Global Policy Forum

Global Tax Evasion: Tax Evasion Stifles Poorest Nations


Martin Hearson

January 26, 2010

Have you filed your tax return yet? This week is the annual scramble to complete the online form before Sunday's deadline. (Me? I sent mine off months ago.)

But it's also a big week in the world of tax for another reason. On Thursday in Paris, Treasury minister Stephen Timms will stand up at a meeting of finance and development ministers from around the world, to discuss a radical shake-up of the way multinational companies present their accounts.

Timms is due to give a presentation to the OECD conference entitled "Country-by-country reporting", setting out how a change in financial reporting standards for multinational companies could help developing countries tackle tax avoidance.

It's a radical proposal, likely to meet stiff resistance from the more shady parts of the corporate world. But it's also one with high-level interest. Buried in the communiqué from last July's Brown-Sarkozy summit in Evian is a call for the OECD "to look at country by country reporting and the benefits of this for tax transparency and reducing tax avoidance".

Under the proposal - championed by development agencies, trade unions, and even the nation's most trusted politician, Vince Cable - multinationals would be required to break down their financial reports at the level of individual countries, rather than presenting the aggregate results, which they can get away with at present. Breaking down results like this would lift a veil of secrecy that currently makes it near impossible to understand how companies avoid and evade tax, opening them up to public scrutiny and debate, as well as giving tax inspectorates the information they need to spot potential instances of tax evasion.

The UK government has chosen a historic, but extremely apposite, meeting to raise this proposal. It's the first time that two arcane-sounding bodies - the OECD's Committee on Fiscal Affairs, working on tax co-operation, and its Development Assistance Committee, which is focused on overseas aid - have met together. Perhaps they were inspired by a meeting of top African tax inspectors in Kampala last November, which declared that "efficient and effective tax administration is key to building capable states". Jeffrey Owens, who leads the OECD's fight against tax havens, has gone as far as to say that, "the correct spelling of the word 'aid' is T-A-X".

At the beginning of last year, ActionAid estimated that the financial crisis would cost Africa as much as $49bn in external income, so it comes as no surprise that its governments have started to look within their own borders for sustainable income with fewer strings attached.

While the governments of developed countries raise on average 37% of their national income in tax, the figure is much lower in most developing countries: Bangladesh and India, for example, take just 8% and 9% respectively. If all developing countries could increase their tax revenues to just 15% of national income, we calculate that $198bn extra each year would be available to spend on education, healthcare and other development activities - more than all overseas aid combined.

So what can be done about it? In-country reforms to improve tax policy, widen the base of people and companies that are taxed, and strengthen tax administrations are all important. With the help of financial and technical assistance from donors such as the UK's Department for International Development, Rwanda - to take one example - was able to quadruple its tax revenues in less than a decade.

But alongside this, reforms at international level are needed to help developing countries crack down on the scourge of tax evasion by multinational companies. It is estimated that this costs them more than the $120bn they received in aid last year.

As we near an election in which all parties want to be seen to be tough on financial excess, obscure risk-taking and lack of transparency, we are asking all of them to support the proposal for country-by-country reporting. It's bad enough for big business in London and Wall Street to cost the British taxpayer billions, but even worse for it to do the same in developing countries too.


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