the matching of rhetoric with action. In a world overly influenced by fat cats and their lobbyists, this will not be easy.
The importance of developing countries in the tax debate
Functioning tax systems are the cornerstone of democracies, of tackling inequality and of supporting crucial public services. This rationale for the creation of robust tax systems is even more relevant in developing countries where there is a lack of access to essential public services and poor government accountability. But raising taxes in developing countries is not just a matter of national action. Developing countries lose out from tax avoidance disproportionately, in particular via illicit financial flows. These parts of the tax agenda must be tackled globally.
According to the African Union/Economic Commission for Africa High Level Panel on Illicit Financial Flows from Africa report, the continent lost about $1tn between 1980 and 2008. Save the Children’s own Making a Killing report found that $15bn is lost in tax revenue from trade mis-invoicing in Sub-Saharan Africa alone. Once you convert these figures into lost health inputs, the human costs of this avoidance become even more apparent: in Kenya the tax losses were more than the average health spend between 2002 and 2010. While the exact estimations are difficult to decipher, what cannot be denied is that huge sums of money are lost from developing countries with dire consequences for economic growth and human development.
While harmonisation and co-operation at an EU or OECD has indicated progress on tax avoidance, they have represented to many an exclusive club of action. The OECD’s ongoing Base Erosion and Profit Shifting (BEPS) project has received criticism from many NGOs as a result of the inclusion of developing countries in discussions seemingly coming as an afterthought instead of making sure they had a seat at the table from the start. Global problems cannot be fixed with regional solutions.
For the past six months the NGO community and major developing countries have been involved in a bitter battle with rich countries to open up the decision making process. But, at the time of writing, it looks unlikely that new global tax norms setting body will be established at the Financing for Development discussions in Addis Ababa in July 2015. Making tax records open to the public may seem like a subsidiary point but it is fundamental to ensuring on-going tax justice and achieving the aim of increasing tax transparency. We need to know who owns companies, where those companies are based, how much profit those companies make, how much tax they’re paying and crucially, where in the world they’re paying tax.
The current draft of the Addis Ababa Action Agenda fails to highlight the need for public reporting. Without this public scrutiny it is much easier for bad behaviour to go under the radar.
The issue of tax havens is critical to tax justice. It is estimated that assets hidden in tax havens may represent a loss to the public revenues of developing countries of between $120- 160bn a year. While too many rich countries refuse to even publically admit that tax havens exist, the UK at least had some strong rhetoric on tax havens. However, the current Conservative government has chosen to take a ‘softly softly’ approach rather than threatening to penalise tax havens for non-compliance. This has resulted in considerable feet dragging across tax havens with many of the crown dependencies and overseas territories choosing to undertake drawn out consultation processes on increased transparency which just lead back to business as usual.
More generally we have failed to make tax avoidance not worth doing. For example, the recent tax evasion scandal involving HSBC’s Swiss subsidiary has seen only one person prosecuted despite there being more than 1,000 account holders. Such little punishment clearly sends the wrong signal.
Missing the point: making the positive case for tax
The OECD found that corporate taxes have seen a pronounced shift downwards across high-income countries and developing countries have also engaged in a race-to-the-bottom on corporate tax, too often prompted by multinational companies threatening to go elsewhere if not given beneficial tax rates. Worse still, tax subsidies in cash starved developing countries are not uncommon. One can only conclude that while we have been winning the argument on tax collection, we have been losing the argument on tax.
The reality is that people don’t always get why they should be paying tax and corporates do not always recognise their moral responsibility. Somewhere in the midst of technical terms and minutiae policy details we have forgotten to remind everyone that tax is what pays for vital and beloved health services, educating our children and building our roads. Private finance cannot replace public finance to deliver essential services.
What the journey so far on tax justice has shown is that change is possible. It is also clear that we are nowhere near the finish line. We need to significantly shift the dial on issues such as inclusiveness and tax havens or risk stagnation or even undoing the good work that has been done. We must continue to make the moral case and we may also need to get more technical to be able to understand the detail and ensure we are really getting progress on tax. After a long battle, the need to tackle tax avoidance is finally at the forefront of the minds of politicians and the public alike. We must continue to fight hard to keep it there.