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Tax Justice Toolkit
Understanding Tax
and Development
STOP
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Understanding Tax and Development
Understanding Tax
and Development
Understanding Tax and Development
3
Contents
Introduction5
The problem
The importance of tax in the fight against poverty The problem of illicit capital flight The effects of tax dodging on poor communities Multinational companies and tax dodging The role of tax havens Tax breaks – a race to the bottom 6
6
9
10
13
17
19
The solutions
Making the system more transparent Reforming the system 20
20
24
Difficult questions and how to answer them
26
Endnotes30
Introduction
This guide provides an introduction to tax as a development issue.
It explores how a lack of tax revenues is damaging the lives and
prospects of poor people across the world and explains why tax
has become so central to the task of ending global poverty. It
focuses on a key problem which European civil society can help
to address: illicit capital flight and tax dodging by multinational
companies – many of them European. While this phenomenon is
affecting people everywhere, including in Europe, the following
guide highlights its impacts on the world’s poorest countries. It
also provides an overview of the different solutions to the problem
and the progress towards achieving these.
This guide is one of three which together make up a toolkit for
European civil society organisations on tax and development.
The other two guides in the toolkit are:
• Guide 2 Advocacy for European NGOs
• Guide 3 Building a Popular Campaign
This toolkit is funded by the European Commission Project ‘Non-State Actors and Local Authorities in Development:
Raising public awareness of development issues and promoting development education in the European Union’.
The problem
The importance of tax in
the fight against poverty
Around the world, hundreds of
millions of people are denied access
to healthcare, education, clean water,
sanitation, decent housing, public
transport and other essential services.
• 2.6 billion people lack basic
sanitation.1
• 1.1 billion people have inadequate
access to water.2
• 790 million people are chronically
under-nourished.3
• 270 million children have no access
to healthcare.4
• 72 million children of primary
school age do not attend school.5
The key question is: where will the
money come from to pay for these
services? In Europe essential services
are paid for by tax revenues. Following
the global financial crisis and problems
in the Eurozone, a number of European
governments have made cuts to public
services (hence the growing public
anger in Europe about large companies
not paying their fair share of tax). In
spite of these cuts, there remains
an expectation in most European
countries that tax revenues will and
should pay for essential services.
6
In developing countries the situation
is quite different. Developing country
governments raise very little in
taxes – on average only 13 per cent
of their gross domestic product
(GDP), compared with 35 per cent in
most European countries.6 Instead
of tax, they rely on aid and loans to
pay for public services. Aid and loans
are essential in the short term but
insufficient and unsustainable in the
long term.
Aid
Developing countries will continue to
need aid for some time to come. But
aid alone is insufficient to cover the
costs of providing good-quality basic
services to whole populations or to
cover the huge costs of adapting to
climate change in the coming years
(estimated at between $75bn and
$100bn a year for the next 30 years7).
Moreover, aid can dry up if the policies
of the donor governments change.
The global financial crisis of 2008 led
to cuts in aid from rich countries. The
Eurozone crisis further deepened these
cuts. The Organisation for Economic
Co-operation and Development (OECD)
reports that development aid fell
by 4 per cent in real terms in 2012,
following a 2 per cent fall in 2011.8
Global aid in 2010 was already $20
billion less than the amount that the
world’s richest nations – the G8 – had
pledged in 2005.9 Aid (and loans) also
frequently come with certain strings
or conditions attached. Developing
country governments may be required
to spend money and adopt policies as
demanded by donors and some of the
aid is often spent in the donor country –
on hardware or technical support.
‘Paying taxes is being
independent’
Motto of the Kenya Revenue Authority
Ultimately, people living in developing
countries – like people in Europe – do
not want to depend on aid and handouts. We would all prefer to stand on
our own two feet and use our own
resources to develop.
Loans
In addition to aid, in recent decades
many countries have had to take out
loans from the World Bank or private
lenders to pay for public services such
as education. But borrowing money
is not the solution either. Even after
the successes of the global Jubilee
Debt campaign in the 1990s, the very
poorest countries were still paying a
total of more than $12.4bn in annual
debt interest payments in 2008 – money
which could have been spent on health
education and other services.10 Indeed,
developing countries currently owe
almost US$5 trillion in external debts11.
Given the cuts to many donors’ aid
budgets, and the crippling cost of
debt interest payments, it makes sense
for developing country governments to
finance essential services and other
poverty reduction efforts not through
aid or loans but through an increase
in tax revenues.
Understanding Tax and Development
Christian Aid/Rachel Baird
Mopani Copper Mine in Mufulira, Zambia. The mine is largely owned by a subsidiary of the giant multinational company, Glencore. It has been accused
of dodging tax in Zambia, an allegation it denies. In addition, it has been accused of causing significant local environmental damage. The Zambian
government estimates that it loses up to $1bn in unpaid taxes from mining companies annually.
Understanding Tax and Development
7
Tax revenues
Tax revenues have clear benefits:
• Tax is a more reliable and
predictable source of finance than
aid or loans. This predictability is
important for governments trying to
deliver essential services such as
health or education. Schools require
teachers and health services require
doctors and nurses. All of these
workers need to be paid regularly
through what are called ‘recurrent
funds’. Unlike aid and loans, tax
revenues can provide recurrent
funding sources indefinitely.
• Tax helps to ensure that governments
are more accountable to their
citizens. The higher a government’s
tax revenues, the more citizens tend
to question how those revenues are
spent. And the more a government
funds its budget through tax
revenues rather than aid, the more
accountable a government tends
to be to its citizens rather than to
foreign donors. An increase in tax
revenues can therefore help to
promote good governance and more
democratic political systems.
• Tax systems determine how
wealth is distributed between
rich and poor. In progressive tax
systems, the rich pay more tax and
the poor pay less. Therefore tax
is a vital instrument for tackling
economic and social inequality,
within countries and globally.
8
Why can’t developing countries
raise more tax revenues?
There are a number of reasons
why developing countries cannot
raise enough tax revenues to pay
for essential services. They include:
• A large proportion of those living
in the world’s poorest countries do
not earn enough to pay income tax.
Low tax revenues are therefore a
product of poverty.
• Developing countries tend to have large
informal sectors (for example, market
traders, casual labourers, small
workshops) where goods and services
are paid for in cash, no records are
kept, and the business activity is
beyond the reach of tax officials.
• Many of the wealthiest individuals
in developing countries move
their money overseas, often to tax
havens, where it cannot be taxed,
and also exert influence over the tax
system, ensuring that taxes on the
wealthy are kept low.
• Tax authorities frequently lack
the capacity and resources needed
to collect taxes.
• The global trend towards free
trade since the 1980s has forced
developing country governments to
reduce the tariffs they charge on
imported goods. Some governments
used to rely on such tariffs for up to
one-third of their tax revenues.12
• Foreign companies are often given
generous tax breaks, supposedly to
encourage them to invest (see page 19
for more information on tax breaks).
• Tax dodging by some unscrupulous
multinational companies – including
European companies – is a significant
factor. There is growing consensus
that the current system for taxing the
global operations of multinationals and
the secrecy involved are facilitating
tax dodging, as we explain below.
The extent of tax dodging by
multinational companies
In recent years, the Paris-based OECD,
which sets the rules governing how
multinational companies pay tax, has
acknowledged that developing countries
could be losing far more through tax
dodging than they receive in aid.
Research by Christian Aid 2008/09
estimated that the tax loss to
developing countries through tax
dodging by multinational companies
was US$160bn a year.13 This is
significantly more than the total aid
given by the developed countries in
the global North,14 which stood at $125
billion in 2012.15 It is also over three
times more than the amount required
annually to end hunger (US$50.2bn).16
Understanding Tax and Development
The problem of illicit
capital flight
Capital flight from developing
countries is a major problem.
This is when companies and individuals
move huge amounts of money out of
the countries where they are operating,
instead of investing in the country’s
local economy, infrastructure and
services. Tax dodging is one of the
main drivers of capital flight.
When money is transferred from
a country without being reported or
registered, it becomes illicit. lllicit
financial flows include:
• Money shifted out of a country
by unscrupulous multinational
companies in order to dodge tax.
This represents 60-65 per cent
of illicit capital flight.
