SEATTLE — The recent discovery of the Panama Papers has reignited a conversation about corporate greed, tax evasion and its effect on the global community. Since the revelation of the papers, Iceland’s prime minister has stepped down and Britain’s prime minister, David Cameron, has admitted to profiting from his father’s offshore account. Leaders in Russia, China and other parts of the world have come forward to deny any illicit financial actions.
The fact that rich businessmen and politicians are profiting off tax evasion is concerning. Particularly since much of the money would have otherwise created tax revenue for the world’s poorest countries.
Tax revenue is one of the strongest indicators of an economy’s health. It allows countries to fund social services that can improve infrastructure and quality of life. In developing countries, tax collection is difficult for the government and unaffordable for many citizens. Therefore, these countries rely more heavily on tax revenue from business transactions and foreign investment.
However, many multinational companies are avoiding payment of these incredibly important funds—and the global community is allowing them to do it. According to a report published by the Independent Commission for the Reform of International Corporate Taxation (ICRICT), tax abuse by multinational corporations robs developing countries of resources to fight poverty and fund public services. Additionally, it worsens income inequality and increases underdeveloped countries’ reliance on foreign assistance.
Some countries provide tax breaks to corporations, allowing them to operate within a company without paying their fair share of taxes. For example, in a 2015 report released by ActionAid, Malawi lost $43 million in revenue over a six-year period due to just one Australian mining company, Paladin. Paladin managed to negotiate a tax break with the Malawian government which lowered some rates and exempt them from paying some taxes entirely.
This is an extreme problem for Malawi, which is classified as the poorest country in the world. The ActionAid report claims that the money Malawi lost by handing out tax breaks could have paid for “431,000 annual HIV/AIDS treatments, or 17,000 annual nurses salaries or 8,500 annual doctors’ salaries or 39,000 annual teachers salaries.”
Another common form of tax evasion is through company use of tax havens, which involves moving operations to countries with lowered or non-existent corporate taxes. For example, a 2013 ActionAid report notes that Tullow Oil Company obtained 84 percent of its sales revenues from Africa.
However, only four of its 81 subsidiary companies were registered in African countries and 47 were registered in tax havens. The United Nations Economic Commission for Africa reports that African governments lose between $30 billion and $60 billion per year to tax evasion practices like those of Tullow Oil.
In January, the EU proposed the European Commission’s Anti-Tax Avoidance Package (ATAP) in order to put controls on tax havens. However, according to Oxfam, ATAP’s intentions have done little to effectively combat the issue. Some of the agreements to track tax havens are non-binding, meaning “implementation depends on the goodwill of member states.” Oxfam also points out that some member states, such as the Netherlands, are tax havens themselves, “so confidence in this can only be low.”
In order to address this issue of impunity, both companies and countries are going to have to put poverty before profit and be held accountable for any illicit transactions.
ICRICT has made the following suggestions:
- Tax multinationals as single firms. This would prevent firms from abusing what ICRIT calls the separate entity principle: where companies split the steps of production to different countries in order to obtain tax breaks for certain activities in the production process.
- Curb tax competition to prevent a race to the bottom. By keeping countries accountable to certain tax rate levels, the global community can prevent countries from becoming tax havens as a means of attracting foreign capital and businesses.
- Increase public transparency of taxes paid by multinationals. If illicit activities carried out by companies are made more public, they may be less likely to engage in tax evasion for the sake of public image.
- Build inclusivity into international tax cooperation. Establishing an intergovernmental tax body within the United Nations and drafting a U.N. convention on tax practices could be a positive step towards cooperation.
– Taylor Resteghini