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05.02.2018

Snack Bar Pays Higher Taxes than Big Company

Tax evasion has reached absurd levels all over the world. But it is possible to make taxation and tax avoidance more transparent.

Martha Luttgrodt from Ghana runs a snack bar next to a brewery owned by the giant firm SAB Miller and even sells their beer. Yet between 2007 and 2010 she paid more in taxes than did this giant company worth billions. Not only has worldwide tax avoidance taken on absurd dimensions; it also has become a global justice issue. When funds are withheld from states and societies that are badly needed for the construction and upkeep of basic infrastructure, the future of their people inevitably will be adversely affected. Hence, the outrageous, illegitimate, and illegal capital flows originated by multinational corporations and wealthy individuals are one of the principal reasons—besides war and climate change—driving people to flee their homes and countries.
 

Countries in the Global South lose far more due to capital flight than they gain from international development aid
 

For every US dollar devoted to development cooperation (i.e., foreign aid), at least ten dollars are sent abroad illegally from developing countries—money that could be put to good use elsewhere. In 2014 flows of hot money from countries in the Global South to rich countries and tax havens amounted to between ten and twenty times the entire budget allocated to development cooperation for 2015. If these illegitimate capital flows were stopped, countries in the Global South would be able to collect 100 to 200 billion euros more in taxes annually, even if that money were taxed at low rates. In that case they could finance urgently needed public projects and offer a better economic and social future to their citizens.

Moreover, tax avoidance strategies adopted by multinational corporations such as IKEA, Google, and Vodafone hit countries in the Global South much harder than those of the Global North. To be sure, even industrialized countries suffer from tax revenue losses due to corporate tax avoidance; Nevertheless, losses in the Global South range from 6 to 13% of the tax take, whereas in OECD countries they amount to just 2 to 3%.
 

The industrialized nations are blocking fair international taxation
 

The rules for taxing corporations promoted by the industrialized nations are highly complex, resource-intensive, and designed primarily to insure that they will be able to collect taxes for their own treasuries. Because of newly enacted regulations, even the German tax authorities badly need more personnel. But their situation is in no way comparable to that faced by tax authorities in many poorer countries. By one estimate, the nations of sub-Saharan Africa would have to hire 650,000 more tax officials in order to match the per capita ratio of tax collectors to taxpayers that prevails in the rest of the world. It is apparent to everyone that they cannot accomplish this even in the short run, nor would they have sufficient public funds to do so. Thus, in the final analysis it is the multinational corporations that so far have profited from the complex rules and regulations.

Double taxation treaties negotiated between Germany and a series of developing countries pose yet another problem, since they can restrict those countries’ rights and room for maneuver. The idea is to prevent corporations doing business in both countries from having to pay taxes twice. For that reason, these agreements limit the right of states to levy taxes. If developing countries refuse to conclude such treaties, they are shunned by foreign firms and capital. The pressure on developing countries to attract investment can lead to a “race to the bottom” where taxation is concerned. Thus, if it wishes to combat the causes of capital flight, the German government should see to it that double taxation agreements insure that the countries of the Global South have adequate rights to levy taxes. Until now, that has rarely been the case.
 

Courageous whistleblowers show the way: transparency is one solution
 

More than anything else, tax avoidance and capital flight rely on anonymity and institutional secrecy. Accordingly, shadow financial centers provide arrangements that can be used not only to evade taxes, but also to facilitate criminal activities, from the trade in drugs and weapons to human trafficking and corruption, and even the financing of terrorist groups around the world. Those shady activities would become much more difficult if we finally could establish across-the-board transparency on international financial markets.

However, courageous whistleblowers so far have done more to encourage transparency than state-enacted regulations. For example, the whistleblower Antoine Deltour revealed through LuxLeaks that large corporations like Google, Apple, Amazon, FedEx, IKEA, PepsiCo, DeutscheBank, and E.ON had ratcheted down their taxation on profits to less than 0.1%. And the Panama Papers showed that money laundering and tax evasion aided and abetted by letterbox companies has become a huge enterprise. These leaks exert pressure on politicians gradually to rethink their positions. To this point, however, efforts to institute greater transparency in financial transactions have failed to keep pace with the expansion of shadow financial centers.
 

Three countermeasures against tax avoidance and capital flight
 

To combat tax avoidance and capital flight in a way that produces sustainable results, we need to have more than a few committed whistleblowers. More concretely, three measures that favor transparency could help:

  1. Full disclosure of the identities of those who profit from letterbox firms, foundations, and trusts. A register of this kind was created in Germany not long ago, although it is not open to the public. That means citizens from the countries of the Global South cannot find out who might be sending money illicitly or illegally out of the country, or with which firms they are affiliated.
     
  2. A genuine automatic information exchange concerning financial accounts. Although this was introduced in 2014, on closer inspection it turned out to be almost exclusively an affair of the Global North. Such information also would be vitally important to the Global South, enabling countries in the region to recognize and block capital flight. But when it comes to data exchanges, Germany continues to insist on reciprocity. In effect, this means that Germany will hand over its information only to countries that collect the same data under the same standards as it does. Given the above-described capacity problems that afflict many tax collection authorities in the Global South, such reciprocity is a pipedream.
     
  3. Country-by-country reporting (CBCR) for business enterprises. This measure would offer a way of determining where companies really do business, earn their profits, and pay taxes--or don’t pay them. By now some 111 countries have instituted such balance sheet reporting; however, the data are usually accessible only to the authorities.

These three transparency measures are crucial to ending illegal capital flight and tax avoidance.

 

Author

Lisa Großmann is the coordinator for Berlin’s Netzwerk Steuergerechtigkeit (Tax Justice Network)

FES Contact: Felix Braunsdorf, Policy Officer for Migration and Development
 

This contribution refers back to the message “Capital flight contributes to migration” of the project “Shaping Migration – Justly and Globally”.

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