Guest blog: involve developing countries more in international tax co-operation

   1   0 Blog, Tax Treaties, Taxing corporations, Transfer Pricing

HaldenwangAfter Panama: developing countries need to be involved more closely in international co-operation on tax issues

A guest blog by Christian von Haldenwang, German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE)

Bonn, July 4, 2016 – Two major mechanisms squeeze the tax base in developing and emerging countries. Rich individuals evade their tax obligations by moving money abroad and submitting false statements regarding income and assets. Large multinational companies exploit international loopholes in laws and regulations and shift profits artificially to states with particularly low rates of taxation.

As different as these two behavioural patterns are, they both converge on one key point: companies such as Mossack Fonseca and countries such as Panama provide the know-how and infrastructure to avoid and evade paying taxes. They are part of an international system, the sole purpose of which is to circumvent the efforts of states to collect taxes. The beneficiaries are the free riders in the global system – tax havens, corrupt elites, criminal gangs and companies operating on the borders of legality.

To date there is scarcely any sound knowledge of the extent to which developing countries suffer from tax avoidance and evasion. However, the existing studies enable two general statements to be made.

First, poorer countries are affected more than richer industrialised countries with regard to their economic strength and tax base. This is primarily due to the fact that they are dependent on capital imports and tax payments from a small number of large companies. Low state capacity and the political influence of national elites also play a role.

Second, the amount of financial assets hidden in tax havens and the annual flows of capital from developing and emerging countries have increased further since the global financial crisis of 2009. This contradicts the impression given that measures introduced under the aegis of the OECD, the EU and the G20, for example to improve the exchange of information between tax authorities, had already resulted in effective curtailment of the problem. Whether and when the new measures will actually take effect remains open at this time.

Multinational companies in particular utilise the business model of tax havens and loopholes in the international tax system to dramatically lower their tax burden. A number of these practices are almost impossible to identify, let alone rectify. For example, even the industrialised nations find it very difficult to monitor the pricing of financial services and intangible assets by multinational groups. To many developing countries this represents an even greater challenge. Other problems are easier to identify, but tackling them requires a high degree of openness to bilateral co-operation and state capacity.

The effects are grave: the countries affected are deprived of the necessary resources for the realisation of development policy objectives. In addition, public investments (e.g. in energy, transport, communications) often have a key leverage effect on the investment behaviour of private providers of capital. A fiscal system that is regarded as unfair can significantly endanger the legitimacy of the state.

Bilateral co-operation needs to be extended to strengthen the capabilities of tax authorities in developing countries. A broad consensus exists with regard to this in the field of development policy. Establishing databases and information systems is of key importance here. In many cases this also includes the strengthening of national statistics authorities and the improved exchange of information amongst state bodies. In addition, public access to data regarding multinational companies, major commodity extraction projects etc is also important.

At an international level, a range of efforts are currently being made to close regulatory loopholes. Many of these measures require bilateral agreement between states. This includes, for example, the automatic exchange of tax information. However, poorer developing countries are overwhelmed by the principle of reciprocity. Industrialised countries should allow for a certain degree of asymmetric behaviour regarding this.

Even more importantly: bilaterally anchored measures are aligned more towards countering sophisticated tax avoidance and evasion schemes with equally complex mechanisms of regulation and co-operation. However, it is questionable whether developing countries with limited state capacity are capable of following this path.

Multilateral approaches that place the taxation of companies on a uniform basis and ensure that the necessary data is collected and made available at an international level would help to promote this development. Such an approach would have the potential to align taxation more towards economic activities, render tax evasion and avoidance more difficult and at the same time ease the burden on less capable countries. With its strong export industry, Germany, too, stands to gain more than it loses in the medium term from increased international co-operation on tax issues.

This blog is available in the original German here and here.

 

 


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One thought on “Guest blog: involve developing countries more in international tax co-operation

  1. David Harold Chester says:

    Large corporations employ all kinds of specialists who know about tax avoidance. These companies are usually quite successful in avoiding much of what they should be paying as tax. Others with less ability to find loop-holes in the system have to pay more tax to make up for it and this situation is unjust and damaging to the general progress of the social system.