• Money acquired through corruption by
politicians and officials which is then
shifted to secretive tax havens where
no questions are asked about how the
money was acquired. This represents
3-5 per cent of illicit capital flight.
• The proceeds of crime shifted
out of a country by drugs and
criminal cartels into secretive bank
accounts, invariably located in tax
havens. This represents 30-35 per
cent of illicit capital flight.
The result is wealth shifted out of
the countries where 80 per cent of
the world’s population live into the
countries where only 20 per cent live.17
Swissploitation – the role of Switzerland in illicit capital flight
Switzerland is the leading hub for the trade in global commodities (mainly
agricultural, oil, gas and mining products). About 15-25 per cent of commodity
trading goes through Switzerland.
In reality, very few of these goods actually pass through Switzerland. Indeed, 90
per cent of the commodities that leave developing countries with Switzerland as
their declared destination are not recorded as imports in Switzerland. As a result,
developing countries cannot be sure of the real final destination of their exports,
which is why tax justice campaigners call it the ‘black hole of Geneva’.
It is estimated that developing countries could have lost US$578bn every year
during the period 2007-2010 through illicit capital flight to Switzerland. This was
income that should have been taxed in developing countries. Instead it ended up
in Switzerland where little tax was paid. It is a phenomenon that has been dubbed
‘Swissploitation’.20
Raymond Baker, a senior fellow at
the US Center for International Policy
and a world expert on this issue, has
described it as ‘the ugliest chapter in
global economic affairs since slavery’.
Illicit financial flows are closely
associated with money laundering.
Money laundering is the term used
to describe the transfer of money to
secretive bank accounts (usually in tax
havens) in order to conceal the fact that
the money was obtained through illegal
activities such as drug trafficking,
corruption, theft, smuggling and tax
dodging. The money is then used to fund
legal financial and trading activities.
On average, developing countries
lost between US$723 billion and
US$844 billion a year through illicit
flows in the period 2000-2009,
according to the Washington-based
Understanding Tax and Development
organisation, Global Financial
Integrity.18 In recent years Africa has
experienced a much greater increase
in illicit flows than other world
regions, a significant proportion of
which has been due to the practices
of multinational companies. Research
published in 2011 estimated that
US$854 billion was illictly moved out
of sub-Saharan Africa between 1970
and 2008. This figure is double the
amount of aid to the region over the
same period and four times the size
of Africa’s debt in 2008, thus making
sub-Saharan Africa a net creditor to
the rest of the world.19
Since tax dodging accounts for such a
large proportion of illicit capital flight
from developing countries, this guide
focuses specifically on the issue of tax.
9
In Europe, news that a number of
multinational companies have not
paid their fair share of tax has caused
widespread public anger at a time when
unemployment is high, governments
are making cuts to public services,
and many are struggling to feed their
families. Corporate tax dodging has
an even greater impact in the world's
poorest countries, given the small
amount of tax revenues these countries
collect from other sources and the
conditions in which the majority of their
populations live. It is one of the reasons
why so many people in these countries
still do not have access to essential
services such as health and education.
Christian Aid / Charlotte Marshall
The effects of tax dodging
on poor communities
Nurse Elisheba Chali works in Kabundi East Hospital, near Chingola in Zambia's Copper Belt.
‘If tax justice were achieved
in Africa, I would not see
women dying while giving
birth simply because they
could not afford to pay
for pre-natal medical care. I would not see ten-year-old
kids going to work because
their parents cannot afford
to send them to school.’
Sandra Kidwingira, Tax Justice Network – Africa
10
The impact of tax dodging on healthcare in Zambia
Zambia is the seventh-largest producer of copper in the world. Huge demand for
copper from China has seen the global copper price soar. And yet Zambia remains
one of the poorest countries in the world, with a life expectancy of only 49 years. Tax
dodging is one of the reasons why.
The Zambian government estimates that it loses up to $1bn in unpaid taxes
from mining companies annually.21 The 2012 healthcare budget in Zambia was
approximately $527m. If Zambia received the correct amount of taxes, it could pay
for existing healthcare services twice over.
In April 2012, Christian Aid staff visited a clinic in Zambia’s copper mine region
where there is only one doctor serving 45,000 people. In the maternity ward, just
one midwife was on duty, even though seven women were in labour. ‘We have land
available to extend this clinic,’ Nurse Chali told us, ‘but there’s just no money.’
Understanding Tax and Development
The links between tax and hunger
Boosting small-scale farming holds
the key to ending hunger.22 This is
because more than 70 per cent of poor
people in developing countries live
in rural areas and depend directly or
indirectly on farming to make a living.23
At least half of the food consumed
worldwide is produced by small farms
of a few hectares. The problem is that
smallholder farmers are often trapped
in poverty, not making enough profit to
invest in their farms and increase their
yields, and not even producing enough
to feed their families when harvests
are poor.
To combat hunger, governments
need to provide smallholder farmers,
especially women, with access to
cheap credit and seeds. Irrigation and
storage facilities are also needed, as
well as roads and bridges to create
better access to markets. Resilience
building, research and advice is also
needed in the face of pest and disease,
and increasing extreme weather events,
caused by climate change. In addition,
special schemes such as school feeding
programmes are needed to prevent
hunger among the poorest families.
All of these measures cost money –
money that could be generated through
higher tax revenues.
Increased tax revenues could also
meet the US$50.2bn that the UN’s
Food and Agriculture Organisation
(FAO) recently cited as the cost per
annum, on top of existing funding,
of creating a ‘world free from hunger’
by 2025.24
How lost tax revenues are hampering El Salvador’s plan for agriculture
One in eight people in the Central American country of El Salvador do not have
enough food to eat. A third of Salvadoreans live in extreme poverty and one in four
children suffer from stunting, a condition caused by malnutrition.
In the 1990s – partly as a result of trade liberalisation and a big rise in cheap food
imports from the US – El Salvador suffered a major collapse in its food production
and hundreds of thousands of Salvadoreans lost their livelihoods. Today, a large
proportion of the country’s food is imported, making the poor vulnerable to global
food price rises. The Salvadorean government has recently adopted limited
measures to regenerate the agricultural sector. However, only 4 per cent of the
government budget – $40m – is devoted to agriculture, which means that the
government’s efforts are unlikely to succeed.25
Meanwhile the Salvadorean government estimates that illegal tax evasion costs the
country as much as $1.7bn a year.26
Ghana’s free school feeding programme – what taxes could achieve
Around one-third of Ghana’s population live on less than US$1.25 a day27 and
more than a quarter of Ghanaian children aged under five are stunted, an indicator
of chronic malnutrition.28
In 2005 Ghana introduced a free school feeding programme, now providing one hot,
nutritious meal a day to more than 1 million pupils from deprived communities.
Since 2005, enrolment rates have risen by as much as 30 per cent in some areas.
The programme is funded partly by the government and partly by foreign aid, but
funding shortages have meant that by the end of 2010, the programme had reached
only 67 per cent of those targeted.29
Tax revenues would be the best means of plugging this funding gap. A study of
Ghana’s mining sector indicates that about US$36m is lost every year due to tax
dodging by multinational mining companies.30 US$36m would cover the shortfall
in the free school feeding programme – and more.
Understanding Tax and Development
11
Would developing country
governments spend increased tax
income on combating poverty?
There are no cast-iron guarantees
about how governments will use their
resources; however, research looking at
the correlation between tax collection
and progress towards the Millennium
Development Goals shows that in
general, the more tax African countries
collect, the better their performance.31
How Bolivia spent increased tax revenues32
After privatisation of its oil and gas industry in 1996, Bolivia reduced the royalties
paid by foreign companies to only 18 per cent. Following intensive campaigning
by civil society over many years and a change of government in 2006, a new law
was passed requiring foreign companies to pay far more for the oil, gas and
minerals extracted. Bolivia now keeps 50 per cent of the value of all its oil and gas
production. These reforms increased government revenues from this sector from
about US$173m in 2002 to an estimated USD$1.65 billion from royalties and the
hydrocarbons specific tax in the first six months of 2013.
