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14 • Fifty Shades of Tax Dodging 2. Why international tax matters for developing countries There is increasing recognition, not least from developing countries, that taxation is a key part of the answer to how development could be financed. 59 Several developing countries are increasingly recognising the need not only to attract foreign investors, but also to make sure that investors pay taxes and contribute to development. The 54 heads of state of the African Union sent an important signal of this stance early in 2015 when they adopted a report on illicit financial flows, along with strong recommendations 60 that identified profit shifting by multinational companies as “by far the biggest culprits of illicit outflows.” 61 But the challenge is not only an African one – it concerns developing countries in general. In new estimates of the scale of the tax dodging problem in 2015, the United Nations Conference on Trade and Development (UNCTAD) estimated that one tax avoidance method alone is costing developing countries between $70 billion and $120 billion per year. 62 The significance of this loss is evident in comparison with the sum of approximately €193 billion 64 that multinational companies do pay in corporate income taxes in developing countries. 65 Perhaps most shocking, an IMF study found that on average and as a share of national income, the revenue loss to developing countries was in the long run roughly 30 per cent higher than for OECD countries. This suggests in the words of the IMF that “the issues at stake may well be more pressing for developing countries than for advanced.” 66 Box 6 Tax dodging in Latin America, Africa and Europe During the last year three new reports showed how development and social justice in both developed and, especially, developing countries are undermined by multinational companies’ tax dodging. In Latin America, LATINDADD has analysed the accounts of the Yanacocha gold mine in Peru, the most important gold mine in South America, which is also the third biggest and the most profitable one in the world, according to its owners. 67 The report estimates that as much as €893.4 million 68 in taxes could have been avoided during the 20-year period from 1993–2013 due to profit-shifting. 69 In Africa, research by ActionAid reported how one Australian uranium mine has potentially avoided millions in tax revenues in Malawi – one of the poorest countries in the world. 70 Rather than funding its operations in Malawi through its headquarters in Australia, the mining company chose to fund it through the Netherlands with a large loan. This generated payments of €138.2 million 71 in interest and management fees back to the Netherlands. 72 Due to the Double Tax Treaty between the Netherlands and Malawi, the withholding tax on interest payments and management fees was reduced from 15 per cent to 0 per cent. 73 This routing from Malawi to Australia via the Netherlands reduced the withholding tax by more than an estimated €20.7 million 74 over six years. 75 A company spokesman later rejected the allegations as ‘fundamentally unsound’. 76 Malawi cancelled its tax treaty with the Netherlands in 2014 and a new one was signed in April 2015. 77 Although the new treaty includes anti-abuse provisions, the concern remains that these provisions will not be effective unless Malawi also gets access to adequate information about the multinational corporations operating in Malawi. 78 Continued poverty and inequality is not just the outcome of tax dodging in developing countries. In Europe, research by SOMO showed how Canadian firm Eldorado Gold – that operates various mines in Greece – set up a complicated financing structure to shift its income. The company uses a complex web of Dutch and Barbados-based mailbox companies to avoid paying taxes in Greece and the Netherlands, a structure that is enabled by EU and Dutch legislation. 79 According to SOMO’s estimations, the Greek government lost around €1.7 million in corporate income taxes in just two years. 80 At the same time Greece faces harsh austerity measures imposed on the country by the Troika, of which the Eurogroup – chaired by the Netherlands – is part.
Fifty Shades of Tax Dodging • 15 Developing countries are more prone to the negative effects of tax dodging than developed countries in many ways. For example, while only 3 per cent of corporate investments in developed countries originate from ‘tax havens’, 81 the comparable figure for developing countries is 21 per cent and the proportion rises to a full 41 per cent for transition economies. 82 Similarly, while 10 per cent of European wealth is held offshore, the comparable figure in Africa is three times higher at 30 per cent. 83 Facing these challenges, some developing countries are pushing back. As of 2014, the Kenyan tax administration had successfully reclaimed approximately €210 million by challenging multinational companies’ internal trading that shifted profits out of the country, 84 while in Bangladesh, a newly established office will police the tax payments of multinational companies. 85 Late in 2014, China won its first major tax claim against a multinational company, taking in €103 million, 86 and has subsequently promised “shock and awe” tactics against tax avoiders. 87 However, developing countries risk coming under immense pressure for targeting multinational companies. Standing up to the threat of reduced investments and being branded a hostile investment destination can be difficult for most developing countries to withstand. And it is not just a matter of standing up to the pressure. Even with the best of intentions, developing countries are learning the same lesson as many rich countries are learning – that making sure that multinational companies do not dodge taxes requires international cooperation. This is particularly the case for developing countries, which often find that the decisions affecting them most on taxing transnational investors are taken where the companies are based − and very often that means Europe. 3. Europe’s role in upholding an unjust international tax system “The Union shall take account of the objectives of development cooperation in the policies that it implements which are likely to affect developing countries.” The Lisbon Treaty, Article 208 88 As the world’s biggest economy that is home to many multinational companies and has close ties to developing countries, Europe plays a central role in any discussion on international tax justice. Europe has taken the lead in the past, adopting policies that were pioneering such as public country by country reporting for the financial sector. However, as the many scandals of the last year have shown (see Box 6), European policies are in some instances also used to dodge taxes. Below we look at a number of aspects of the international tax policies of Europe and their effect on developing countries. 3.1 Bank secrecy and the lack of exchange of information The leak of banking information from the Swiss branch of HSBC – Europe’s biggest bank – caused a major uproar in 2015 and brought banking secrecy back into the public spotlight. What the so-called ‘SwissLeaks’ revelations exposed was a banking system built on concealing money, with few questions asked and a maximum amount of secrecy. Table 1 shows that more than €51 billion 89 was stashed away in 50,000 bank accounts that were connected to developing countries. Reacting to the SwissLeaks scandal, an economist from Swaziland said: “It’s shocking how huge banks such as HSBC have created a system for enormously profiteering at the expense of impoverished ordinary people, worse by assisting numerous millionaires from Africa in particular to evade tax payment, disadvantaging the already poor.” 90 Table 1: SwissLeaks and developing countries – the numbers Total amount in billion € 91 No. of bank accounts No. of clients Total developing countries 51,573 50,071 37,845 Source: Eurodad calculations based on ICIJ data. 92 The data is based on the leaks of bank accounts from the Swiss branch of HSBC dating primarily from the period 2006–2007. Please note that there are 33 developing countries that are not covered in the SwissLeaks database.
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