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The tax hypocrisy

  • 13 mei 2016

De verdeling van welvaart in de wereld wordt steeds schever. Vooral ook door het oneerlijke belastingsysteem waarmee multinationals ruim 100 miljard euro aan belastinggeld ontwijken in arme landen. Zo blijven arme landen arm. Farah Karimi, algemeen directeur van Oxfam Novib, spreekt overheden aan op hun belofte om voor 2030 een einde te maken aan extreme armoede. 'Overheden van rijke landen moeten zich inspannen om het belastingsysteem te hervormen, als ze zich aan hun belofte willen houden.'

Last September, world leaders adopted the Sustainable Development Goals. These provide a global agenda for sustainable development for the next 15 years. The Sustainable Development Goals include

  • ending poverty, in all its forms, everywhere;
  • ending hunger and achieving food security;
  • ensuring healthy lives for all;
  • ensuring inclusive and equitable quality education for all; and
  • reducing inequality within and among countries.

This is an ambitious agenda, but in a civilized world, we have to fulfill the rights of all people, and leave no one behind. And that is actually the reason why Oxfam engages in this discussion.

Now we need to find the means to realize these ambitions. More economic growth will not do the job. In Zambia, annual GDP growth averaged 6% between 1998 and 2010. However, the share of Zambia’s population living in poverty increased at the same time from 64% to 79%.This is obviously because of increased inequality.

In fact, at the global level, inequality is soaring. Five years ago, the richest 388 people on earth owned as much as the bottom half of humanity. That already dramatic disparity in wealth has only become worse. Now just 62 people own as much as the bottom half. A large part of that wealth is hidden in states like Panama, Delaware, or Singapore. Some 30 percent of all African wealth is held offshore.

To meet the Sustainable Development Goals, developing countries need to increase their budget for education, agricultural development, healthcare, and other essential public goods and services. Only one out of five developing countries meets the internationally agreed budget target for education. Only one out of six African countries meets the target for agricultural development. No African country meets the African Union target for healthcare. Governments should allocate a larger part of their budget towards these essential sectors.

Governments also simply need a larger budget. Most of that money will not come from foreign aid. Only a handful of rich countries meet the official target for development assistance, 0.7% of Gross National Income. Moreover, rich countries that do meet the target spend billions of their aid budgets in their own countries to pay for the costs of receiving refugees. This is the case for the Netherlands, for instance. That goes at the expense of helping the poorest people in developing countries.

Thus, while we call on rich countries to increase real development assistance, developing countries need to improve budget priorities and enhance domestic revenues.

Commitments required from rich countries

Enhancing tax revenues requires a commitment from rich countries as well. Tax havens like Luxembourg, Switzerland, Belgium and – indeed – the Netherlands, allow multinational companies to shift profits out of developing countries into their low-tax regimes. These rich countries have all agreed on the Sustainable Development Goals. However, they have not committed to undertake reforms that will put an end to international tax dodging.
This is what I call the tax hypocrisy. When it comes to development goals, they all agree, but when it comes to tax measures that are necessary to finance these goals, they look the other way.

Therefore Oxfam just started a public campaign in the Netherlands, calling on the government to end harmful tax practices. For example, we want public transparency about tax rulings and demand that so-called informal capital rulings, which facilitate aggressive tax avoidance, are banned altogether. We cannot achieve the Sustainable Development Goals without creating a fairer tax system.

We believe campaigns are necessary to put pressure, because tax policy always involves conflicts of interests, within and between countries. In that respect, tax is no different from any other development issue.

Let me illustrate that with a brief story about fish. It is a common saying among development workers that instead of handing out fish to poor people, so they have something to eat, it is better to teach them how to catch fish themselves. Building capacity is more sustainable. However, it does not end there. Imagine that others are fishing in your waters, with larger and more modern boats and equipment, and hardly leave anything for you to catch.

What’s the use of building capacity in such a situation? And that is precisely what happens to many African countries. Big European trawlers secured rights to fish in the waters of many African countries, making millions of local fishers worse off.

Without addressing such perverse policies and practices, sustainable development is impossible. Development is not just a technical story of distributing better boats and fishing nets, and teaching people to use them. It is also a matter of politics.

