Reformers v lobbyists: where have we got to on tackling corporate tax dodging?

May 9, 2014

     By Duncan Green     

The rhythm of NGO advocacy and campaigning sometimes makes it particularly hard to work on complicated issues, involving drawn-out negotiations where bad guys have more resources and staying power than we do. Campaigns on trade, climate change, debt relief etc often follow a similar trajectory – a big NGO splash as a new issue breaks, then activists realize they need to go back to school (I remember getting briefings on bond contracts during the 1998 Asia financial crisis) or employ new kinds of specialists who can talk the new talk. And then for a while we get geeky, entering into the detail of international negotiations, debating with lobbyists and academics. When it works (as in the debt campaign), we contribute to remarkable victories or to stopping bad stuff happening (which I would argue was a big civil society contribution at the WTO).

But citizen activism has always been characterized by spikes of activity, rather than the steady, long term grind of states and business lobbyists. As an policy funnelissue moves down the policy funnel (see pic), the technical content gets greater, and the chance to mobilize the public declines. It becomes harder for NGOs to maintain commitment with new issues appearing, and all the other competing priorities. Sometimes we spin off smaller specialist organizations who can dig in for the long term (like the Bretton Woods Project); at other times we just let things slip.

I thought of this when reading an excellent new Oxfam paper on corporate tax dodging, by Claire Godfrey. It’s both a handy, non-technical overview of how tax dodging affects poor countries, and a laudable effort to keep up the pressure for reform as the memories of the global financial crisis fade, and the lobbyists mobilise to try and stop the OECD and G20 from turning post-crisis promises into something more concrete.

First the issue:

‘The OECD has found that multi-national corporations pay as little as 5 percent in corporate tax, while small companies pay as much as 30 percent. This tax-dodgerssituation can mostly be explained by two phenomena: multinational business shifting profits or otherwise structuring cross-border transactions to avoid their tax liabilities; and companies securing tax incentives from governments bidding to attract foreign investment. The tax gap for developing countries – the amount of unpaid tax liability faced by companies – is estimated at $104bn every year (including profits shifted in and out of tax havens). Governments in these countries then give away an estimated $138bn each year in statutory corporate income tax exemptions.’

Now the response:

‘The ‘Action Plan on Base Erosion and Profit Shifting’ (BEPS) proposed by the OECD and approved by the G20 seeks to redefine international tax rules to curb profit shifting activity [by companies], and ensure they pay taxes where the economic activity takes place and value is created. The action plan should be ready for implementation by the end of 2015.

However, there are several reasons why this process, in its current state, will not deliver an outcome that leads to more progressive tax systems worldwide where multinational companies pay their fair share of tax or do so where the value is generated.

Firstly, the business lobby currently has a disproportionate influence on the process, which it uses to protect its interests. Correcting the rules that allow the tax dodging practices of global giants like Google, Starbucks and others that lead to tax revenue losses in OECD countries will be difficult, given the size of the corporate lobby. But worse, perhaps, is that the interests of non-OECD/G20 countries are not represented at all in these negotiations.’

tax protestThe paper highlights the skewed nature of policy formulation – when the OECD ran a public consultation on its draft rules to curb tax abuses, ‘almost 87 percent of the contributions have come from the business sector, none from developing countries’ tax authorities, and the remaining 13 percent include contributions from NGOs (eight, including Oxfam), academics (seven), experts related to tax administrations (two) and one trade union. More striking, of 135 contributions in total, 130 come from rich countries.’

The paper concludes that the only way to avoid the lobbyists and the race to the bottom between governments is to create a World Tax Authority, (something Vito Tanzi, former Director of the Fiscal Affairs Department at the IMF, proposed after the Asia Crisis). NGOs are always calling for new international bodies to be set up, but it feels like the case for this one is unusually strong, and the political economy arguments for governments might be persuasive (if they can just shake off the malign influence of the financial lobbyists) – in the end, all governments (as well as their citizens, of course) lose out from a race to the bottom on tax.