The extra revenue has been spent on:
The actions of developing countries
that received debt relief in the late
1990s provide us with further evidence
that an increase in government
revenues tends to lead to an increase
in spending on poverty reduction.
Contrary to fears that debt relief
would be spent on the wrong things
or disappear into personal pockets,
countries that qualified for the Heavily
Indebted Poor Countries Initiative and
Multilateral Debt Relief Initiative have
increased their spending on poverty
reduction programmes.
The importance of civil society in
ensuring tax revenues are spent on
reducing poverty and inequality
In a growing number of developing
countries, civil society groups are
playing a key role not only in getting
a fair deal from multinationals
operating inside their borders, but
also in persuading governments that
increases in revenue from taxation
should be spent on basic services for
poor communities and other measures
for reducing poverty. At the same
time, these groups are promoting
progressive domestic tax reforms
and educating the media and the public
12
• pensions to relieve extreme poverty among elderly people
• grants to poor families for primary school enrolment
• grants to uninsured new mothers to encourage them to seek medical care
during and after pregnancy – to reduce maternal and infant mortality
• school breakfasts for primary school children to guarantee they have one
good meal a day.
Tax and education in Kenya
Tax revenues have increased significantly in Kenya in recent years, from US$2.4bn in
2002 to US$6bn in 2009, largely by bringing more Kenyan citizens into the tax system.
Until 2002, parents had to pay for books and uniforms, and a school building fee.
Children whose parents could not afford these things were either ostracised or
did not go to school. In 2002, the government introduced universal free primary
education. Increased tax revenues have made this possible. Kenya now has the
highest secondary enrolment rate in East Africa and the best pupil–teacher ratio for
primary education. Moreover, 87 per cent of Kenyans over the age of 15 are literate.
In sum, increased tax revenues have created a better-educated population.33
about the benefits of better tax rules
and increased tax revenues.
Clearly, it will be essential for donors
in Europe to continue supporting these
activities so as to build the pressure
for governments to increase tax
revenues and then spend the revenues
on reducing poverty.
Understanding Tax and Development
Multinational companies
and tax dodging
What types of taxes do multinational
companies pay?
The most common tax levied on
companies is corporation tax, charged
as a percentage of a company’s profits.
Companies also pay other taxes such
as those on imports and exports, on
dividends they pay to shareholders,
and on capital gains.
Governments also receive tax revenues
from the taxes that company employees
pay on their incomes (income tax). And
regardless of where they are based,
governments will collect valued added
tax (VAT) on the goods and services sold
by companies (paid by the consumer,
not the companies).
seek to reduce their tax bill in the
countries where they operate, particularly
with regard to corporation tax.
How multinationals dodge tax –
legally and illegally
• demanding tax breaks (see page 19).
There are numerous ways in which
multinational companies (MNCs) may
Illegal tax evasion methods include:
Legal tax avoidance methods include:
• using special tax avoidance
schemes devised by accountants
• falsifying invoices charged to other
companies (in order to distort the
profits made and the taxes paid on
those profits)
• mispricing the transfer of goods and
services to subsidiary companies
within the same multinational
company (again in order to distort
the profits made and the taxes paid)
• transferring cash out of
the country illegally.
Christian Aid/Hannah Richards
In reality, however, the distinction
between legal tax avoidance and
illegal tax evasion can be blurred and
some MNCs tread a fine line between
the two. Tax avoidance schemes are
often deemed to be illegal tax evasion
upon examination by a country’s tax
authorities. Meanwhile, legal tax
breaks are often secured by illegally
bribing corrupt officials.
Nine-year-old Omar shines shoes every morning in El Alto, Bolivia, earning £1 a day if he’s lucky.
In the afternoons, he goes to school.
Understanding Tax and Development
13
Trade mispricing
As already noted, it is estimated that
developing countries are losing $160bn
a year through tax dodging by MNCs.
This figure is a Christian Aid estimate
based on research into illicit capital
flight conducted by Raymond Baker, of
the US Center for International Policy,
subsequently supported by a detailed
analysis of trade data in Europe and
the US by Harvard professor Simon
Pak. He focused on two forms of tax
dodging by multinationals: abusive
transfer pricing and false invoicing.34
Together these methods are referred
to as ‘trade mispricing’.
Transfer pricing: a transfer price is
the price paid for goods and services
that are bought and sold between
different companies, which are part
of the same multinational. Transfer
pricing is supposed to be based on the
‘arm’s-length principle’, meaning that
companies should buy and sell goods
and services from each other at the
price those goods or services would
fetch on the open market. However,
60 per cent of world trade now takes
place within multinationational
companies, between their subsidiary
companies. With so much trade going
on between subsidiaries of the same
company, the arm’s-length principle
is easily and frequently flouted.
Abusive transfer pricing describes
a practice whereby two companies
– usually subsidiaries of the same
14
Trade mispricing: crazy prices, crazy profits
• A leaked draft of an auditor's report recently suggested that multinational
giant Glencore (now Glencore Xystrata) had been exporting Zambian copper
to Switzerland (on paper at least) for as little as a quarter of the market price.
Sold on at its true value, the profit could then remain in Switzerland where it
would be subject to little or no tax. Glencore denied any wrongdoing.35
Research undertaken for Christian Aid36 revealed that, on paper:
• 36,000 kilos of Nigerian coffee were exported to the US for 69p per kilo at a time
when the world coffee price was $2.35 per kilo.
• A consignment of hairdryers was exported to Nigeria at a cost of $3,800 per
hairdryer when the market price of that model was $25.35.
multinational company – buy and sell
products and services from and to each
other at a too high or too low cost in
order to reduce their profits in countries
where they would have to pay tax on
those profits. It usually involves buying
or selling to their subsidiaries in tax
havens where taxes on profits are low or
non-existent and no questions are asked.
To provide ‘cover’ for this activity, the
subsidiary in the tax haven frequently
charges its sister company (the one
engaged in real economic activity)
for management advice or financial
services, or for use of the brand name
– anything vague and intangible that
could allow the company to increase the
price of the goods or services when they
are sold on to a subsidiary elsewhere.
False invoicing involves a similar
practice, where deals are made
between unrelated companies to
fiddle invoices and manipulate prices
so as to reduce their taxable profits.
In other words, the paper invoice
does not reflect the actual price paid.
False invoicing is difficult to detect in
official statistics because it is often
based purely on verbal agreements
between buyers and sellers, but it is
widespread. Such false invoicing, as
well as being used for tax evasion,
can be used for money laundering,
enabling the proceeds of crime and
corruption to be shifted out of the
country and made ‘clean’.
Understanding Tax and Development
In reality a multinational company
sells and ships your banana directly
to a supermarket, which then sells
the banana to you.
On paper, the route is more roundabout
– via one or more tax havens:
• A company in a banana-producing
country sells a banana to a subsidiary
company in a tax haven at a very low
price – the same price that it cost to
grow the banana in the first place.
Global flower industry giant found guilty of transfer mispricing in Kenya
In 2013 the Kenyan government prosecuted Karuturi Global Ltd, the world’s biggest
producer of cut roses, for using transfer mispricing to avoid paying nearly US$11m
(about €8m) in corporation tax. This was the first time an African government had
taken a large multinational company to court for transfer mispricing through a fully
public process. Karuturi had sold roses to a subsidiary in Dubai for one-tenth of
the market price, before the subsidiary in Dubai sold them on to Europe at the real
market price. Because of this, nine-tenths of the profit from the roses grown in
Kenya ended up in Dubai, which is a tax haven.38
See http://allafrica.com/stories/201305101359.html
How tax havens hide costs
• As a result, it looks as though no
profit has been made, and therefore
there is no tax to pay in the country
where the banana was produced.
• The subsidiary in the tax haven then
sells on the banana to a subsidiary
in another country at a very high
price, using the cover that expensive
financial services were incurred in
the tax haven.
1p* Profit made
10.5p* Costs
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Trade mispricing explained –
the banana in your fruit bowl
1.5p* Workers
8p*
Country of production
• The profits made on the sale of
the banana by the company in the
tax haven are very high, but the
company pays little or no tax on
this profit because of low or nonexistent tax rates in the tax haven.37
8p*
4p* 4p*
6p*
17p*
1p*
39p*
Country of sale
Tax havens
Some unscrupulous companies exploit the financial secrecy provided by tax havens. Costs are
artificially created in a tax haven in order to hide the profits made and dodge the taxes owed.
