Where is tax in sustainable development talks?

Friday, June 17, 2016 - 13:18

Walking through the huge Brussels conference centre where the European Development Days are taking place, which is crowded with events and stalls on many aspects of the Sustainable Development Goals, one crucial question is striking by its near-absence: how countries will raise more tax to pay for the SDGs.

Tax matters because of the general recognition that the huge costs involved in financing the SDGs cannot be met from aid budgets alone, meaning that developing countries will have to raise more of their own revenues. The prevailing assumption that private capital flows will provide much of the financing for the SDGs raises the vital question as to how these flows will be taxed.

Yet the topic of tax barely got a mention in the opening speeches by presidents and prime ministers and out of more than a hundred panel debates, only one (organised by ActionAid, Oxfam and Eurodad) dealt explicitly with tax. What this tells us is that the development community needs to involve itself far more in the tax reform debates which have erupted in the wake of recent scandals like the Panama Papers and LuxLeaks.

There is a widespread recognition, though not one given much attention at the European Development Days, that the capacity of developing countries to raise more tax is impaired by the ability of cross-border investors and rich individuals to shift their income into offshore tax havens. IMF staff have estimated that tax avoidance by multinationals, which exploits tax rules and treaties across jurisdictions, could be costing developing countries US$200 billion a year.

There was general recognition at our event that the ability of developing countries to tax investors from Europe can be hugely and negatively affected by Europe’s own tax rules and treaties. As an European Commission official put it, Europe needs to put its own house in order as far as tax is concerned. DG DEVCO does now recognise that the problems of tax collection in developing countries are partly due to external problems - like the global network of bilateral tax treaties which reduces the taxing rights of poor countries – and not just to weak tax administration in these countries.

However, the tax reforms expected to be agreed shortly by the European Institutions fall seriously short of this recognition. For example, the European Commission has proposed a general concept of public country-by-country tax reporting by multinationals, which would make it clearer where companies are shifting profits into tax havens. But the Commission proposes to include only EU countries and tax havens in this reporting, so the reports will have no value for concerned citizens or tax authorities in developing countries, which might otherwise not have access to this vital information.

Member States also look set to adopt a legal requirement for a number of anti-tax avoidance measures, including anti-tax haven or “controlled foreign companies” rules but the standard that they propose to adopt is so weak that in practice it will have very little effect, unless Member States choose to make it effective. It is again a missed opportunity: strong CFC rules could have a significant positive impact in developing countries. This weakness reflects the fact that certain Member States do not want stronger rules which might hamper their ability to undercut each other with low tax rates and tax breaks. As the IMF has found, international tax competition reduces tax revenues in developing countries by two to three times more than in developed ones.

So on the one hand, a dawning official recognition that Europe cannot help developing countries raise more tax from investors without reforming its own rules and treaties. On the other, a generally inadequate response to the scale of corporate tax avoidance. To close the gap, the development community needs to get much more involved on debates on global tax reform, to act as a counterweight not just to corporate lobbying against reform but also to the tendency of Member States to reach for lowest-common denominator solutions which leave fundamental problems unresolved.