The unprecedented leak of files from the offshore law firm Mossack Fonseca reveal that although people and companies can use tax havens for legitimate purposes, too often such mechanisms are abused by those seeking to avoid paying their fair share of tax, potentially depriving the governments of hundreds of billions of dollars in revenues. Unsurprisingly, the call for all businesses and individuals to 'pay their fair share' is increasingly popular among tax justice campaigners in the Global North, where governments lose billions each year from tax dodging -- even as they reduce public spending on essential services in order to 'balance the books.' The rationale for ending tax haven abuse is incontrovertible: recouping the huge sums involved could enable governments to reverse programs of economic austerity, reduce inequality or even help fund innovative public investment programs such as a green new deal.
Globally, economists estimate that $7.6tn worth of assets are held off shore and are thereby avoiding taxation -- 25% more than five years ago and equivalent to 8% of the world's total financial assets. Citizens for Tax Justice have calculated that Fortune 500 companies alone hold a record $2.4tn in offshore accounts, which they argue allows them to avoid almost $700bn in US federal income taxes. Most recently, Oxfam have estimated that the 50 largest US companies have $1.4 trillion hidden in Tax havens, which costs the US government approximately $111 billion each year. In the EU, governments are reportedly losing out on revenues of between 50-70bn euros ($56-79bn).
Undermining Social Solidarity and Economic Development
In a global economy, tax avoidance of this magnitude not only weakens social solidarity and redistributive mechanisms within countries, it severely hampers efforts to reduce global poverty and strengthen international systems of sharing. The research organisation Global Financial Integrity estimates that developing countries lose around $1tn a year in illicit capital flows, much of which is facilitated by tax havens. According to UNCTAD, developing countries lose $100bn a year in revenues from corporate tax avoidance alone -- which is a far higher proportion of their GDP compared to rich countries, and only $30bn less than what they collectively receive in oversees aid. Calculations by Oxfam help put this figure into perspective:
"$100 billion is four times what the 47 least developed countries in the world spend on education for their 932 million citizens. [It] is equivalent to what it would cost to provide basic life-saving health services or safe water and sanitation to more than 2.2 billion people."
Improving international cooperation on tax matters and stemming the perverse flow of capital from the Global South to North would mean that developing countries could potentially channel significant amounts of additional funding into the provision of social safety nets and basic welfare. It would also empower them to end their dependency on oversees aid and finance poverty reduction from their own resources.
Despite the recent Panama revelations, the call for a more transparent, just and effective global tax framework has long been advocated by civil society organisations and a majority of developing countries. Most recently, the proposal was widely discussed during the Sustainable Development Goals (SDGs) negotiations, when the G77, China and a broad swathe of civil society groups called for an intergovernmental tax body with universal membership to be established under the auspices the United Nations.
However, even though donor countries pushed for governments in the Global South to take greater responsibility for mobilising development finance domestically, they once again neglected to enact the concrete measures needed to prevent illicit financial flows and tackle tax avoidance. This failure to empower developing countries to improve domestic revenues was widely decried as a major disappointment during the Financing for Development negotiations in July 2015, especially as it was unclear how governments would be able to meet the 'Global Goals' without mobilising huge amounts of additional finance.
In the absence of a more effective and inclusive global tax agreement, decisions on international tax rules continue to be undertaken undemocratically by the Organisation for Economic Co-operation and Development (OECD). Unfortunately, most developing countries have been excluded from the key decisions that have been made on global tax standards thus far, even though they are expected to abide by them. A complex web of thousands of unscrutinised and outdated tax treaties also exist between countries, many of which create additional opportunities for multinational tax avoidance. As Action Aid outline in their recent report 'Mistreated', these treaties invariably favour higher income nations and impose an unfair burden on lower-income countries, thereby widening global inequalities. To quote just one of many examples from their research:
"Bangladesh is losing approximately US$85 million every year from just one clause in its tax treaties that severely restricts its right to tax dividends. With an annual total health expenditure of approximately US$25 per capita, remedying this alone could pay for health services for 3.4 million people."
Towards International Tax Cooperation at the UN
The Panama Papers demonstrate that the world's fragmented tax systems are not only ineffective and open to abuse, but they can directly undermine systems of economic sharing and the provision of essential public goods and services. They also make a convincing case for establishing a more inclusive and just global tax architecture that can prevent the worst tax avoidance practices and bolster government revenues -- particular in developing countries. Unsurprisingly, calls for governments in rich countries to reconsider the proposal for a global tax body that were originally put forward during the SDG negotiations are once again on the rise.
According to the European Network on Debt and Development, the overall purpose of a UN tax body is to ensure that the international tax system is transparent, coherent and supports equality and development. In the longer term, one of the key tasks of the intergovernmental body should be to establish a legally binding and comprehensive UN Tax Convention that could level the playing field and replace the many thousands of complex treaty systems that currently exist. Central to the entire proposal, therefore, is the need to scale up international cooperation and ensure that all nations are involved in both the decision making and implementation process. Needless to say, the UN is the only forum in which such an inclusive and democratic process could be deliberated, since it has universal membership and provides a voice for all nations.
Even though there remains a robust demand from civil society groups and countries in the Global South for a UN-coordinated tax framework, OECD countries have shown little sign that they are willing to consider such a proposal. In response to the Panama leaks, the European Commission have instead proposed public tax transparency rules for multinationals on a country-by-country basis. But the proposals are weak and ineffectual as they are limited to the EU, do not apply to the vast majority of multinational companies, and only pertain to a small and selective list of tax havens. Similarly, the recent 'hammer blow' by European nations designed to expose shell firms and oversees trusts is regarded by campaign groups as lacking ambition and unlikely to ensure that beneficial ownership information is ever made public.
A number of international conferences in the coming weeks present governments with additional opportunities to rethink global tax cooperation and finally work towards an inclusive international solution. These include the latest Financing for Development meeting in New York, an anti-corruption conference in the UK and a World Humanitarian Summit in Istanbul. However, given the long history of government inaction on this critical issue and the influence of vested interests that benefit most from the secrecy that tax havens provide, it is unlikely that the needed reforms will be forthcoming anytime soon. As movements such as Nuit Dabout in France and Democracy Spring in the US demonstrate, an escalation in peaceful public protest therefore presents an important opportunity for concerned citizens to demand tax justice and a fairer distribution of wealth within countries and internationally.
Author: Rajesh Makwana