Survival of the Richest

Global developments 2016
Another method used by multinationals to dodge taxes is
what is known as ‘treaty shopping’. This method means that a
company, in order to minimise its tax liability, artificially shifts
its operations or profits into a jurisdiction that has a favourable
tax treaty in place. The Panama Papers revealed how the
oil company Heritage Oil & Gas Ltd. relocated its stakes in
the Ugandan oil business from the Bahamas to Mauritius in
2010 in order to avoid paying US$404 million in taxes on its
sale of oil field stakes. 28 In a country that ranks at 163 on the
Human Development Index of the United Nations Development
Programme (UNDP), aggressive tax planning by one single
company may have wide-reaching effects. In this case the
Ugandan government decided to push back and in the end it
was able to collect taxes on the sale from the buying party,
Tullow Oil. However, this only happened after long court battles
and also after a deal was reached between the government
and Tullow to substantially lower the final tax bill. 29
Government officials in developing countries may often find
it difficult to stand firm against big foreign investors that use
complex aggressive tax planning strategies to minimise their
tax bills. In cases where developing countries do take steps
to change national tax policies or reduce tax breaks, they
may face the prospect of being sued by the companies under
domestic law or on the basis of the investor-state dispute
settlement clauses that are found in many bilateral investment
treaties and trade agreements. For many poor countries, even
the risk of being involved in expensive court cases that go on
for years will be enough of a deterrent for them not to push
back. 30 However, public awareness about tax dodging and illicit
financial flows is growing rapidly in developing countries. In
2015, the so-called Mbeki High Level Panel on Illicit Financial
Flows from Africa found that Africa is losing at least US$30-
60 billion per year – a phenomenon referred to as ‘the
bleeding of the continent’s resources through illicit financial
outflows’. 31 Following up on the report, a coalition of civil
society organisations across Africa kicked off the campaign
‘Stop the Bleeding’, to end illicit financial flows from Africa.
Another element that has increased awareness of tax
dodging and illicit financial flows is the adoption of the new
UN Sustainable Development Goals (SDGs). In discussions
about how to finance the achievement of the goals in
developing countries, a lot of emphasis has been put on
the need for developing countries to raise more domestic
funds. Tax is, of course, one important way for countries to
raise revenue, as noted by the Addis Ababa Action Agenda
adopted at the Financing for Development summit in the
Ethiopian capital in July 2015. 32 However, independent
of institutional capacity, tax dodging by multinational
companies is a problem that all countries are struggling
with. The fundamental causes must be addressed at the
global level through a serious reform of the policies and
regulations that perpetuate this drain on public resources.
Exclusive global decision-making
Civil society organisations have strongly argued that
democratic reform of the international tax system is
necessary to deal with the problem of international tax
dodging. 33 At the 2015 UN Financing for Development
summit, the issue of establishing an intergovernmental tax
body where all countries have a seat at the table was one of
the main issues left unresolved. It was strongly pushed by
developing country delegates but effectively blocked by rich
countries such as the United States and EU members (in
particular France and the United Kingdom). 34
Still today, the key decision-making body on international
tax standards is the Organisation for Economic Cooperation
and Development (OECD) – also known as the ‘Rich
Countries’ Club’ – which consists of only 35 35 member
countries. In recent years, OECD decision making has
included an increasing involvement of the Group of 20 (G20),
which includes some of the world’s largest developing
countries. However, more than 100 developing countries
have continued to be excluded from decision making. 36
One of the latest examples of decision making is the joint
OECD G20 project on base erosion and profit shifting (BEPS),
which concerned international tax dodging by multinational
corporations and was finalised in 2015. 37 Initially it was
hoped that the process would deal with fundamental
problems in the current approach to transfer pricing as well
as specific developing country issues (such as the extractive
industry). In the end, however, both the exclusive decisionmaking
process and the final outcome made it very clear that
the new rules were far from the solutions needed. Instead, it
was apparent that they would only amount to minor tweaks
to a deeply flawed system based on the highly controversial
‘arm’s length principle’ (see Box 3 on 'Multinational
corporations – separate or single entities?').
Civil society chanting "EU! US! Shame-Shame!"
and calling for developing countries to participate on
an equal footing in tax decision making. UNCTAD 14
conference, Nairobi, Kenya, July 2016. Photo: Eurodad.
12 • Survival of the Richest