This enables companies to dodge taxes in both the country of production and the country of sale.
Here is an example of how a banana can travel through various subsidiaries in different tax havens.
The money made through the services charged there are not taxed.
Understanding Tax and Development
15
How SABMiller shifts its profits out of Africa
SABMiller is the world’s second-largest beer company, with interests across six continents. Its brand portfolio includes
Grolsch, Peroni and Miller and its global profits amount to £2bn year. In 2010 ActionAid published a report based on a six-month
study of SABMiller's Accra Brewery in Ghana and five other African companies owned by the company.39 ActionAid discovered
that Accra Brewery had reported a loss and paid no corporation tax in Ghana for two years, even though it is Ghana’s secondbiggest beer-seller, sells £29m-worth of beer a year in the country and has seen increased sales in recent years. Every year, the
six brewing subsidiaries across Africa transfer millions of pounds to sister companies in tax havens. ActionAid estimated that
across all SABMiller's companies in Africa, including those whose accounts were not public, the payments amounted to:
• £43m (about €49m) in royalty payments by SABMiller’s subsidiaries in Africa to a subsidiary company in the Netherlands –
to pay for the brand name
• £40m (about €46m) in management service fees to a subsidiary company in Switzerland
• £32m (about €37m) on paper for raw materials supposedly bought by SABMIller's subsidaries in Ghana and Tanzania from a
subsidiary company in Mauritius (a tax haven), even though these products were shipped direct from South Africa
• SABMiller’s subsidiary in Ghana also borrowed a large amount of money from its subsidiary in Mauritius and then had to pay
interest on this loan amounting to £445,000 (€510,000) a year.
ActionAid estimated that the tax lost by African governments as a result was £18m a year. SABMiller denies that the
transactions identified by ActionAid were undertaken for tax reasons. Full details of ActionAid's investigation, and SABMiller's
response, at www.actionaid.org.uk/tax-justice/calling-time-the-research
Thin capitalisation
Round-tripping
Another common practice used to
reduce multinationals’ tax bill is
`thin capitalisation’. This involves a
subsidiary of a multinational company
borrowing large sums of money from
another subsidiary within the same
multinational; the lending subsidiary
is based in a tax haven. The company
that has ’borrowed’ the money then
pays interest on this loan and receives
tax relief on the loan in the country
where it is based – as was the case
for SABMiller’s subsidiary in Ghana,
the Accra Brewery (described above).
Meanwhile the company in the tax
haven that lent the money pays no tax
on the interest earned because the tax
haven charges very little or no tax at all.
Round-tripping is when a company
shifts its profits from a given economic
activity in one country to a subsidiary
company in a tax haven and then brings
this money back into the original
country as ‘foreign direct investment’.
Because it is supposedly ‘foreign
investment’ from overseas, the money
coming back into the country can
benefit from the generous tax breaks
often offered to foreign companies (see
section on tax breaks on page 19).
16
Double tax agreements
Bilateral double tax agreements (DTAs)
are supposed to help eliminate the
potential for companies’ operations in
more than one country to be taxed twice
(that is, by both the country from
which a company originates and
the country or countries in which
it operates). While avoiding double
taxation is a sensible aim, many
companies seek to ‘treaty shop’ and
channel funds through countries
with especially favourable DTAs (for
example, the Netherlands) in order
to avoid taxes. Developing countries
frequently lack the capacity or
the economic muscle to negotiate
favourable double tax agreements
with developed countries in Europe
and elsewhere. As a result, the
ability of developing countries to tax
companies from developed countries
operating in their territory can be
significantly reduced.
Understanding Tax and Development
The role of tax havens
Tax havens are also known as:
Where do tax havens fit into
the global economy?
• secrecy jurisdictions – owing to
their high levels of secrecy
Tax havens lie at the heart of the
global economy.
• More than half of world trade –
at least on paper – passes through
tax havens.40
• Over half of all banking assets
and one-third of multinational
company investments are routed
via tax havens.41
• In 2010 the International Monetary
Fund estimated that the money
on the balance sheets of small island
tax havens alone amounted to
$18 trillion – about one-third of the
world’s financial wealth.42 The Tax
Justice Network has estimated that
as much as $32 trillion may be hidden
in tax havens; this is equivalent to
the national wealth of the US and
Japan combined.43
What is a tax haven?
Definitions of the term tax haven’ differ
but most of the world’s 60 or so tax
havens share two distinct features:
• high levels of financial secrecy
• very low or zero levels of tax offered
to companies registered there
• offshore financial centres –
a term preferred by authorities
in tax havens.
Tax havens are key players in the
business of corporate tax dodging.
Some multinational companies use
tax havens for legitimate purposes –
for example, travel companies with
operations in the Caribbean. But many
companies use them to hold huge sums
of money that would be taxed in other
countries. The standard practice is
as follows:
The difference that tax havens
can make to a company’s tax bill
In 2012 Christian Aid analysed the
financial and ownership data of more
than 1,500 MNCs operating in India,
Ghana and El Salvador. This research
concluded that those MNCs that have
links to tax havens paid on average
28.9 per cent less in taxes than MNCs
with no such links.44
• The multinational creates a
subsidiary company in a tax haven
that receives the profits made
in other countries – including
developing countries. Most tax
havens allow the registration of
companies even if they are not
engaged in activities of substance.
• The tax haven charges little or
no tax on these profits.
• The identity of the parent company
that owns both the subsidiary and
associated bank accounts and
trusts in the tax haven is generally
kept secret, so that the true extent
of profits made and taxes dodged
remains hidden.
Understanding Tax and Development
17
Where are tax havens located?
A tax haven can be any jurisdiction
with its own special laws regarding
tax, secrecy and registration of foreign
companies. It could be a country,
a state, or even a city.
The role of accountancy firms
A slew of court cases in recent years, particularly in the US, have revealed the
involvement of the world's largest accountancy firms in facilitating tax dodging
through the tax avoidance schemes they have devised for clients.45
• European tax havens include:
Andorra, Cyprus, Luxembourg,
the Netherlands and Switzerland.
The tax avoidance industry is dominated by four accountancy firms known as the
‘Big Four’: PricewaterhouseCoopers (PWC), KPMG, Deloitte, and Ernst & Young.
They have been a driving force behind the creation of complex tax structures and
accounting systems for multinationals, involving the routing of profits through
multiple subsidiaries in multiple tax havens.
• Tax havens in Britain's former
empire, with the City of London at its
centre include: the Cayman Islands,
Hong Kong, the Bahamas, Bermuda,
Montserrat, the British Virgin Islands
and Britain’s Crown Dependencies in
the Channel Islands.
The Big Four help fund the International Accounting Standards Board (IASB) a selfappointed body that devises the rules covering how companies should produce their
annual accounts. More than 100 governments worldwide, including those of the UK and
all other countries of the EU, tend to rubber-stamp their findings into law. A number of
the IASB board members also have an employment history in the Big Four.
• Tax havens shaped around the
US zone of influence include: the
American Virgin Islands and certain
US states such as Delaware.
18
Civil society organisations argue that the IASB’s current accounting standards
reinforce the lack of transparency and accountability of multinational companies.
For example, IASB standards only require multinational companies to provide
a global figure for the profits they make and the taxes they pay – rather than
a country-by-country breakdown. This can make it easier for less scrupulous
companies to hide their profits in tax havens.
Understanding Tax and Development
Tax breaks – a race to
the bottom
Alongside tax avoidance and evasion,
tax breaks have played a major part
in limiting developing countries’ tax
revenues. Some tax breaks are a good
thing, designed to encourage or change
certain social behaviours – such as tax
breaks on savings accounts in order
to incentivise saving, or tax breaks
on low-carbon transport. But the tax
breaks offered to large companies
frequently have a negative impact in
poor countries.
Since the 1980s, globalisation has
led many developed and developing
countries to compete with one
another to attract foreign investment
by offering generous tax breaks to
multinational companies. Some have
dubbed this tax competition a ‘race
to the bottom.’ The most widespread
tax breaks are:
• ‘tax holidays’ – a temporary reduction
or exemption from paying tax
• ’free trade zones’ or ’special
development zones’ for foreign
companies.
