Raising the global profile of tax justice issues
The Tax and Transparency Forum organised earlier this month in London by International Tax Review magazine was unique. For the first time it brought together tax justice advocates and the corporate world of multinationals to discuss the burning international issues of tax and transparency. The high profile speakers included Clare Short, chair of the Extractive Industries Transparency Initiative, Pascal Saint Amans who as head of tax at the OECD (Organisation of Economic Co operation & Development) is probably the most important figure in global tax affairs, Richard Murphy and John Christenson of Tax Justice Network and David McNair formerly of Christian Aid and now with Save the Children. The corporate side was represented by the heads of tax policy of a number of well known multinationals. Nearly 200 people attended.
That this event took place at all is a result of increasing understanding of the crucial role of tax in development and poverty alleviation, and growing public appreciation of the issue. Developing countries need tax revenues to develop, reduce poverty and ultimately end aid dependency. It is currently estimated by Christian Aid, Action Aid and others that developing countries lose more through international tax avoidance and evasion than they receive in aid.
The Extractive Industries Transparency Initiative (EITI), a British initiative, is also helping counter corruption in countries rich in natural resources. It aims to end the ‘resource curse’ where a country’s natural wealth impoverishes the population and can lead to its becoming a fragile state.
The most relevant topics of the day were on ‘country by country’ reporting, the relationship between transparency and corporate social responsibility and ‘automatic information exchange’.
A new standard: country by country reporting
The proposal for country by country reporting by multinationals is a response to the fact that 60% of international trade is conducted by multinationals trading with themself (‘intra-group’ trading). This can effectively enable profits and costs to be allocated to different jurisdictions such as the tax havens and the countries in which real economic activity takes place in such a way as to reduce tax liabilities. The relevant concept is ‘transfer pricing’ (prices agreed within a multinational for its intra group trade). Transfer mis-pricing is where imports can be given an exaggerated price to inflate costs and exports a low price to shift profits into a tax haven. The current standard set by the OECD is ‘arms length transfer pricing’ whereby multinational operations are supposed to act as if they are not related by using market prices. Under current accounting standards, ‘intra group’ trading within multinationals is hidden.
It is argued that adopting country by country reporting would:
• enable developing country tax authorities to ‘risk assess’ where they are losing potential tax revenues
• help defeat corruption by supplementing EITI (putting EITI disclosures into context)
• make globalisation accountable locally (multinationals do not float above the global economy)
• benefit everyone using multinational’s accounts (including shareholders)
• enable arms length transfer pricing in developing countries to work effectively (as information on market prices is often not available)
• expose the abuse of tax havens, a cost which is borne by us all.
• Economists would further argue that disclosing this information and making risks explicit is an essential component of free markets which would make them more efficient in allocating resources. This would reduce the cost of capital, encourage more economic growth and reduce poverty. This belies any suggestion that tax justice has an anti markets and business agenda.
Transparency and Corporate Social Responsibility
The changes discussed at the conference need international agreement and legislation which, even if there were political will behind it, takes time. Meanwhile, corporate social responsibility has a part to play. Indeed, there is a moral and a practical case for extending corporate social responsibility to transparency and tax. The prominence now given to tax issues and recent press coverage of tax at Vodafone, Goldman Sachs and Barclays means that companies may need to consider a number of risks: that their reputation with the public may be damaged, that they may face the uncertainty of litigation over tax avoidance arrangements with the closure of such arrangements disrupting their cash flow / profitability and the effects on recruiting and retaining the brightest and best (many people do not want to work for the ‘bad guys’).
How Automatic Information Exchange will help
If tax evasion is to be deterred and detected, jurisdictions need to exchange relevant information with other countries’ tax authorities on those who have shifted money abroad. The OECD’s current standard is called ‘information exchange on request’ which is widely considered inadequate as tax authorities seldom have sufficient details on who is hiding money abroad. That is why information should be exchanged automatically subject to protections such as excluding countries that do not respect human rights or the rule of law.
Tax havens are often called secrecy jurisdictions as they all, in some way, offer secrecy to those from outside. It was noticeable at the conference that none of the multinational representatives used the terms tax havens or secrecy jurisdictions, yet these jurisdictions have become central to the workings of the international finance system and the scale of tax avoidance and evasion which is particularly detrimental to developing countries. It was also noticeable that John Christenson of the Tax Justice Network gave a separate presentation to the conference on automatic information exchange before the panel discussion, implying that the multinational representatives would have felt uncomfortable participating in a panel discussion with him (except for the introduction to the conference, the other sessions consisted of panel discussions which included multinationals’ representatives).
The Tax Justice Network views the recent tax ‘deals’ between some EU members (including the UK) and Switzerland that preserve the famous Swiss tax secrecy as ‘toxic spoilers’ because they enable assets to remain hidden, are corrosive to markets, democracy and social stability, and will not generate the amount of revenue claimed (for a number of reasons, including assets moving to more distant secrecy jurisdictions).
Multinationals’ perspectives, areas of controversy and positive developments
Companies making investment decisions want a predictable and stable tax regime in order to forecast future profitability, and multinationals want a global standard so that the same rules apply to all companies in a market. They would also like to see the building of tax authority capacity in the developing world (it is better to deal with someone who knows what they are doing). The Department for International Development is currently focusing on building tax capacity.
Particular areas of controversy include:
• whether arms length transfer pricing can be made to work or if it should be replaced by an alternative system known as a ‘common consolidated corporate tax base with unitary apportionment’?
• how to account for and tax ‘intangibles’ such as intellectual property and brands which have become a more significant part of a multinational’s value and which are easy to hold in a secrecy jurisdiction as they are seldom geographically specific?
• the right balance between taxpayer confidentiality and deterring / detecting tax evasion and avoidance?
• the international tax system was largely built to prevent ‘double taxation’ of the same economic transaction by two countries’ tax systems, but how to remove the opportunities for artificial ‘double evasion’?
• when developing countries offer tax incentives to attract multinationals to set up operations in their country, whether the benefits exceed the costs?
Recent positive developments include:
• work by the OECD to enhance transparency and reduce the potential for evasion and avoidance
• calls by the European Parliament and the Council of Europe for country by country reporting (it is also being considered by the UK Parliament’s cross party International Development Committee)
• legislation covering transparency, such as the Dodd Frank Act in the US.
However, it was also pointed out that consensus to improve global standards is impossible whilst it is opposed by countries such as Switzerland and Singapore.
Views on tax justice have changed dramatically in the last four years, from those in the know regarding it as a harmless, gentleman’s sport to growing appreciation that tax dodging imposes real costs on society and especially on developing countries. This conference marked a milestone in that journey. The journey is a reflection of the impact that the Tax Justice Network and other advocates have achieved.
Progress to date now needs to be transformed into international agreements and real reforms. This needs political will and widespread support. Those who are concerned about global poverty and development should not shy away from the subject in the belief that tax is too technical for them. We can all understand the basics and become tax justice advocates.