ATTAC.IE Taxation Expert Claudine Gaidoni: Transnational corporations violate human rights by using tax avoidance mechanisms. Interview: Victoria Mutti, Nueva Sociedad, Argentina ( Originally published in Spanish New Society )
Mutti: Tax evasion and tax dodging by transnational corporations is a major cause of inequality and poverty. The recent Apple case in Ireland is just the “tip of the Tax-dodging iceberg” and other large firms have also been privileged by “fiscal black holes”. What are the general estimates of this problem and what do they mean? What are the causes of this phenomenon?
Gaidoni: The recent Apple case, in which the European Commission ordered that the Irish tax authorities should recover Apple’s $14.5 Billion in unpaid taxes. That order has again drawn public attention to the phenomenon of tax avoidance by transnational corporations (TNCs). In Ireland, law abiding taxpayers on modest incomes were shocked and outraged to learn that in 2014 Apple had paid as little as 0.005% in corporate tax on profits registered in Ireland. Yet there is nothing particularly new nor surprising in this case.
Following on from the LuxLeaks scandal, which revealed, in November 2014, that the Luxembourg tax authorities had guaranteed TNCs individual deals enabling them to pay less taxes in that country, the EC began to investigate similar cases of illegal state aid. They concentrated initially on Fiat-Chrysler in Luxembourg and on Starbucks in The Netherlands. In January 2016, it ruled that Belgium had granted selective tax advantages to at least 35 transnational corporations.
A week before the EC issued its verdict on Apple, US Treasury official Robert Stack warned that investigations into American companies “may lead to a growing chilling effect on US-EU cross-border investment”. And yet, according to EU Competition Commissioner, Margrethe Vestager, the European Union’s tax probe into Apple’s tax practices was a follow on from the US Senate tip-off. in 2013, a Senate investigation had found that Apple was paying very low taxes on its profits by taking advantage of gaps in the Irish and US tax codes, but had found no evidence of illegal activity. So although US Treasury Secretary Jack Lew had protested that the EU was specifically targeting US companies, the truth was that he was well aware of the problems created by tax loopholes on both sides of the Atlantic.
The Irish Times newspaper quoted statements by Pascal Saint-Amans, director of the centre for policy and administration at the Organization for Economic Co-operation and Development’s (OECD). It states that since most of the research and development of Apple take place in the United States, the bulk of the profits attributed to Irish operations belongs to the United States.
Although the nation is heavily indebted, the Irish government has decided not to claim back taxes owed by Apple and has instead sided with the multinational in challenging the EC’s finding of illegal state aid. Groomed by an army of lobbyists, both Ireland and the US are siding with the TNCs at the expense of their own taxpayers. Meanwhile another army of lawyers and accountants has been busy designing loopholes in each of the countries’ tax codes where these companies operate.
As a result, EU estimates indicates that tax evasion by firms in its member states costs between 50 Billion and 70 Billion euro per year in lost taxation. According to a report by Oxfam USA ( “Broken at the Top”, April 2016), tax evasion and tax avoidance by transnational corporations costs the US approximately £111 Billion (UK pounds) per year, while developing countries lose at least £100 Billion per year in tax revenue because of tax evasion and tax avoidance of large corporations.
There is a harmful race between countries to be more competitive and thus attract more investment. This race includes mechanisms of tax dodging and avoidance with disproportionate benefits favouring large transnational corporations and their local agents. What are the consequences of these illegitimate procedures in terms of democracy and the welfare of nations?
It is becoming more and more obvious that tax wars between countries are counterproductive and only lead to a race to the bottom, as each country tries to offer the best deals to transnational corporations in an effort to attract (and retain) foreign investment (FDI). TNCs benefit, but countries are deprived of much needed income. They can only make up the shortfall by either reducing public services or investing in infrastructure or increasing the tax burden on their citizens or on small local businesses.
The irony in this and is that TNCs will often privilege as locations for investment those countries which can offer them a well-educated workforce and good infrastructure. They also demand equal treatment to local companies and try to enforce this demand through binding investment and trade agreements. Basically they want all the advantages, as free-riders.
Poor countries are most affected by the lack of corporate tax revenues, in the first place, because they are more dependent on FDI. The anti-poverty organization Action Aid estimated that, in low- and middle-income countries, the corporate income tax represents (on average) 18% of total tax revenue. And, of course, the needs of the population are greater in these countries. But in most countries, there is now a widening gap between the richest and poorest sectors of society, and this growing inequality is a dangerous source of unrest.
In very poor countries, people become so desperate to emigrate in search of better prospects, some even risk their lives. In a single day last June, Italian coastguards rescued more than 5,000 migrants who had departed from the Libyan coast in rubber dinghies in an attempt to reach the coasts of mainland Europe. But in many of those destination countries chosen, the local population also feels at risk of poverty and react with hostility to the presence not only of economic migrants but even of refugees. They demand the closure of borders, if not the construction of walls.