Many governments believe that tax
breaks are necessary to attract foreign
investment, which they need in order
to bring about economic development
and an end to poverty. In reality, lost
tax revenues resulting from tax breaks
have frequently exceeded the benefits
of increased investment.46 Some
Oil, mining and gas extraction curse or blessing?
In addition to low corporation taxes, companies in the oil, mining and gas sector –
known as the extractives sector – are frequently offered low royalty rates (royalties
are payments to governments of a fixed percentage of the oil, gas or minerals
extracted). Following the privatisation of its copper-mining industry in the late
1990s, for example, Zambia offered mining companies what is believed to be the
lowest royalty rate ever set: 0.6 per cent.51
The secrecy surrounding the agreements makes it easier for governments to offer
such low royalty rates. This means there is no scrutiny of the agreements by civil
society, parliament or trades unions.
A lack of transparency has fuelled high levels of corruption in the extractives
sector, involving both governments and multinational companies. This is one of
the reasons why many resource-rich countries are racked with extreme poverty,
inequality and poor governance. In Africa, for example, mineral exports are worth
nine times more than aid52 and yet several of the countries producing these exports
are among the poorest in the world. Other resource-rich countries on the continent
are among the most unequal.
countries are losing as much as 5 per
cent of their entire national wealth
through tax breaks.47 Tax breaks
offered to companies in Kenya, for
example, are costing the government
US$1.1 billion in lost tax revenues –
almost twice the total health budget
– in a country where 46 per cent of the
population live in extreme poverty.48
In addition to offering tax breaks,
developing countries are under
pressure to keep their corporation tax
rates for foreign companies low – again
in order to attract foreign investment.
The World Bank’s influential annual
Doing Business report, for example,
actively encourages lower levels of
taxation in its recommendations for
Understanding Tax and Development
improving the investment climate
in developing countries, and ranks
countries according to their corporation
tax rate. The lower its corporation tax
rate, the higher a country scores.49
In fact, there is little evidence that
tax breaks or low tax rates have ever
been the single most important factor
in determining whether a company
decides to invest in a developing country
or not. Business surveys repeatedly find
that while taxation matters for foreign
investors, other considerations – such
as good infrastructure, the quality of
the labour force, and good governance
(all largely financed by tax revenues)
– matter more.50
19
The solutions
Making the system
more transparent
Tax authorities in developing countries
have consistently stated that the key
to recovering the revenues they are
currently losing lies in better access
to information about companies’
profits – and where and by whom these
profits are being held. At present,
tax haven secrecy, combined with
a lack of transparency in company
accounts, makes it almost impossible
for developing countries to detect tax
dodging by multinational companies.
The solutions listed below would go
a long way to ending this secrecy.
‘Any regulation that allowed
an international standard
for declaring profits of
transnational companies
would be very useful.’
Erick Coyoy, Guatemalan Economy Minister 54
20
Making company accounts
more transparent
At present, international accounting
standards only require multinational
companies to give a global figure for their
profits made and taxes paid. Without a
country-by-country breakdown of the
profits made by every subsidiary within
a multinational company (including the
profits of subsidiaries registered in tax
havens), it is difficult to detect taxdodging abuses such as trade mispricing.
Ideally, a country-by-country reporting
standard would require an MNC to
include in its annual financial statements:
• the name of each country in which
it operates and the names of its
subsidiaries in each country
• the company’s sales, purchases,
labour costs, employee numbers, pretax profits and assets in each country
• tax payments to the government in
each country.
Country-by-country reporting offers
the following benefits:
• Revenue authorities could access
the evidence required to detect and
stop transfer mispricing and other
forms of tax evasion.
• Investors would have more
information when assessing the
risks (including tax risks) of investing
in a multinational company.
• Tax-compliant and responsible
companies would be given the
opportunity to demonstrate
powerful public evidence of their
tax payments and their contribution
to services and to society.53
The International Accounting Standards
Board (see box page 18) has yet to
agree to introduce a new countryby-country accounting standard.
Unsurprisingly, there is little concrete
support for such a standard among
MNCs themselves.55 Nevertheless,
pressure from both civil society and an
increasing number of policy-makers
has resulted in some concrete steps
towards greater transparency in
multinationals’ operations, particularly
in the extractives sector.
Understanding Tax and Development
Progress in increasing the financial
transparency of multinational companies
• In July 2010 the US Congress
passed the Wall Street Reform
and Consumer Protection Act
(otherwise known as the DoddFrank law). This includes a
landmark provision that requires
energy and mining companies
registered with the US Securities
and Exchange Commission to
disclose how much they pay to
individual foreign countries and to
the US government for the oil, gas
and minerals they extract. Since
companies only have to disclose
payments to governments rather
than a breakdown of profits made,
it is more of a tool for detecting
corruption than tax dodging.
Nevertheless it is regarded as an
important first step in the process
towards full country-by-country
reporting for companies.56
• In June 2013 the European Union [EU]
adopted new laws that go further
than the US Dodd-Frank legislation,
requiring European oil, mining, gas
and also logging companies to report
on their payments to governments,
including taxes and royalties, with
regard to any projects worth more
than €100,000.
• In 2013, EU banking legislation was
reformed in order to require banks to
disclose their profits made and taxes
paid on a country-by-country basis.
• On 22 May 2013 EU leaders, in
response to public outrage at tax
avoidance by corporate giants such
as Apple and Google, declared their
commitment to exploring further
opportunities for country-by-country
reporting for all large companies, not
just those in the extractives sector.
At present, the OECD requires tax
havens to sign at least 12 bilateral Tax
Information Exchange Agreements
(TIEAs) with other countries if they
wish to avoid being blacklisted as noncooperative jurisdictions. However, TIEAs
have proved of little benefit to developing
countries for the following reasons:
Lifting the secrecy in tax havens
• To date, tax havens have only
agreed to sign TIEAs with a few of
the more economically powerful
developing countries such as India.
Hence the need for a multilateral
agreement on information exchange.
Tax haven secrecy is proving to be a
major obstacle to detecting tax dodging
by MNCs and wealthy individuals.
Greater transparency in tax havens
is therefore as important as greater
transparency in companies.
Automatic information exchange
A multilateral, automatic sharing
of information about individuals and
companies holding wealth in a given
country or tax haven with the country
where that wealth originated would
equip countries with timely information
about where tax abuse is likely to
be taking place. Obliging tax havens
specifically to share such information
automatically with developing countries
would be a major step in the battle to
end tax haven secrecy.
• TIEAs only provide for the exchange
of tax information ’on request’, not
automatically. This means that a tax
authority seeking information from
a tax haven needs to gather concrete
evidence of potential tax dodging by
a given company or individual before
it can request information from
the tax haven. This is a huge task,
even for relatively well-resourced
European tax authorities. Most
developing countries do not have the
capacity to do an ‘on request’ appeal
for information.
‘There should be
transparency. Particularly
the tax havens should
cooperate with countries
to unearth the ill-gotten
resources which are being
deposited there.’
Pranab Mukherjee – then Indian Finance Minister –
speaking in 201157
Understanding Tax and Development
21
Progress in securing automatic
information exchange
and automatic information exchange
in the future. The challenge is to
ensure that tax havens sign up to the
Multilateral Convention.
• At their summit in 2012, G20 leaders
called on countries ’to join the
growing practice [of automatic
financial information exchange]
as appropriate’.58 This reflects a
growing view among policy-makers
that automatic tax information
Sarah Filbey/Christian Aid for the IF campaign
• The EU’s Savings Tax Directive
provides for the exchange of
information between EU countries
and 15 tax havens outside the EU
about individual account-holders
(though not about companies).
However, some European tax havens
have not signed up to the Directive
and others have done so only partially.
• In November 2011, all G20 countries
agreed to sign up to the OECD’s
Multilateral Convention on Mutual
Administrative Assistance in Tax
Matters, which contains some
provision for the exchange of tax
information between different
countries, including automatic
exchange. Although the Convention is
relatively weak, this formal backing
from the G20 provided a starting
point for implementing multilateral
Pupils in Northern Ghana collect their school lunch, which is provided through the government's school feeding programme. Ghana loses at least
US$36m in taxes through its mining sector alone. If it could collect the tax it is owed, it could reach many more children
22
Understanding Tax and Development
exchange is the standard that all
countries – including tax havens –
should strive towards.
