- Date submitted: 28 Oct 2011
- Stakeholder type: Major Group
- Submission Document: Download
- Additional Document:
Christian Aid submission to the Rio+20 conference on the issue of domestic resource mobilisation and taxation.
Comments and questions should be addressed to Dr David McNair firstname.lastname@example.org +44 20 7523 2034
Christian Aid is a Christian organisation that insists the world can and must be swiftly changed to one where everyone can live a full life, free from poverty. We work globally in over 40 countries for profound change that eradicates the causes of poverty, striving to achieve equality, dignity and freedom for all, regardless of faith or nationality. We are part of a wider movement for social justice. We provide urgent, practical and effective assistance where need is great, tackling the effects of poverty as well as its root causes.
This submission sits under the specific request for comments on the ?Institutional framework for sustainable development: Priorities and proposals for strengthening individual pillars of sustainable development, as well as those for strengthening integration of the three pillars, at multiple levels local, national, regional and international.?
Here we focus on resource mobilisation to meet the demands of agreed action plans emerging from the summit. Insufficient financial resources are a major reason for the gaps in implementing the agreed sustainable development commitments and action programmes since the 1992 Rio Summit on Environment and Development. The performance of developed countries in meeting their financial commitments to developing countries has been very disappointing. At the same time domestic resource mobilisation by developed countries has been constrained by the lack of appropriate tax norms and rules, especially at the international level.
Tax plays a crucial role enabling countries to provide basic services, strengthening the accountability between states and citizens. That domestic resource mobilisation is a key element of the self determination of a country is a view shared by the UN, the EU, and the OECD. These actors also recognise the role of taxation in promoting good governance, and the importance of non-state actors (civil society, the media and parliaments) in ensuring that revenues are collected and spent equitably and effectively. It is therefore a crucial element of building social and economic development at the national, regional and global level.
Yet revenue mobilisation in many developing countries is very weak. While OECD countries tend to collect 35% of their GDP in revenue, in Latin America the average is 16%,iv in Africa the figure is 15.9%.v Governments need to be equipped to raise revenue effectively through adequately resourced tax authorities and good domestic tax policy, and by having access to information. Transparency is required so that civil society can monitor revenues and how they are spent.
The ability of countries to collect revenue effectively is systematically undermined by the financial secrecy of tax havens and abuse of transfer pricing rules designed by and for OECD countries in close consultation with Multinational Companies.
The scale of the losses
Christian Aid estimates that developing countries lose US$160 billion each year in tax revenues due to the profit-shifting of some unscrupulous multinational companies and other businesses through ?Transfer Pricing? and ?False Invoicing?. The table below shows estimates of potential loses as a result of these practices.
Lost Tax Revenue from G77 countries to EU and US (million USD)
[ UNDESA/DSD: Please download the original submission to view table]
?Transfer pricing? is the name given to a body of rules, practices and processes, involving both domestic law and international law considerations, that aim to determine how transactions conducted between related persons should be treated for tax purposes.
Transfer pricing rules seek to counter a situation where a multinational enterprise (?MNE?), with operations in numerous jurisdictions, obliges its subsidiary based in a ?high tax? jurisdiction to pay fees at artificially inflated rates for goods or services provided by another related subsidiary based in a ?low tax? jurisdiction.
The effect can be to ?strip? profits out of the highly-taxed subsidiary and ?earn? them in the lowly-taxed subsidiary, decreasing the overall effective tax rate paid by the MNE in respect of those profits. It is this ?value stripping? that transfer pricing rules seek to counter.
Transfer pricing is governed by the arm?s length principle ? while related companies may have incentives to charge high or low prices for legitimate business purposes, when trading across borders, this affects profitability and therefore the tax due in a jurisdiction. The arm?s length principle requires MNEs to trade with related parties as if those parties were unrelated. While companies are usually required to provide documentation to show that transactions have occurred on an arm?s length basis (usually by identifying similar transactions on the open market), applying this standard is resource intensive and requires significant expertise ? particularly in relation to intellectual property and intra-company financing where MNEs have a monopoly. Valuable brands and intellectual property can be stored in tax havens to ensure greater profits are declared there.
Recent examples of companies accused of such behavior include SABMiller (accused by development NGO, ActionAid of dodging taxes in Ghana),vii Commodity traders ADM, Bunge and Cargill, who were accused by the Argentinean tax commissioner of tax evasion,viii and Swiss commodity trader Glencore, recently accused of tax evasion on its operations in Zambia by NGOs who accessed a leaked independent audit report.ix The companies involved deny any wrongdoing.
Financial and banking secrecy provided by tax havens facilitates tax evasion and avoidance by allowing companies and individuals to hide money offshore. By refusing to share information on account holders, some jurisdictions actively undermine the tax bases of other countries. This occurs not only among the usual suspects such as Caribbean Islands and Alpine tax havens but also occurs in the City of London, and the US state of Delaware.
Measures to address tax evasion and avoidance
To shift the balance of power in the international taxation system, developing countries need a greater say in norm setting and the development of international tax rules. To curtail this transfer of income from poor to rich requires greater capacity to monitor transactions with revenue and customs authorities, greater transparency from business,x but also the effective exchange of tax information between jurisdictions so that companies and individuals cannot hide money in tax havens away from the sight of tax administrators and regulators.
Christian Aid therefore proposes the following recommendations as part of the new and emerging issues to be addressed at the Rio+20 Conference and also as part of the Institutional Framework for Sustainable Development:
Strengthening of the UN tax committee
Currently, international cooperation in tax matters and norm setting with regard to tax rules for multinationals is driven by the OECD. The UN Committee of Experts on International Cooperation in Tax Matters is the most representative forum for developing countries to engage in international tax cooperation issues. Yet it is currently under resourced. This committee should also be upgraded from an expert committee to an intergovernmental body under the auspices of the UN.
Strengthening capacity building in revenue authorities
Capacity constraints within revenue authorities are significant. While aid donors and multilateral organizations are engaged in this agenda, it is dominated by the IMF, World Bank and, increasingly the OECD and these organizations do not always represent the best interests of developing countries.xi The work of regional organizations such as the Inter-American Center of Tax Administrations (CIAT), the African Tax Administrators Forum (ATAF) UNDP and the UN Committee of Experts on International Cooperation in Tax Matters should be supported and strengthened.
A new accounting standard, country-by-country reporting would enable tax authorities, civil society and other regulatory agencies to monitor the activities of MNEs located within their jurisdiction, how their trade is undertaken, and what profits and taxes they declare. Using this data, revenue authorities could compare the trading performance of an MNE operating in their jurisdiction with what it does elsewhere and identify artificial profit shifting.
Automatic Information Exchange
A multilateral agreement on the automatic exchange of tax information between jurisdictions, would equip developing countries with the information they need to identify and challenge tax abuse. This would also offer a significant deterrent effect to those considering abusing the tax system by hiding assets offshore. Much progress has been made on encouraging tax havens to share information, but many developing countries have yet to access these agreements. These kinds of information sharing activities currently occur in Europe through the European Savings Tax Directive, which has since 2005 put in place a working system for multilateral, automatic information exchange. In an improved form it could be used to inspire or serve as a template for a global standard.