At the Financing for Development Conference in Addis in July 2015, developed countries blocked a proposal to establish an intergovernmental body within the United Nations on international cooperation in tax matters. There is a fundamental difference between North (where international companies are mostly headquartered) and South (whose interest lies in obtaining a fair share of the tax revenues arising from the operations of international companies in its territory). This divide can be better bridged in work by an intergovernmental body in the UN. The Addis Ababa outcome however sacrifices good governance and tax justice.
Who decides international tax cooperation norms?
In the waning hours of negotiations on the outcome of the Third International Financing for Development Conference in Addis Ababa, only one issue hung in the balance: upgrading United Nations cooperation in international tax matters to an intergovernmental level. This would have given the UN, with its global membership, at least equal standing with the purely Northern OECD to set norms of international tax cooperation.
The hopes of developing countries for intergovernmental tax work in the UN were dashed late in the last evening of the conference. There was polite clapping when negotiations ended, but no euphoria or elated relief. As one observer noted, it was as if people were celebrating that the world would not change, that the OECD would continue to have exclusive power to decide on norms related to international tax cooperation. Despite being proposed in the zero draft of the outcome document, there would be no intergovernmental cooperation on tax at the UN.
Northern model is holding back the South
In a May 2014 study entitled Spillovers in International Corporate Taxation, the IMF found that the network of bilateral double taxation treaties based on the OECD model significantly constrains developing countries’ rights to earn taxes on foreign company operations in their territories. The negative “spillover impacts” (the effect of tax laws and practices) on developing countries are more than twice as large in non-OECD as in OECD countries. These losses are in many cases substantial since developing countries derive a greater proportion, as much as 50 per cent of their tax revenue in some cases, from corporate taxes (while OECD countries can rely on other sources such as individual income taxes).
A report commissioned by the UN Economic Commission for Africa and the African Union (High Level Panel on Illicit Financial Flows 2015) highlights the possibility that illicit flows from Africa could be as much as US $50 billion per annum. Developing countries have always seen preventing these kinds of losses as a priority but cannot do it alone since the infrastructure of tax avoidance and evasion are sustained by the laws and actions of developed countries. In fact, for developing countries, the biggest tax havens are London, New York, Miami, Amsterdam and Zurich.
The Addis Ababa outcome falls far short of meeting the standards of “good governance at all levels” and “rule of law” because it failed to strengthen either norm setting or joint actions in the global partnership for development. Instead it moved these out of the reach of the communities and countries that are their proclaimed beneficiaries.
Capacity-building is not enough
One consolation offered in the Addis Ababa outcome is the promise on the part of developed countries to support developing country capacity building to reduce tax evasion and abuse. But in the same May 2014 study, the IMF says “Limiting adverse spillovers on developing countries requires not just capacity building, but also addressing weaknesses in domestic law and international arrangements.” Capacity building is not enough. In fact, one could go further and pose a far more pertinent question: if the OECD countries are unable to effectively prevent tax avoidance on an embarrassing scale within Europe by companies such as Google, Microsoft, Starbucks, Caterpillar and Apple, what kind of technical assistance can they possibly share with developing countries? The OECD project Base Erosion and Profit-Shifting (BEPS) tries to wrestle with these issues, but this project does not cover all the tax evasion issues that are of direct interest to developing countries.
In conceptual terms, there is a fundamental difference between the approach of countries in the North (where most transnational company headquarters are resident) versus that of those in the South. Developing countries want to base their tax revenues on the “source income” because it allows them to obtain tax revenues from the local operations of foreign companies. In contrast, countries of the North want to tax the headquarters’ earnings of their companies. By design and self-interest, this conceptual chasm is not addressed in the OECD BEPS project.
Fairer tax governance as a pathway to better development outcomes
The amounts that developing country authorities are unable to collect in taxes because of uncontrolled international mechanisms of evasion and avoidance translates into higher tax burdens on purely domestic enterprises, including on smallholder farmers and small businesses in which women disproportionately participate. The same uncollected sums severely constrain tax revenues that can be used for social protection and infrastructure investment. These lost revenues obstruct the ability of states to apply the “maximum available resources” to fulfill their human rights obligations.
In the negotiations on the outcome of the Addis conference, many European Union states and non-EU members—notably Switzerland—waxed eloquent about the imperatives of gender equality and human rights, as did the USA and other developed countries. These same countries succeeded in freezing out developing countries from decision making in international tax sharing in the Addis Ababa outcome. By keeping to themselves decision making on international tax cooperation, these countries are able to trumpet their concern for gender equality and human rights without being brought to account for the impact of their own tax policies and practices on meeting these human rights obligations in developing countries.
High Level Panel on Illicit Financial Flows. 2015. Report of the High Level Panel on Illicit Financial Flows from Africa. Report commissioned by the AU/ECA Conference of Ministers of Finance, Planning and Economic Development. February 2015.
International Monetary Fund. 2014. Spillovers in International Corporate Taxation. IMF Policy Paper, May 9, 2014, IMF: Washington DC.