• The Foreign Account Tax
Compliance Act (FATCA), which
came into effect in the US in
2013, is a key milestone towards
automatic information exchange
globally. FATCA requires foreign
financial institutions to file
information automatically with
the US authorities about their US
account-holders with foreign-based
accounts worth more than $50,000.
Financial institutions which fail to
comply with FATCA will effectively
be locked out of the US financial
marketplace. While FATCA creates
obligations on financial institutions,
it is largely being implemented
by agreements between revenue
authorities to share information
automatically. Although FATCA
relates only to individual accountholders, it is helping to erode the
secrecy in tax havens and it proves
that automatic information exchange
is technically possible. It is also
enabling European countries (most
of which have signed up to a pilot
project) to access more information
on the assets in tax havens, as
EU countries are demanding the
same access to information that is
required by the US FATCA. However,
it is unclear whether any developing
countries will benefit from progress
being made as a result of the US
legislation.
Identifying beneficial ownership
‘Beneficial ownership’ is a legal
term used to describe anyone who
has the benefit of ownership of an
asset (for example, a bank account,
trust, or property). Identifying the
beneficial owner can be difficult (or
even impossible) because anonymous
shell companies, nominees and other
techniques can enable the real owners
to be kept secret. Companies and
wealthy individuals frequently hold
their wealth in a myriad of trusts,
foundations and companies in tax
havens, making it almost impossible to
trace who the actual owner is.
Alongside automatic information
exchange, a mechanism is therefore
needed that provides tax authorities
and ordinary citizens with information
about ‘who owns what where’. This
should take the form of a public
registry in every country – including
every tax haven – of the real owners
of all the trusts, foundations and
companies established within its
borders, which both governments and
ordinary citizens can access.
Progress on beneficial ownership:
Within the EU, a review of the AntiMoney Laundering Directive (AMLD)
is providing a golden opportunity
to promote financial transparency,
including on beneficial ownership.
However the draft proposal published
by the European Commission in
February 2013 59 falls short of what is
necessary. Instead of public registries,
Understanding Tax and Development
it proposes only that companies
hold their own beneficial ownership
information and make this available to
the relevant government authorities
and financial institutions.
Tackling money laundering in the EU
The EU must take responsibility for the
vast amounts of developing countries’
money that end up in bank accounts
in EU countries or European tax
havens. In addition to its shortcomings
with regard to beneficial ownership
(mentioned above) the European
Commission’s proposal for the AMLD
fails to address the question of sharing
information with non-EU countries,
even though the legislation applies
to laundering the proceeds of crimes
regardless of where they happen in
the world.
The AMLD also fails to treat tax crimes
as full money-laundering offences.
Such a definition would represent a
key step in the battle against illegal tax
evasion. If tax evasion were a so-called
’predicate offence’ on the same level
as corruption, for example, banks
and other financial intermediaries
would be legally obliged to look out for
transactions that could be laundered
money from tax evasion. Campaigners
across Europe are now pushing for
more ambitious measures to identify
beneficial ownership (ie through
public registries) and to tackle money
laundering (including tax evasion) than
are currently on the table.
23
Reforming the system
There is a growing view that what
is needed is not only greater
transparency, but a reform of the
system itself, particularly the way
in which multinational companies’
activities are taxed.
The basic problem is that the
international tax system no longer
reflects how multinational companies
operate. Current tax rules assume
that the different entities that form
an MNC act independently from one
another. However, recent allegations of
tax dodging by Amazon, Google, Ikea,
BNP Paribas, Starbucks, Apple and
other multinationals suggest that this
is not the case. In fact the different
subsidiaries that form a multinational
group operate as one entity and follow
a single business strategy.
One proposal is that MNCs should
be treated as just one single entity
in a so-called ’unitary approach’,
rather than as a sum of independent
companies. Under such an approach
and on the basis of an agreed formula,
the taxes charged to a company would
be apportioned to the countries where
24
the company is economically active.
This could decrease the segregation,
between where companies’ real
economic activities take place and
where profits are reported for tax
purposes. It could mean that they
would no longer benefit from creating
fictitious subsidiary companies in
tax havens as a strategy to avoid or
evade taxes.
Some NGOs are yet to be convinced
that a unitary system would benefit
developing countries and fear that the
formula agreed for apportioning the
tax bill within a multinational company
might benefit only rich countries. Others
believe that a more unitary approach
– if designed by and for all countries
including developing countries – could
enable countries to collect a fairer
share of the profits earned by MNCs
operating in their territory.
Progress towards developing a new
system for taxing multinationals
The term that the OECD and others
use to describe the problem of
corporations shifting profits out of
countries for tax purposes is `base
erosion’ as it results in an ‘erosion’ of
the tax base of the countries affected.
In February 2013, the OECD published
its initial report, Addressing Base
Erosion and Profit Shifting.60 This
report acknowledges that base
erosion constitutes a serious risk to
tax revenues and that multinational
companies’ profit-shifting strategies
are a fundamental cause of base
erosion. It also recognises that the
international tax rules drawn up 80
years ago have not kept pace with
the changing business environment
and are not fit for purpose. It asserts
that unilateral action would not solve
the problem and that a holistic and
comprehensive approach is needed.
It calls on governments to think
‘outside the box’ and identify new
approaches to the taxation of MNCs.
The OECD’s report is an important
milestone in the process to develop a
new system for taxing multinational
companies. Now we need to ensure
that developing countries are given
the space in which to defend their
interests and are fully included in any
process aimed at designing new global
tax rules so that the rules do not only
benefit rich countries.
Understanding Tax and Development
Progress in the UK towards tax justice
Nowadays media stories about multinational companies not paying their fair share
of tax are everywhere – and for good reason. The UK’s tax authority, Her Majesty’s
Revenue and Customs, estimates that tax evasion and aggressive tax avoidance –
including by big business – is costing the UK purse around £30bn (roughly 35 billion
euros) annually.61 In response, the UK prime minister, David Cameron, has told
companies they need `to wake up and smell the coffee’.62 This was a reference to the
coffee multinational, Starbucks, which paid no corporation tax in the UK for three
years, causing a public outcry.
Cameron has pledged to clamp down on UK tax havens such as the British Virgin
Islands, by calling for a global standard on automatic information exchange and
backing the creation of public registries of the real owners of all trusts and ‘shell
companies’ (often created in order to dodge tax). This political shift is partly down
to campaigning by NGOs, though not entirely.
Cuts in public spending and job losses in the UK have made ordinary people angry
about tax dodging by big companies and this in turn has put pressure on the
government to respond. The profile of the issue has been raised further by radical
groups such as UK Uncut, who have picketed and occupied the shops and outlets of
companies known to have dodged tax in the UK. Although public anger has focused
on the impact of tax dodging on the UK, the high profile of the issue has enabled
NGOs to expose its effects on developing countries too.
In 2013, more than 200 civil society organisations from the UK’s international
development sector came together in a joint campaign to push the UK prime
minister and other G8 leaders to tackle the causes of global hunger, including
tax dodging. The campaign managed to persuade David Cameron to put tax and
transparency at the top of the agenda of the G8 summit of world leaders in 2013
which the UK chaired.
Companies and politicians in the UK have a long way to go on this issue before
NGOs can stop campaigning. Nevertheless, the signs are that major change is
now a real possibility.
Understanding Tax and Development
25
Difficult questions and
how to answer them
If companies have to pay more tax,
won’t we have to pay more for their
goods and services?
services will be balanced by increased
tax revenues – money that can be spent
on providing improved public services.
It is unlikely that companies will
want to make their goods and services
less competitive by raising prices,
so we should not assume that prices
would go up.
Shouldn’t we be focusing on our own
problems in Europe in these difficult
economic times rather than those of
developing countries?