Hostility towards the movement of people has grown even within Europe and an upsurge in the number of EU immigrants to Britain was one of the decisive factors in the Brexit referendum. And yet, if we want a fairer, less unequal society, should we not focus less on the free mobility of people and more on the free mobility of money?
In his book The Hidden Wealth of Nations, French economist Gabriel Zucman denounces the scourge of tax havens, which are the facilitators of grand theft (perpetrated on all of us) by criminals, corrupt elites, and TNCs avoiding taxes . According to Zucman, “55% of the total profits of US firms are now kept in such tax havens”. Indeed the study entitled “Offshore Shell Games 2016”, released by Citizens for Tax Justice, the Institute on Taxation and Economic Policy and the US US Public Interest Research Group Educational Fund, reports that Fortune 500 companies account for nearly $2.5Trillion in accumulated profits located offshore.
Opaque fiscal rules and an extreme concentration of wealth in obscure tax havens means that citizens all around the world are deprived not only of economic, social and cultural rights, but also of their civil and political rights. In particular they’re deprived of the right to be informed and to participate in policy decisions.
What are the policy reforms that can be developed by stakeholders to dismantle the power of transnational corporations? What could be the role of the US, the EC and other regional and international institutions play in this campaign?
If US-based TNCs book their profits in various tax havens, they do so to avoid paying taxes in the US. The study entitled ”Offshore Shell Games 2016″ reveals that Apple recorded $214.9 Billion offshore, of which $65.4 Billion in US taxes would be due if these benefits were repatriated. The US could act unilaterally to combat this, notably it could prevent TNCs from deferring tax payments, demand the repatriation of those benefits and taxing them at the statutory corporate tax rate of 35% (with consideration made for taxes paid abroad). However, other measures to combat tax evasion of TNCs need international cooperation.
A first step in the right direction is the OECD BEPS project, mandated by the G-20 initiated in 2013. BEPS means “Base Erosion and Profit Shifting” (transfer pricing) a set of tactics used by TNCs to reduce what they pay in tax. The purpose of the OECD / G-20 BEPS project is “to reform the International tax framework and ensure that profits are reported where economic activities are carried out and value created”.
A key tool of the package is the Country by Country Reporting (CbCR) reporting, a transparency requirement that requires TNCs to provide an annual report on the global allocation of their income and taxes. Countries can then sign the Multilateral Competent Authority Agreement (MCAA) in the OECD, which requires the automatic exchange of country-by-country disaggregated information between the signatory countries. As of October 21, 2016, forty nine countries had signed the MCAA, Brazil being one of the latest signatories.
The OECD BEPS project is not perfect. For example, it specifies that only TNCs with a minimum turnover of 750 million euro per year have to implement country-by-country reporting, a threshold that excludes 80% to 90% of TNCs from reporting. It also accepts the fiction that different subsidiaries of a multinational corporation can be treated as independent entities, leading to the application of very complex (and difficult to implement) rules by underfunded tax administrations.
In April 2016, the EU Commission proposed to go beyond OECD proposals so that TNCs submit public reports on a country-by-country basis, which would imply that access to such reports would not be limited to fiscal authorities alone. In the EU, public CbCR already exist for banks, which first published them in 2015, and for the extractive and the logging sectors, which are due to start CbCR beginning in 2017. This proposal would improve transparency and accountability, but based on the OECD BEPS project, as it is, the Commission’s proposals aren’t perfect either. This could improve when the EC introduces the next element of its corporate tax reform, the Common Consolidated Corporate Tax Base (CCCTB) project, which would treat transnational corporations as single entities and apportion the tax they must pay based on their actual activities in different tax jurisdictions. This could be a significant move in the fight against tax havens.
Both European initiatives – Country by Country Reporting (CbCR) and Common Consolidated Corporate Tax Base (CCCTB) – are implicit acknowledgments that the BEPS project alone is not sufficient to eliminate tax avoidance by TNCs. Another problem is that while the OECD has invited all interested countries to participate, the BEPS Project only addresses the concerns of the G-20, the club of the 20 largest countries (measured by GDP). Developing countries have different needs and priorities, and so have repeatedly called for the creation of an inclusive international tax agency under the auspices of the United Nations (UN).
Progress on this issue may come from Latin America. Ecuador has just assumed the presidency of the G-77 (developing countries group) and last month at the UN General Assembly, Guillaume Long, Ecuador’s foreign minister, called for the creation of an intergovernmental body at the UN for tax justice, to avoid tax havens and to adopt a legally binding international instrument to deal with TNCs that violate human rights. The connection should be clear: TNCs can violate human rights in many ways, tax avoidance is one of them.