Should countries cooperate on taxes at the United Nations?

Marta Batalla, Social Watch

Globalization has changed the rules of the game regarding tax systems. Seeking ways to increase their profits, multinational corporations take advantage of regulatory gaps and the public sector is always one step behind, trying to close loopholes.

In order to allow for fair taxation, more than good will is needed. The current UN debates on Financing for Development (FFD) and the new sustainable development agenda cannot avoid the issue of where resources will come from and the reform of the international corporate taxation system is one of the biggest demands from civil society.

An Independent Commission for the Reform of International Corporate Taxation (ICRICT), led by Colombian economist José María Ocampo and backed by Nobel Prize-winning economist Joseph Stiglitz published in June a report claiming that “almost half of global trade occurs within related corporate structures”. Global corporations can relocate their business activities to avoid taxation and do not pay their fair share of tax where they do business. As a consequence of this malpractice, innovation and technology investments are affected in developing countries, reducing their resources for sustainable development. Ocampo argued that “there is a need to bridge the gap between the technical challenges and everyone’s right to participate and provide solution to the reform of the international taxation system”. By taking into account the current discussions on the FfD process,

ICRICT wrote on their declaration a list of six key recommendations for reform:
– tax multinationals as single firms,
– curb tax competition,
– strengthen enforcement,
– increase transparency,
– reform tax treaties and
– build inclusivity into international tax cooperation.

Some of these recommendations have found their way into the draft texts of the coming Financing for Development conference to be held in July in Addis Ababa. FfD brings a fantastic opportunity to tackle tax evasion and promote a significant reform into the international corporate taxation system, but disagreements between developed and developing countries have so far prevented a solid compromise on this issue.

On the ongoing FfD discussions that are taking place in the United Nations at the Headquarters in New York, there is agreement about the need to mobilize domestic public resources. Member state views coincide on improving revenue administration, better tax policies, capacity building and efficient tax collection as tools to raise more domestic public resources. There is also a common understanding that building productive capacity with access to modern technology can significantly expand domestic tax bases in particular in LDCs. But the Group of 77 and China expressed their difficulties to achieve these goals without a higher commitment from developed countries to change global rules.
To promote mobilization of domestic public resources, Germany, the UK, the Netherlands, the US, the EU, Switzerland, Japan, Norway, the IMF and the World Bank have created a Tax Administration Diagnostic Assessment Tool (TADAT), designed to provide an objective assessment of the health of key components of a country’s system of tax administration. Even though there is no clear understanding of how this body can evaluate tax administration functions, the countries that created it support the introduction of this tool into the FfD draft.

Illicit financial flows, which include tax evasion, are another controversial point in the FfD discussions. The Group of 77 and China has proposed a target to halve them by 2020 and eliminate tax evasion by 2030. The European Union and the United States have declared that target to be very difficult to achieve and therefore demanded it erased from the text.

The promotion of transparency in financial transactions between government and companies, particularly large companies, is key to reduce tax evasion. Countries are showing willingness to collaborate on this point but there is still no final agreement. Multinational corporations are still quite reluctant in providing information about their internal transborder corporate transactions.

The OECD has its own Global Forum on Transparency and Exchange of Information for Tax Purposes. For OECD member states, this body is ensuring the implementation of the internationally agreed standards of transparency and exchange of information in the tax area. However, developing countries fear that, rather than a tool for implementing agreed standards, this body will be used as a way to impose standards upon them without having adequately participated in their design.

The FfD drafts do not mention tax havens explicitly, but member states have agreed on the principle that profits should be taxed in the countries where they are generated.

Brazil, France, Chile, Spain, Germany, Algeria and South Africa are interested in promoting the idea of global taxes, but the FfD process is not talking about this potential tool to address global problems and at the same time to raise revenue for development.

The proposal that the Addis Ababa conference should create an intergovernmental tax body with enhanced participation of developing countries was rejected by developed countries and, instead, the proposal is to strengthen the existing UN committee of tax experts.