I did not start this blog with the intention of endlessly cataloguing strange-numbers-and-weird-beliefs in the international tax avoidance debates, but since I have taken on the role of the child-who-missed-the-memo-about-the-Emperor’s-New Clothes, I guess I have to keep pointing them out when they stride past.
Last week the king who was in the altogether was Transparency International, the grandfather of transparency and anti-corruption advocates, a usually sober organisation which takes its own accountability seriously
Transparency International’s Brussels team put out a video on the issue of multinational tax avoidance which makes the case for public country-by-country reporting; highlighting the issue of profit shifting, the ‘lux leaks’ scandal and state aid cases involving Fiat and Starbucks. (its about 3 minutes)
‘The potential impact of such deals is huge’
After introducing the topic the video says
“The potential impact of such deals is huge; In the EU alone 1 trillion Euro is lost each year by tax evasion and avoidance, luckily there is a solution…. ”
Hold up. A trillion Euros a year is not just huge, its huuuuuuuge. It is more than double the total amount of corporation tax that European governments collect from domestic and multinational companies combined. It is around 20 times what is implied by the OECD’s recent estimate of global Base Erosion and Profit Shifting, or 7 times the equivilient figure that Ernesto Crivelli, Ruud De Mooij and Michael Keen at the IMF come up with (*warning: back of an envelope calculations– see below).
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Tax abuse scandals have played a big role in the Zambian national debate on how best to tax mining, and Zambia, as a case study, has played a big role in international debates on tax abuse and development.
In particular many believe that Zambia is a prime illustration of where multinational mining corporations are selling commodities at below market prices to offshore subsidiaries, creating an ‘illicit flow’ which conceals a hidden tax-free profit margin. Others (such as the International Council on Mining and Minerals and the World Bank) argue that the reason why Zambia’s copper revenues appear lower than other countries is more prosaic: a combination of costly mines and large recent investment expenses.
David Manley’s excellent ICTD working paper ‘Caught in a Trap’ describes the controversy and the history of Zambia’s mining taxation regime – the push and pull of secrecy and leaked documents, public pressure and government and industry brinkmanship – and the swinging pendulum of reforms that has resulted. He highlights the fiscal policy design dilemmas of dealing with the ‘obsolescing bargain’ problem, price volatility and public expectations – and the trap of low-performing unstable investment environments that this can lead to. In particular he argues that there is a trade-off between regressive royalty-based regimes and progressive profit-based systems. Royalties deliver earlier public payouts and are less vulnerable to avoidance, but are susceptible to continual renegotiation pressures. Profit based taxes are responsive to price changes and underlying costs but depend on the capacity of revenue authorities to administer things like transfer pricing, and to secure public confidence in the system.
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Last Friday a story appeared in the national press in South Africa, Ghana and Uganda with headlines about ‘MTN’s offshore billions’. It appeared to reveal a secret ‘stash’ of money built up by the company behind a brass-plate shell company in Mauritius.
“The Finance Uncovered global network of investigative reporters have today published a cross-border investigation into South African telecoms giant MTN exposing how billions of rand from its subsidiaries in Ghana, Nigeria and Uganda have been shifted to a shell company in the small island tax haven of Mauritius.”
I have written about some of the confusion and misperceptions around the big number estimates of international tax dodging, but I am wary of jumping in to ‘defend’ individual companies. There are lots of reasons not to. They can defend themselves. People will roll their eyes and say “there she goes again, helping the tax dodgers”. And if it turns out to be the next Petrobras scandal-in-waiting, I will look pretty silly, gullible or even mendacious.
But still, it’s a serious charge and deserves looking at seriously. If MTN are finagling to artificially shift profits to low-tax destinations there are questions to be answered. It they are illicitly concealing them in a secret offshore ‘stash’ that is really serious. But what if their accounts simply reflect what it looks like when you undertake the complex, legitimate and hugely important business of bringing capital, technology, cash-flows and know-how together to build mobile phone services across 21 countries in Africa and the Middle East? Continue reading ‘Looking for MTNs ‘Offshore Stash’’
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As regular readers of my occaisional blog posts will know I have had a bee in my bonnet for some time about the how we understand (and frequently misunderstand) the ‘big numbers’ about international tax evasion and avoidance (and related illicit flows), and what they might mean in relation to finance for development.