If MNCs do raise their prices as
a result of paying more tax, there
would be more of a level playing field
between small and medium-sized
enterprises (SMEs) and multinational
companies. At present, SMEs are often
at a disadvantage as they do not have
multiple subsidiaries in tax havens
like some of the less scrupulous
multinational companies, and therefore
pay the full rate of tax. Enabling SMEs
to be more competitive could have farreaching benefits. For example, SMEs
generate more jobs than MNCs.
Moreover, any small increase in what
we pay for companies’ goods and
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The tax reforms we are proposing are
global so they would help European
countries as well as developing
countries. Whether in Europe or
the developing world, tax dodging is
damaging national economies. The
UK’s tax authority, for example, has
estimated that it is losing around
35 billion euros a year as a result of
tax dodging.63 In addition, tax dodging
hurts the poor most because they
depend most on public services.
If companies are forced to pay
more tax in Europe, won’t they stop
investing here and just go elsewhere?
Won’t that have a devastating effect
on jobs in Europe?
We are campaigning for a global
solution and for measures with which
all companies and governments in
all countries will have to comply.
It will mean there is nowhere for
unscrupulous multinationals to hide
their profits.
In any case, research shows that
the rate of taxation is rarely the
decisive factor in determining whether
a company invests in a country.
Business surveys repeatedly find that
while taxation does matter to foreign
investors, other considerations such
as good infrastructure, the quality and
cost of labour, and good governance
matter more when it comes to longterm investments.64 Moreover, if
large companies have to pay more
tax in Europe, small and mediumsized companies could become more
competitive, which could then generate
more productivity and jobs in these
smaller companies.
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Name:
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Juan Dav
Age:
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Address
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Will you
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speak up fo rest
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Postcard adressed to the UK Prime Minister
ahead of the 2012 G20 Summit asking
world leaders to tackle the twin challenges
of climate change and tax dodging
21/02/2012
12:05
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Understanding Tax and Development
Companies will always find ways of
dodging tax. You close one loophole,
they’ll find another. So what’s the point?
Many tax dodging practices are legal.
Who can blame anyone for trying to
reduce their tax bill?
Some multinationals and individuals
will always try to find ways to dodge
tax. Nevertheless the tax system
should make it as difficult as possible
for them to do this.
If no one paid tax, there would be no
public money to invest in education, or
health, or the police or judiciary, or in
transport, roads or power. We agree
with the Swedish Prime Minister that
companies have an obligation to society:
At present the CEOs of big
multinationals may feel that if other
multinationals are increasing their
profitability by dodging taxes, they have
to do the same thing. Otherwise they
risk being considered unsuccessful by
their boards and shareholders.
As citizens of Europe, we need to
persuade companies that irresponsible
tax practices will damage a company’s
reputation. If tax was to be regarded
as a core element of multinational
companies’ corporate social
responsibility policies, there would
be less demand from multinational
companies for aggressive tax
avoidance schemes and less pressure
placed on the ‘Big Four’ accountancy
firms to find loopholes in the system.
‘These companies ask for
a lot of investments in
infrastructure, in research
and development. They
want to have well-educated
staff members. Well …
pay your taxes. Then we
can afford all of these
investments.’
Fredrik Reinfeldt, Prime Minister of Sweden, 22 May 2013 65
There is a difference between avoiding
tax in compliance with the law and
avoiding tax in a way that violates
the original purpose of the law. If a
particular tax avoidance scheme can
be proved to be contrary to the purpose
of the law, the tax authority may rule
that it is illegal. This is why the OECD
guidelines for multinationals refer to
the intention of the law and include tax
avoidance, not just evasion.
Understanding Tax and Development
If governments in poor countries get
more tax revenues, won’t corrupt
politicians just squander this money?
How do we know this money won’t
just go into their pockets?
As already noted, there are no
guarantees how a government will
spend the money raised. However,
research has shown that in general,
the more tax African countries collect,
the better their performance towards
the Millennium Development Goals.31
Throughout the world, citizens,
parliaments and the media have
an important role to play in
monitoring government spending,
holding governments to account
and influencing them to spend the
increases in revenue from taxation
on reducing poverty and building
better societies. If citizens know their
governments have more money, they
want to know what their governments
are doing with it and how they are
spending it. An increase in tax
revenues can therefore help to
reduce corruption.
Of course, it is not only developing
governments that have been implicated
in corruption. Where large sums of
money are involved, big companies
have often been exposed for bribing
politicians and officials and banks so
as to fix systems in their favour.
27
In many poor countries, foreign
companies pay money into
a social fund to help tackle poverty.
Isn’t that better than paying tax?
Social funds often produce short-term
benefit to a fixed group of people (for
example, the communities in the vicinity
of a mine or factory). By contrast,
taxation provides governments with
a sustainable source of income that
they can use to provide services for
all citizens. Moreover, there is less
accountability built into social funds
than there is with services provided by
governments, in that governments are
accountable to their citizens, whereas
companies are primarily accountable to
their shareholders.
If we stop tax havens, won’t all the
people living there become very poor?
It is worth remembering that in most tax
havens, the residents pay similar rates of
tax to those paid by citizens elsewhere.
Low or zero tax rates are generally
only offered to foreign companies and
individuals not residing there.
28
Nevertheless, since many people
living in tax havens are employed in
the financial services industry, the
impact of a tax haven crackdown on
the citizens living there needs to be
considered. Increasingly, tax havens
are becoming a high-risk model for
their citizens. The collapse of Iceland’s
banks in 2009 and Cyprus’s banks in
2013 demonstrated how toxic debts
stashed away in tax havens can
become hidden time-bombs for the
citizens living there.
more a question of how these financial
services are managed and whether
they facilitate tax dodging.
At the same time, the growing
pressure that world leaders in the
G8, G20 and the EU are putting on
tax havens to become less secretive
is unlikely to go away. Therefore
tax havens may face economic and
political isolation if they do not change.
A lack of capacity is a major problem
for tax authorities in developing
countries. For this reason, civil society
organisations are calling on European
donors to increase aid and support
to developing country tax authorities.
However, the most elaborate and wellfunded capacity-building programmes
will fail if tax authorities do not have
the information with which to detect tax
dodging. Put simply, information is power.
Small island economies should
consider diversifying their economies
into other sectors (for example, by
focusing more on tourism) so that they
are less dependent on volatile financial
services. But it does not have to be
the case that tax havens stop offering
financial services altogether. It is
Rather than singling out individual tax
havens, the real solution is to raise
standards everywhere.
Tax authorities in poor countries
won’t have the capacity to make use
of the additional data that might be
provided by country-by-country
reporting by companies.
Understanding Tax and Development
Christian Aid/Felicia Webb for the IF campaign.
Meal time in Ethiopia: tax revenues are key to tackle hunger and malnutrition
Understanding Tax and Development
29
Endnotes
1 World Health Organization (WHO),
World Health Organisation www.who.int/water_
sanitation_health/mdg1/en/index.html
2 Ibid
3 World Resources Institute Pilot Analysis of
Global Ecosystems, February 2001
4 UNICEF
5 Educational for All Global Monitoring Report,
UNESCO, 2010
6 ' Tax in Developing Countries: Increasing
resources for development’, House of Commons,
International Development Committee, Fourth
Report of Session 2012-13, 16 July 2012, p5
7 World Bank figure, www.worldbank.org/
en/news/feature/2011/06/06/economicsadaptation-climate-change
8 T he OECD Development Assistance Committee
(DAC) reports a 4 per cent drop in real terms in
global development assistance for 2012, which
followed a drop of 2 per cent in 2011. www.oecd.
org/dac/stats/aidtopoorcountriesslipsfurtheras
governmentstightenbudgets.htm
9 B ased on OECD figures and quoted by Jeffrey
Sachs, ’The Facts Behind G8 Aid Promises’,
www.guardian.co.uk, 4 July 2010. The figure of
$20bn takes account of inflation.
10 F igure from the World Bank. See http://data.
worldbank.org/indicator/DT.INT.DECT.GN.ZS
11 World Bank, International Debt Statistics 2013
http://data.worldbank.org/sites/default/files/
ids-2013.pdf, p2
12 F igure quoted in Tax Justice Advocacy: A Toolkit
for Civil Society, Tax Justice Network, 2011
13 T he US$160bn figure was a Christian Aid
estimate in the report Death and Taxes, the
true toll of tax dodging, 2008, based on work on
illicit capital flight by Raymond Baker. It was
supported by further detailed research on
trade mispricing by Professor Simon Pak in
the Christian Aid report False Profits, Robbing
the Poor to Keep the Rich Tax Free, 2009.