Tax is just like fish: the politics matter. Of course, it is important to build the capacity of tax authorities in developing countries. And the Dutch government, for example, is proud to be a key supporter of tax capacity building, and with good reason. However, capacity building is not enough. It is even more important to address the conflicts of interests, within and between countries, that create distorted budget allocations and dysfunctional tax systems. For rich countries, that means ending the tax hypocrisy. The Dutch government, again, still has some way to go in that regard, and it is not alone.

Reforms required in developing countries

At the same time, developing countries need to put their own house in order. Many countries are foregoing huge revenues because of tax breaks for special economic zones, specific industries, professionals, or individual firms.

Often people think that this is an inevitable outcome of countries competing for foreign investment. That is partly true. Although research shows that tax incentives are often not a decisive factor for investment decisions, foreign manufacturing firms are in a strong position to push for favourable tax breaks. Where there is real competition for foreign investment, developing countries need to coordinate their actions to end excessive tax benefits.

In many cases, though, tax exemptions seem to be designed to benefit specific domestic interests. What to think of the VAT exemption in Bangladesh for the photography industry, for example? What could be its social purpose?

Oxfam supports local civil society organizations in countries like Bangladesh to advocate better tax policies. Last year, we supported a research project in several countries called the Fair Tax Monitor. The results show that

Bangladesh stands out as a country with particuarly weak governance of tax exemptions. This creates all kind of possibilities for special interests to capture tax benefits.

The IMF and OECD are encouraging countries to rationalize tax incentives. Whereas that is very much welcome, their emphasis on cost-benefit analyses largely misses the point. Better tax tools, like better fishing nets, are not the most important thing. Tax breaks are a political problem. Wasteful tax exemptions exist for a reason – they often serve special interests.

Two opportunities to reduce tax leakages

Before I come to a conclusion, I want to highlight two measures that would help to reduces tax leakages in rich and poor countries alike.

First, adopting strong rules against parking profits in tax havens, so-called Controlled Foreign Corporation rules. EU member states are currently negotiating such rules for EU-based multinationals, with the aim to reach a political agreement on 25 May. If they achieve consensus about robust and effective CFC rules, it will become unattractive for EU-based multinationals to shift profits into tax havens. This would protect the tax base of EU countries as well as developing countries.

Unfortunately, there are signals that the UK is not cooperating. The UK seems to put its own interest to attract corporate headquarters, including through weak rules against tax avoidance, above the interest of all countries to address corporate tax dodging. This is the tax hypocrisy at its worst. As Oxfam we call on the UK government to act responsibly and to refrain from blocking effective CFC rules.

Second, requiring multinationals to publish figures about taxes, profits, and the size of their activities on a country-by-country basis. This makes it much easier to identify profit shifting and discourages aggressive tax behaviour. It also serves another purpose that is often overlooked. Public country-by-country reporting allows to identify which foreign investors benefit from corporate tax breaks. That information is currently often unavailable and will help civil society in developing countries to hold their own governments to account.

Again, some rich countries seem to put specific economic interests above the common interest to create a better tax system. Last month, the European Commission proposed a public reporting standard that would require multinationals to report taxes and other key figures per EU country, but not per developing country. The hypocrisy is obvious here. We need separate data for all countries worldwide.

Leaving no one behind

To summarize, all governments made an inspiring promise to realize the Sustainable Development Goals by 2030, for everyone. They promised to leave no one behind. Try to imagine what a difference that will make to the world.

For example, this picture shows Shanaj, a poor Bangladeshi woman, with her daughter Sarah Pauline. The government does not provide proper education for her daughter. There is only one teacher on every 75 children. I want that this situation changes, and that in 15 years, Sarah Pauline is no longer living in poverty and has developed her full potential.

The adoption of the Sustainable Development Goals comes with responsibilities for all countries, for all political leaders and business leaders. It implies that the governments of rich countries must commit to tax reforms that are necessary to finance these goals. We must end the tax hypocrisy, and Oxfam will continue to remind governments about that.

Bron: Oxfam Novib, 13 mei 2016