I am now working on a small project with the Center for Global Development to build shared understanding of these numbers. Most excitingly the project has an advisory group which includes campaigners and tax experts engaging constructively together.
Here is the ‘launch’ post, reblogged. Do comment here, or over at CGDev. And if you would like to be involved as a reviewer get in touch with me: h…m….@gmail.com (i.e. email address is the same as the WordPress title)
Taxing Multinationals: Is There a Pot of Gold of Finance for Development?
Taxation, which has been a Cinderella subject in development, has finally been invited to the ball, but the arguments that have helped to push taxation up the finance-for-development agenda may also be in need of clarification.
There is widespread perception that:
- There are huge areas of untaxed or undertaxed economic activity in the poorest countries
- Undertaxing is mainly a product of clever “tax-dodging” practices of multinational corporations, with armies of lawyers and accountants, and
- Gaps in basic health care, education, and infrastructure could be solved by a few changes to international tax policy and transparency.
These views are often expressed by campaigners who have played a key role in pushing the complex and technical topic of international taxation into the spotlight. They believe that reforming taxation of multinational enterprises would deliver amounts of money that could unlock major development benefits for the poorest countries; enough to offer a path out of poverty for billions of people (Action Aid), get every child into school four times over (Oxfam), end world hunger (IF Campaign) or prevent 3.6 million deaths in the world’s poorest countries (ONE campaign).
It is certainly true that the potential for domestic resource mobilization dwarfs all other forms for financing for public spending, and it is also true that countries have achieved significant gains by concentrating on improving tax collection. But there are methodological issues with some of the calculations of taxes lost, and the particular issues they relate to.
And more broadly there is an inconvenient truth that these ‘big numbers’ (in the region of $100 billion) are just not that big, amounting to a 1 or 2 percent increase in overall tax revenues, according to a recent study by UNCTAD, with the biggest sums concentrated on larger emerging economies. The headlines about bringing billions out of poverty and closing gaps in basic services seem to be based on the assumption that every penny of additional tax raised would go to social spending and would cross borders effortlessly. But taxes raised in countries such as China, Indonesia, and Russia are unlikely to be available for buying mosquito nets and exercise books in Mozambique and Mali. (NGOs are not the only ones to say this: the OECD’s soundbite that developing countries lose three times more to tax havens than they get in aid seems to be based on a similar conflation of big and small economies).
A polarizing dynamic has emerged in which these numbers, and the perception that they represent problem-solving sums of money for the poorest countries, have got a life of their own, and have become a barrier to understanding the problem of domestic resource mobilization. While no one argues that initial rough estimates are sufficient for evidence-based policymaking, criticizing or questioning these estimates often tends to attract rebuttals and accusations of “defending tax dodging”.
That is not constructive. Tax policy discussions should be based on sound analysis. Civil-society advocates, policymakers, and tax experts need some common ground of concepts, definitions, and data to be part of the same conversation.
We are contributing with a small project to determine how estimates related to tax avoidance and tax reforms should be interpreted, what they tell us about the potential for specific policies to raise taxes in specific countries, what we know (with what degree of confidence), and what has just become de facto common knowledge because it has been repeated so often.
The result will be a short report with a long acknowledgements list. As a first step we have drawn together an advisory group including Alan Carter, HMRC; Paddy Carter, ODI; Mike Devereux and Judith Freedman, Oxford Centre for Business Taxation; David McNair, ONE Campaign; Robert Palmer, Global Witness; Wilson Prichard, International Centre for Tax and Development; Heather Self, Pinsent Masons; Mike Truman, recently retired as editor of Taxation; and Marinke van Riet, Publish What You Pay (all participating as individuals). Alex Cobham from the Tax Justice Network also participated in the first meeting to discuss the issues.
There was considerable agreement among the group that better analysis is needed to support nuanced policy discussion but disagreement about whether the initial use of rough-and-ready calculations and name-and-shame accusations was justified as a way to raise attention about a poorly understood and under-resourced policy area.
