Need for a global tax regulator

The practice of tax evasion and tax avoidance has now become a global menace affecting both the rich and the poor countries with the latter taking the bigger hit.

The Organisation for Economic Cooperation and Development (OECD) estimates that as much as $240 billion is lost in tax revenues each year — that’s said to be significantly more than the total global aid budget. Some $100b of this is borne by developing countries.

According to Rosa Cañete (Calling time on tax havens—International Politics & Society newsletter dated Oct 4, 2017) that money ($100b) could provide education for 124 million children who don’t currently go to school.

Cañete coordinates Oxfam’s Iguales campaign against inequality in Latin America and the Caribbean. She sits on Oxfam’s executive board and is an expert in tax justice issues. She is now pushing vigorously for a new UN body to tackle global tax evasion and avoidance.

At last year’s UN General Assembly in September, 2016 Ecuador’s Foreign Minister Guillaume Long had also proposed the creation of a global tax regulator with powers to close tax havens, crack down on multinational corporations that evade tax, and expose individuals who hide their wealth in offshore banks.

The third International Conference on Financing for Development in July this year had placed the establishment of an agency to drive reforms of the global tax system at the heart of its agenda. Unfortunately, the plan was said to have been thwarted by the US and the UK.

But the demand for such a body is gaining increasing worldwide support as the exposure of current practices in the Panama Papers, Swiss Leaks and Lux Leaks has fuelled public debate. Citizens are demanding their governments be held accountable.

An initiative by the OECD and G-20 to tackle base erosion and profit shifting (BEPS) — using tax loopholes to artificially shift profits to low or no-tax locations — is said to be a step in the right direction. However, the terms of this initiative, according to Rosa Cañete, have mainly been defined by rich countries. Key concerns of the global South are said to have remained unaddressed.

For instance, as Rosa Cañete pointed out, the private sector in rich countries benefits from tax competition between poorer countries, which lower their tax rates to attract foreign direct investment. Since the rich countries that make up the OECD benefit from this practice (whereas poor countries lose out), tax incentives are not covered by the BEPS initiative.

She further pointed out that equally, there is the question of tax liabilities — should they apply to the country where a company has its head office or where it produces its goods? Wealthy countries, she said, naturally prefer to pay tax where a company has its head office. Countries in the South, on the other hand, are keen to see companies pay tax based on where they produce the goods they sell, as many companies have set up branches in developing countries.

In view of these opposing interests, a multilateral authority under the UN is said to distinguish itself by involving all countries in the democratic process and working towards a consensus in the case of disputes.

According to Rosa Cañete, the topic of fair taxation is rapidly gaining ground in Latin America as a slump in global oil prices is leading to reduced revenues in these countries. At the same time, Latin American countries are finding themselves competing against one another to attract foreign direct investment. Limiting competition is crucial if countries in the region want a share of the profits multinationals make on their soil, and improve the lives of their citizens.

Meanwhile, the East African Community (EAC) is said to have agreed to harmonise tax policies between its member states, with the aim of reducing distortions affecting tax revenues. This has led to EAC member states agreeing on a single minimum corporation tax rate of 30 per cent.

Without regional and international coordination, at a UN level for example, the situation is expected to go from bad to worse.

Published in The Express Tribune, October 7^th, 2017.

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