14 Countries that are members of the Development
Assistance Committee (DAC) of the OECD
27 UNDP, Human Development Report, 2012
28 Ibid
15 w ww.oecd.org/dac/stats/aidtopoorcountries
slipsfurtherasgovernmentstightenbudgets.htm
16 F igure based on Josef Schmidhuber and
Jelle Bruinsma, ‘Investing towards a world
free from hunger: Lowering vulnerability
and enhancing resilience’, in Adam Prakash
(ed), Safeguarding Food Security in Volatile
Global Markets, FAO, 2011. Action Contre la
Faim/Institute of Development Studies, Aid
for Nutrition: Using innovative financing to end
undernutrition, undated, p13. See Susan Horton
et al, Scaling up Nutrition: How much will it cost?
World Bank, 2010, p24.
17 F igure cited by Raymond Baker for Global
Financial Integrity, Washington
18 Dev Kar and Sarah Freitas, Illicit Financial Flows
from Developing Countries Over the Decade Ending 2009, Global Financial Integrity, 2011
19 Research published in J Boyce and L Ndikumana,
Africa’s Odious Debts, Zed Books, 2011
20 Evidence cited in Who pays the price?,
Christian Aid, 2013
21 w ww.reuters.com/article/2012/02/07/zambia-mining-taxes-idAFL5E8D75SN20120207
22 T he World Bank estimates that growth in
the agricultural sector is three times more
effective in reducing extreme poverty than
growth in other sectors. See Susan Horton et
al, Scaling up Nutrition: How much will it cost?
World Bank, 2010, p24.
23 F
AO Statistical Yearbook, 2012
24 Food and Agricultrure Organization of
the United Nations (FAO) The State of Food
and Agriculture 2012, p35, www.fao.org/
docrep/017/i3028e/i3028e.pdf.
29 T he US$160bn figure was a Christian Aid
estimate in the report Death and Taxes, the
true toll of tax dodging, 2008, based on work on
illicit capital flight by Raymond Baker. It was
supported by further detailed research on
trade mispricing by Professor Simon Pak in
the Christian Aid report False Profits, Robbing
the Poor to Keep the Rich Tax Free, 2009. The
figure has subsequently been reaffirmed in a
paper in a World Bank publication.
30 SEND-Ghana, Investing in Smallholder
Agriculture for Optimal Result: The ultimate
policy choice for Ghana, 2009
31 Attiya Waris and Matti Kohonen,
2013 The publication is available at
http://eadi.org/gc2011/waris-109.pdf
32 T
he Benefits of Foreign Investment: Is Foreign
Investment in Bolivia's Oil and Gas Delivering?,
Christian Aid, 2007
33 Development Initiatives, Kenya: Resources for
Poverty Eradication Background Paper, Sept 2012
www.devinit.org/wp-content/uploads/Kenyapublic-expenditure-background-paper.pdf
34 S ee endnote 13.
35 E xample of alleged trade mispricing
by Glencore quoted by EURODAD in
How EU country-by-country reporting could
tackle tax dodging and why this is needed
http://eurodad.org/211928/
36 Christian Aid, False Profits: Robbing the Poor
to keep the Rich Tax Free, March 2009
37 B anana example taken from Nick Shaxson,
Treasure Islands: Tax Havens and the men who
stole the world, Bodley Head, 2011
38 h
ttp://allafrica.com/stories/201305101359.html
25 T he Salvadorean NGO, FESPAD (Foundation
for the Study and Application of the Law)
estimates that $1.4bn is needed to regenerate
the agriculture sector.
39 C
alling Time: Why SABMiller Should Stop
Dodging Taxes in Africa, ActionAid, 2010
26 F igure quoted in Christian Aid, Who Pays
the Price? Hunger: The Hidden Cost of Tax
Injustice, 2013, p22
30
Understanding Tax and Development
40 F igure quoted in Nicholas Shaxson, 2011, op
cit, based on a statistic which was quoted by
the Paris Group of Experts in 1999 and based
on research undertaken by J Christensen and
M Hampton. Evidence indicates the share has
grown since 1999.
41 S ee Ronen Palan, Richard Murphy and
Christian Chavagneux, Tax Havens:
How Globalisation Really Works, Cornell
University, 2010.
42 IMF Working Paper, WP/10/38, February 2010
43 James Henry, The Price of Offshore Revisited,
Tax Justice Network, 2012
44 W ho Pays the Price? Hunger – The Hidden Cost
of Tax Injustice, Christian Aid, 2013
45 Death and Taxes: The True Toll of Tax Dodging,
Christian Aid, 2008, p 27, www.christianaid.org.uk/
images/deathandtaxes.pdf See also Prem
Sikka etc
46 International tax expert and OECD consultant
reported on this research at a conference in
Ghana. Reported in ’Ghana: no incentive needed
for investing in the mining sector – tax expert’,
Public Agenda, Accra, 25 February 2008, http://
allafrica.com/stories/200802251515.html.
See also Gordon H Hanson, Should Countries
Promote Foreign Direct Investment? G-24
Discussion Paper No.9, 2001.
47 F igure quoted in Bringing Taxation into the post2015 Development Framework, ActionAid, 2013
48 Tax Competition in East Africa: A Race to the
Bottom? Tax Incentives and Revenue Losses in
Kenya, ActionAid International, 2012
49 S ee Approaches and Impacts: IFI tax policy in
developing countries, ActionAid/EURODAD, 2011.
50 See Revenue Mobilisation in Developing Countries,
Fiscal Affairs Department, IMF, 2011.
51 T homas Baunsgaard, A Primer on Mineral
Taxation, IMF Working Paper WP/01/139,
p26, 2001.
52 F igure quoted by Publish What You Pay Europe
in 2012.
53 Christian Aid, Shifting Sands: Tax,
Transparency and Multinational Companies,
2010, www.christianaid.org.uk/images/
accounting-for-change-shifting-sands.pdf
54 Interviewed by Christian Aid in September 2010
55 A survey undertaken by Christian Aid of the
UK’s top 100 companies (FTSE100 companies)
in 2010 indicated that only 3 of the 38 companies
that responded would support a country-bycountry reporting standard.
56 w ww.whitehouse.gov/the-press-office/
statement-press-secretary-transparencyenergy-sector
57 T he minister is quoted in this article, from
the Economic Times of India: http://articles.
economictimes.indiatimes.com/2011-02-18/
news/28615319_1_tax-havens-black-moneytax-information
58 S ee G20 Communique, Mexico, June 2012
59 http://eur-lex.europa.eu/LexUriServ/
LexUriServ.do?uri=CELEX:52013PC0045:
EN:NOT
60 A
ddressing Base Erosion and Profit Shifting,
OECD. See www.oecd.org/tax/beps.htm
61 HMRC, Measuring tax gaps, 2011.
62 Quote from a speech given by David Cameron at
the World Economic Forum, Davos, January 2013
63 F igure of £30bn from Her Majesty’s Revenue
and Customs, UK
64 See Revenue Mobilisation in Developing Countries,
Fiscal Affairs Department, IMF, 2011
65 Reported in: Henry Chu, ‘Pay your taxes,
Europe warns multinationals’, Los Angeles
Times, May 23, 2013, www.latimes.
com/business/la-fi-euro-corporatetax-20130523,0,5076262.story
Understanding Tax and Development
31
STOP tax dodging is a joint initiative seeking tax justice.
Membership includes organisations such as:
Acknowledgments
Project coordination: Mariana Paoli
Text: Hilary Coulby and Helen Collinson
Design, editoral: Christian Aid
The authors would like to thank all member organisations of the STOP tax dodging campaign for their valuable feedback and input.
14-770-J1727
This publication has partly been funded by the European Union. The contents of this publication are the sole
responsibility of Christian Aid and other member organisations of the STOP tax dodging campaign and can in
no way be taken to reflect the views of the European Union.