What do you think? Do the ends justify the means? What is the best way forward to improve domestic resource mobilization?
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On January 7th, like many others, I watched with horror the shaky mobile phone videos of masked gunman on the streets of Paris.
Since then I’ve read the blogs and commentary on religion and freedom of speech, and I’ve discussed the issues with my teenage children, as they have tried to make sense of it for themselves. Salil Tripathi’s commentary is the best thing I’ve read; restating the principles that “freedom of expression is fundamental; that religion is an idea; that nothing, no idea, is sacred; that ideas don’t have rights, people do”.
But on January 7th there was also homework to do and schoolbags to pack. Checking over my son’s bag I noticed his Religious Education (RE) homework on Islam and Mohammed. Each time Mohammed’s name appears on the printed worksheet it was followed by the acronymn ‘PBUH’ (Peace Be Upon Him) and at the bottom there was an instruction to remember not to use any images of Mohammed.
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This week the Daily Mail created a stir by reporting that t-shirts produced for the Fawcett Society by Whistles, and modelled by British political leaders, had been made in ‘Sweatshop conditions’ in Mauritius.
I’m not a big fan of gesture politics, overpriced boxy t-shirts, or the Daily Mail. But I am a feminist and I know a little bit about the apparel industry.
This is not what a sweatshop looks like.
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Reblogging my post from the International Centre for Tax and Development:
Taxation is important for development, not only because taxes provide the revenues to fund public services and infrastructure, but because they are a critical accountability link between governments and citizens.
Regular headlines and report findings tell us that a major problem keeping poor countries poor is that large corporations use clever techniques to avoid paying their fair share of tax:
- “The money that developing countries lose each year because of the tax antics of big business is very nearly one-and-a-half times what they receive in terms of aid. So, on the one hand, you’ve got relatively rich governments handing out aid, but at the same time you’ve got the multinationals busy taking out as much as they can from those countries.” (Christian Aid)
- “If multinational companies were taxed fairly, developing countries could raise an extra $242 billion to tackle inequality.”(Oxfam)
- “Developing countries lost US$5.86 trillion to illicit financial flows from 2001 to 2010 and […] corporate tax abuses such as transfer mispricing accounted for 80 per cent of those outflows.” (International Bar Association)
- “[Developing countries] lose between €660 and €870 billion each year through illicit financial flows, mainly in the form of tax evasion by multinational corporations”(Eurodad)
- “Tax dodging corporations are depriving the world’s poorest countries of billions of dollars they could use to feed their people” (IF Campaign)
It’s a shocking message, but one that is also appealing in that it identifies familiar, satisfying and conveniently accessible culprits for underdevelopment.
It is an argument with undeniable moral power, but most compellingly of all it offers the promise that a few relatively simple international interventions could unlock massive new flows of revenue to governments in the poorest countries. Respected development organisations tell us that stopping this international tax avoidance could release resources on a scale that would solve the most urgent challenges for development:
- The IF campaign estimated that corporate tax avoidance is costing developing countries an estimated £70bn a year, which could be used to save the lives of 85,000 children under the age of five in the world’s poorest countries every year.
- Action Aid stated that tax losses recovered in Africa would be enough to achieve universal primary education and universal healthcare, with enough money left over to upgrade Africa’s entire road network[i]
- ONE said that as many as 3.6 million deaths could be prevented each year in the world’s poorest countries if tax avoidance due to trade mispricing was addressed.
- Christian Aid said that tax avoidance costs the lives of 1,000 children a day.
As Christian Aid point out if you do, you risk looking like you want to detract attention from the consensus on tax dodging and developing countries. And people will probably assume that you are an apologist on the payroll of Big Tax Avoidance.
But still, not looking too closely at the evidence puts those who are concerned with tax and development at risk of conveying misunderstandings, distorting our own priorities, missing chances for constructive engagement, and ultimately risking advocating for poor policy. So I think it is worth taking the data seriously and not just using it for decoration. Continue reading ‘Corporate Tax and Development: opening Pandora’s Box’
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