Why you should care
Taxes and accounting have a lot more to do with global poverty than you think. And activists and economists are trying to change that.
Pooja Bhatia is an OZY editor and writer. She has written for The Wall Street Journal, The New York Times and the Economist, and was once the mango-eating champion of Port-au-Prince.
The scene: the opening session of September’s Clinton Global Initiative, an annual gathering of business and political elites aimed at reducing poverty. The player: Mo Ibrahim, the Sudanese billionaire and transparency advocate. The windup: a softball question about what tech companies should do in Africa.
The result: a soapbox.
“The first thing, Mr. President, they can do, actually — all these wonderful companies — is to pay their taxes,” Ibrahim said. “Believe me, all those big companies don’t pay taxes in Africa. That’s just not acceptable.” The discourse gained speed and fury as it segued into the damages caused by overfishing. Then it circled back: “Please stop the raping of our oceans and our tax systems, and let us have a decent relationship. That’s all we’re asking for.”
Cue a smattering of applause and much shifting in seats: Ibrahim is right. Experts say that for every aid dollar developing countries receive, between $1.50 and $3 exits those countries through tax dodging. A multinational corporation with a sophisticated system of transfer pricing and tax havens can easily pay no taxes in poor countries. Most use aggressive tax strategies to minimize their payments to poor country treasuries. Lack of tax revenue, in turn, leads to all sorts of ill effects in developing countries: Nations with empty coffers generally can’t provide basic services like health and education, invest long-term in projects or even build up adequate police departments.
For every aid dollar developing countries receive, between $1.50 and $3 exits those countries through corporate tax avoidance.
The problem has received more attention over the past few years, thanks to more activism and the global recession, which has put more pressure on large corporations to show how they benefit — and what they cost — governments.
A 2010 report by the nongovernmental group ActionAid focused on the Ghanaian operations of SABMiller, a conglomerate beer maker whose subsidiaries extend tentacle-like around the world. In Ghana, the report said, it paid no income tax, while the Ghanaian owner of a bodega that sells its beer paid plenty.
The problem is twofold, experts and advocates say. First, many poor countries lack resources for tax collection, enforcement and audits. Multinational corporations, on the other hand, are hugely sophisticated, sometimes with budgets comparable to entire GDPs — and have some of the best tax attorneys and accountants in the world. Their job description involves gaming the system to minimize their companies’ tax burdens.
Meanwhile, a worldwide tangle of bilateral tax agreements, havens, trademark laws and transfer-pricing agreements allow corporations to juggle their profits around to low- or no-tax jurisdictions. The thicket has unintended effects. For instance, treaties intended to avoid double taxation, in which companies overpay their taxes by paying them twice, have resulted in double no-taxation.
The problem: Tax avoidance ‘is not illegal. It’s part of the system,’ says attorney Heather Lowe.
“It’s not rocket science” even if it sounds complicated, says Eric LeCompte, president of Jubilee USA, one of the organizations that in recent years has galvanized the fight against “illicit tax flows.” NB: Illicit doesn’t mean “against the law.” “That’s actually the problem,” says attorney Heather Lowe, who works on the issue for Global Financial Ingrity. Tax avoidance “is not illegal. It’s part of the system.” (Lowe worked for many years as a corporate tax attorney and knows the strategies and incentives for evasion from the inside.)
Tax transparency advocates have scored a few recent victories. At June’s G8 summit, leaders of the world’s rich economies pledged to take a tougher stance on tax evasion, including more transparency about where taxes are paid and shell companies. The OECD soon after issued an action plan to stem tax-base erosion and profit shifting. That plan, which calls for measures to end double nontaxation and to enable more information sharing, among other things, was endorsed at the G20 summit in September.
Activists say they’re heartened by the attention and declarations — in some ways, just admitting that tax avoidance is a problem for poor countries is a huge step — but they don’t go far enough. Proponents of tax fairness are shooting for something that sounds terribly wonky and (let’s admit it) exciting, too: country-by-country reporting. CBCR would enable watchdogs (and eventually the public) to discern exactly how much companies contribute to national treasuries and how much they profit. All of that information already exists, says Lowe, but companies are reluctant to share it, often because, they say, they don’t want to disclose their tax strategies. But CBCR would “at least would create the ability for a tax authority to say we think something is off, we have reason to investigate,” says Lowe, as well as an incentive for companies to play fair. “Having that information be publicly available would make them reluctant to do otherwise.”
For all the nice talk, there’s still plenty of resistance. Lowe points out that despite massive public support for closing tax loopholes and ending corporate havens, “the responsibility rests in the hands of our lawmakers who are either not willing or not brave enough” to take on the challenge because they depend on corporate donations. Or, as Carl Gibson, founder of tax accountability movement U.S. Uncut, puts it: ”Congress has become a brothel, no disrespect to sex workers.”
I always say that for every corrupt leader, there are 50 corrupt businesspeople, half of them sitting here.
There’s resistance even at the international level. Cephas Lumina, a Zambian human rights lawyer who is an Independent Expert for th UN’s Office of the High Commissioner of Human Rights – he specializes in finance and human rights – was charged by the Human Rights Council to do a comprehensive study of illicit financial flows, including tax avoidance, and their effects on human rights.
“When I got this task, I faced a lot of questions and resistance from developed nations,” he says. They asked him, ”how is it a human rights issue?” he says.
For Lumina and many others, the answer is obvious, and has to do with countries having enough money to provide their citizens a decent standard of life. As for the allegation that corruption, not tax avoidance, is mostly to blame for empty treasuries in the Global South? Pshaw, said Ibrahim, the Sudanese billionaire.
“I always say for every corrupt leader, there are 50 corrupt businesspeople,” he told the suits in the audience at the Clinton Global Initiative, “half of them sitting here.”
Cue the uncomfortable laughter.