Exposing the lost billions

Added 31 Jan 2013

Abstract of an article first published in Third World Resurgence No. 268, Dec 2012, pp 21-26.The article builds on Eurodad report Exposing the lost billions, 2011.

Third World Network’s magazine Resurgence recently published the edition Siphoning the South’s resources: Transnational corporations, transfer pricing and tax evasion. The compilation of articles shows how the current uproar in the North over tax dodging by multinationals reflects a problem that has long plagued developing countries and cost them billions of dollars every year. Eurodad explains how developing countries lose billions to tax dodging every year, and how the EU can contribute to plugging the leaks.

In early December the coffee-shop chain Starbucks was all over the international media headlines. Citizens' movements in the UK found it unfair that their local coffee-shop had to pay taxes while multinational Starbucks got away without any tax contributions. Following public campaigning, Starbucks agreed to pay 'a significant amount of tax' over the next two years.

This case is a telling example of how rich corporations, with the help of good lawyers, accountants and complex company structures, can shift their profits to countries in which taxes are low or absent. Google and Amazon are other giant companies whose tax-dodging practices have made it to the headlines.

What is less covered by international media and public debate are the billions of dollars illicitly flowing from developing countries to the Global North every year. These lost billions are the result of the same tax-dodging mechanisms. It is paradoxical that while many European countries are struggling with tight budgets and cuts in essential services, the European Union is not showing enough political will to put in place regulations that would help uncover tax dodging and make companies pay their fair share of taxes in the countries where they operate - be it in Europe or in developing countries. 

European Union: Progressive language, but is there political will for implementation?

At the European Union level, much has been said in favour of increased transparency measures and support for domestic resource mobilisation in developing countries. However, it remains to be seen if political will is strong enough to put weight behind the words.

The EU now has a new opportunity to put their words into practice, with the review of the EU Anti Money Laundering Directive in 2013. Eurodad research shows how anti-money-laundering frameworks provide an opportunity to secure transparency around who owns and controls companies and other corporate vehicles, by revealing the real people that own and control bank accounts and legal structures such as companies, trusts and foundations. It also shows how such frameworks could address illegal tax evasion by deterring and punishing the companies and professionals who facilitate it, and how greater transparency around beneficial ownership disclosure and harmonisation of laws would make it easier to understand legal or semi-legal aggressive tax planning and avoidance schemes. The review of the Anti-Money Laundering Directive provides a unique opportunity to ensure legislation that makes it more difficult to hide illicit money in secrecy jurisdictions. Following the HSBC and other banking scandals, in November the US announced that it will review all legislation relating to money laundering.

Not only the revenues

Bringing the now illicit flows back into the tax net would yield enormous benefits to governments in terms of increased fiscal revenues that can be spent on pro-poor measures such as health, education and infrastructure. However, tax has multiple functions whereof revenue is only one aspect. Tax is also an efficient tool for redistribution through its progressivity and how tax revenue is spent. Not least, taxation strengthens democracy and a government's accountability to its citizens. As citizens demand that their taxes are spent wisely and for their benefit, this leads to greater public participation in a country's political process.

Against this backdrop and following its progressive rhetoric and commitments to contributing to international development, the EU should lead in implementing the transparency regulations as set out in the full article. Adequate transparency regulations in the form of country-by-country reporting and requirements to reveal the real owners of companies, trusts and foundations are feasible and would be major steps towards shedding light on harmful tax  practices  diverting  money away from slim European budgets and, more importantly, robbing developing countries of billions of dollars every year. They would help tax collectors to uncover irregularities and make multinational companies pay their fair share of taxes in the countries in which they operate. Implementing such regulations is a matter of political will.

Read the full article here

See the TWN Resurgence