    There is an answer to it and it means having to tax something which is impossible to hide, namely the ownership rights of land. This means that the big corporations (who occupy a site of land and whose site is most valuable because it is most productive), should pay a tax which depends on their site value.

    The concept of Land Value Taxation was first proposed by Henry George in his seminal book “Progress and Poverty” in 1879, but even today few governments have become sufficiently ethical in their aims, as to make this tax system a part of their means of government. It is significant because LVT actually does a whole lot more good than mere taxation, in spite of the fact that it is something that many people could do without. In practice a whole lot more people could do with it, but very few political balances exist between rich and poor. Because it is yet another tax, a national policy for LVT is sometimes called “politically unacceptable”, which automatically puts in the “not wanted during term” file. George’s claim was to make this a single tax and to stop taxing all of the production-related things like earnings, purchases and capital gains. Below are listed all the features:

    17 Aspects of LVT Affecting Government, Land Owners, Communities and Ethics

    Four Aspects for Government:
    1. LVT, adds to the national income as do other taxation systems, but it replaces them.
    2. The cost of collecting the LVT is less than for all of the production-related taxes–tax avoidance becomes impossible because the sites are visible to all.
    3. Consumers pay less for their purchases due to lower production costs (see below). This creates greater satisfaction with the management of national affairs.
    4. The national economy stabilizes—it no longer experiences the 18 year business boom/bust cycle, due to periodic speculation in land values (see below).

    Six Aspects Affecting Land Owners:
    5. LVT is progressive–owners of the most potentially productive sites pay the most tax.
    6. The land owner pays his LVT regardless of how his site is used. A large proportion of the ground-rent from tenants becomes the LVT, with the result that land has less sales-value but a significant “rental”-value (even when it is not used).
    7. LVT stops speculation in land prices and the withholding of land from proper use is not worthwhile.
    8. The introduction of LVT initially reduces the sales price of sites, even though their rental value can still grow over a longer term. As more sites become available, the competition for them is less fierce.
    9. With LVT, land owners are unable to pass the tax on to their tenants as rent hikes, due to the reduced competition for access to the additional sites that come into use.
    10. With LVT, land prices will initially drop. Speculators in land values will want to foreclose on their mortgages and withdraw their money for reinvestment. Therefore LVT should be introduced gradually, to allow these speculators sufficient time to transfer their money to company-shares etc., and simultaneously to meet the increased demand for produce (see below).

    Three Aspects Regarding Communities:
    11. With LVT, there is an incentive to use land for production or residence, rather than it being unused.
    12. With LVT, greater working opportunities exist due to cheaper land and a greater number of available sites. Consumer goods become cheaper too, because entrepreneurs have less difficulty in starting-up their businesses and because they pay less ground-rent–demand grows, unemployment decreases.
    13. Investment money is withdrawn from land and placed in durable capital goods. This means more advances in technology and cheaper goods too.

    Four Aspects About Ethics:
    14. The collection of taxes from productive effort and commerce is socially unjust. LVT replaces this extortion by gathering the surplus rental income, which comes without any exertion from the land owner or by the banks– LVT is a natural system of national income-gathering.
    15. Bribery and corruption on information about land cease. Before, this was due to the leaking of news of municipal plans for housing and industrial development, causing shock-waves in local land prices (and municipal workers’ and lawyers’ bank balances).
    16. The improved use of the more central land reduces the environmental damage due to a) unused sites being dumping-grounds, and b) the smaller amount of fossil-fuel use, when traveling between home and workplace.
    17. Because the LVT eliminates the advantage that landlords currently hold over our society, LVT provides a greater equality of opportunity to earn a living. Entrepreneurs can operate in a natural way– to provide more jobs. Then earnings will correspond to the value that the labor puts into the product or service. Consequently, after LVT has been properly introduced it will eliminate poverty and improve business ethics.

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