Today it is TAX Justice Blogging day and I am sure you have heard about the complex strategies that big multinational companies have adopted to evade paying tax. But what are the effects of tax- evasion on sustainable development and developing countries?
Let me start with a short introduction explaining the difference between tax evasion and tax avoidance. Tax evasion is illegal and occurs when individuals for example intentionally do not declare their money or earnings to internal revenue services. Tax avoidance is however not necessarily illegal and means maximizing your tax deductions for example by donating to charities. Many constructions that facilitate tax avoidance in other countries are ´described as legal,´ however they can have big consequences on economic development.
Billions of dollars have been hidden in Switzerland and other more remote tax havens for example by multi-nationals and rich individuals that take advantage of the different tax rates in different countries. Also special arrangements are made between companies and the tax- authorities in countries that have more favorable tax rates than others like the Netherlands. Big companies like Apple, E-bay, Google and Starbucks pay payroll tax as well as business rates, however they are trying to avoid, where possible, to pay corporation tax. Corporation tax is the tax you pay over your profits and not over your sales. So if you can reduce your profits on paper, you can bring down this tax. Some tactics to achieve a lower profit are;
- bringing your costs up, through heavy interest rates (agreements with investors),
- debts or losses over past years that were not profitable,
- royalty agreements through inter company interests on sales of a specific brand name.
Starbucks is a famous example that has officially gone into the books as paying very little corporation tax because, according to the paperwork, they have made losses for over 14 years in the UK. For every specific drink that is sold, royalties are paid for brand rights. These costs are then paid to offices located in the Netherlands for example, while ´officially´ the company is making little profit. This is convenient to bring down corporation tax.
The flow of capital is very complicated and it is apparently not too difficult to lie about your profit. But only if the company is able to hire expensive lawyers and consultancy firms to help declare low profits and in this way reduce and minimize their tax bills. Tax evasion tactics have become a sport for companies and bankers from banks like HSBC in the UK that has been found to facilitate ´legal tax evasion´ (Falsiani files). Lawyers and accountants facilitate schemes for big multinationals to evade tax payment while small national companies, that also pay payroll tax and business rates, do not have access to these tax cuts. Because small companies and taxpayers do not have access to these strategies designed by consultancy companies, they are paying comparatively more tax. So while public revenues, which are needed to pay the social bills of schools and hospitals are being depleted due to tax evasion, small businesses are at the same time destroyed because of unfair competition. This all together has big consequences for economic development.
Poverty and inequality
What I find interesting, is to wonder why big companies are investing so much in these complex offshore structures to hide their assets and refuse to pay federal taxes. As described by Noam Chomsky, American linguist and one of the most influential thinkers of the 21st century, the fact that many countries are losing a significant amount of tax revenue is actually a gesture symbolizing a refusal to make a voluntary contribution to the government. Not putting enough tax back into the economy means choosing not to support the continuation of social structures that are put into place by governments through tax money. Examples are transportation (roads, infrastructure), safety to transport and sell products without getting robbed, but also quality controls and high quality ingredients and very important access to education that provides companies eventually with access to skilled employees. Negative consequences of refusing to pay federal taxes will someday be felt by everyone. This can be in bad education, resulting in bad roads, buildings as well as difficulties with finding skilled employees for your company. Noam Chomsky has nicely described our attitude towards taxes as illustrative of how democratic a society is:
´Here we are getting together to fund the society that we have decided on.´ - Noam Chomsky
According to Chomsky, tax paying day should be a day of celebration. Tax evasion is therefore, apart from putting small companies out of work that ARE paying their taxes, due to the social function of tax causing inequality and corrupting the global economy.
So what can we do?
Countries need to take their responsibility and governments should and can do much more to prevent tax avoidance and evasion. The “tax planning opportunities” that are clearly available should be corrected for example through improved information exchange between countries. The offshore-industry and trust offices are however still controversial subjects and often tax evasion is still left unpunished. According to Richard Brooks, the former senior investigator in the Inland Revenue’s International Division and leading writer on tax, countries will be ´fiscally eating itself´ if governments do not put a stop to this. Estimations have been made of numbers as big as 21 to 32 trillion dollars in 2010, of which one third is estimated to be evaded in developing worlds. This money, parked in offshore havens is desperately needed however by developing countries to build the structures to grow. While people are complaining that global aid money is being paid to developing countries, because of the tax evasion that is facilitated by the Netherlands alone, an estimated 460 million in taxes is lost by developing countries. When we look at the whole picture, the effect of loosing this money, that could have been invested back into society promoting economic development, is not contributing to the social system the company so happily took advantage of.
´One thing is sure, without commitment from rich nations, sustainable development for all people will remain an idealistic dream´ - Mogens Lykketoft, (the President of the UN General Assembly).
As described by the sustainable development knowledge platform, changes to the international tax laws that make multi-national companies pay their fair share of tax, are needed and possible to make the 17 development goals (UN member states) a reality. Therefore we are calling for national action and global cooperation to make tax fair. This will contribute greatly to the reduction of poverty and inequality andcreate a shift in the global economy to more just societies.
By Sara Stevenson
Watch and read more here
Why International Tax Justice blogging Day?
Why are we campaigning today and encouraging people to become more aware about what the effects are of tax evasion? Unfair tax has a negative effect for example on the 17 Goals that apply to all UN member states and call for national action and global cooperation to end poverty and reduce inequality and build more peaceful and just societies. Tax campaigner activists, supported by over 20 organisations across Europe and the Global South as part of the EU project Tax Justice Together, are writing blogs to outline why they are campaigning in support of tax justice and why it is important to encourage young European citizens to be aware of issues around tax in their country. On the 7th September, partners will promote these blogs to create online noise and awareness about.