Wednesday, July 27, 2011

Poor countries fight against rich countries on global tax

From the Treasure Islands site:

I have an article on The Guardian blog today, co-authored with Martin Hearson of ActionAid. It's hard to get a lot of traction in the media about international tax and developing countries - but it matters a great deal. The article reads as follows:

Poor countries fight for reform of global tax systems
The OECD club of rich countries is battling poorer states over a controversial global tax deal that could affect multinational tax schemes

By Martin Hearson and Nicholas Shaxson

Visiting South Africa and Nigeria last week, David Cameron wrote in a South African newspaper about the benefits of "effective tax systems" – but failed to mention aggressive tax avoidance by multinational corporations, something that South Africa's finance minister has called "a serious cancer eating into the fiscal base of many countries".

Meanwhile, the British government is locked in battle with South Africa and other developing countries over a controversial global tax deal, which is due to be finalised in Geneva on Wednesday; a deal that could potentially have a large impact on multinational tax schemes. It has become a rather hot potato.

On one side of this fight sit Britain, the US, the EU and other rich countries, which want to maintain the pre-eminence of the OECD (Organisation for Economic Co-operation and Development), a club of rich countries, as the body that dominates the setting of global tax rules. On the other side, along with South Africa, sit Argentina, Brazil, China, India, Mexico and other developing countries, which want developing countries to have a bigger voice.

When a multinational from one country invests in another, these global rules form the framework for deciding which country gets to tax which bits of the resulting income, and to what degree. Current OECD-dominated rules tend to skew taxing rights towards richer countries, and do a poor job of stopping multinational corporations (typically from rich countries) setting up schemes to avoid tax, often via tax havens.

The developing countries are seeking to strengthen the UN's own tax committee – the committee of experts on international co-operation in tax matters – which could potentially represent and advance the interests of developing countries far better than the OECD ever can. And, as Chile's permanent mission to the UN noted recently, the UN tax committee "is the only body with global membership in which these issues can be discussed".

More than a quarter of G20 member states – including Mexico, its next chair – are on record in favour of a stronger committee, and now, after years of relative quiescence on this crucial issue, developing countries seem to be finding their voice.

"The day is gone," said a speaker at a recent UN meeting in New York, "when there are rule makers and rule takers."

Argentina and China tabled the proposal earlier this year to upgrade the status of the committee, but the rich countries are justifying their opposition to this with rather convoluted logic, saying that sticking with a dominant OECD would "maximise synergies" and "avoid duplication".

This issue has been discussed before, and the UK has long opposed reform. Back in 2008, British diplomats spiked a similar proposal at a UN development conference. In answer to a written question in parliament in March, Treasury minister David Gauke curtly reiterated the UK's position opposing this route to giving developing countries a greater voice.

To be fair, some argue that while the UN may be the most legitimate forum to deal with international economic issues, it isn't always the most effective. Even UN secretary general Ban Ki Moon recognised as much last month: the UN is a universal forum, with unique legitimacy, he said, "but legitimacy alone is not enough".

The UN's tax committee is probably one of its more effective bodies. With scant resources, it takes complex global tax standards developed by rich countries through the OECD, and seeks to adapt them to better reflect the needs of developing countries. For example, it produces a model tax treaty used by developing countries when they negotiate tax treaties with rich countries. "Without that UN model [tax treaty], geez, negotiations would be a hard time," one African tax official told ActionAid earlier this year.

Tax inspectors from developing countries say they need the work of both the OECD and the UN to do their jobs well. But the OECD cannot be allowed to dominate proceedings. As another African tax official said: "The UN should do more. We are losing a lot from the OECD."

The UK, US and others should listen to developing countries and support the long-needed reform for which they are calling.

Cameron, as it happens, was accompanied on his South Africa trip with the bosses of some of the most accomplished exponents of the devious arts of aggressive tax avoidance, including Barclays, Vodafone and auditors PriceWaterhouseCoopers, who advise many businesses on how to dodge tax.

According to preliminary indications, things haven't gone very well in Geneva this afternoon for developing countries - but we await further information.


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