Developing Nations Lose Billions to Multinational Tax Dodging
CURRENT AFFAIRS, 5 Dec 2011
Not corruption but multinational tax dodging is the main reason why developing nations stay aid-dependent, says a new report. And while new proposals by the European Commission try to tackle the problem, they turn a blind eye towards tax havens.
In its report, the European Network on Debt and Development (Eurodad) gives a detailed overview of the many ways in which multinational companies avoid paying taxes to the countries where they operate, while it urges the EU to crack down on multinational tax dodging.
“It is estimated that more than a trillion dollars per year is flying out of developing countries,” Marta Ruiz, senior policy and advocacy officer at Eurodad and co-writer of the report, tells IPS. And “more than half of this amount is related to activities conducted by international companies.”
According to Eurodad, multinationals shift profits away to other countries by making use of trade mispricing. “Trade is manipulated between subsidiaries of the same international company operating in different countries,” Ruiz explains. “Goods are sold to the subsidiary abroad at a much lower price than the market price, just to minimise the profits made in the country of origin.”
The report launched Nov. 21 gives two examples of trade mispricing: one U.S. company operating in a developing nation appeared to import plastic buckets from its subsidiary in the Czech republic at a price of 972.98 dollars each, while another U.S. company exported car seats to Belgium for 1.66 dollars each.
“The Organisation for Economic Cooperation and Development (OECD) has calculated that more than half of world trade is intra-group,” says Ruiz. “The clear implication is that taxes on profits are not paid to the country where the economic activity is taking place.”
As Eurodad’s detailed overview demonstrates, profits are made in countries which have a close to zero tax rate. These are the so-called tax haven islands such as Jersey, the Isle of Man or the Cayman Islands. But European countries like Belgium, Switzerland or Luxembourg are also named on the list of tax havens.
Eurodad’s report cites an investigation done in 2007 by the British newspaper The Guardian. According to this investigation, channel island Jersey is one of the largest exporters of bananas to Europe, even though every banana boat from Africa or the Caribbean travels directly to the consumer country.
But on paper, these banana boats follow a complex journey on which they stop at a half a dozen offshore financial centres where they are sold to subsidiaries before they reach the European mainland. The data show that for every euro that is spent on bananas in Europe, only one cent of taxable profit is reported to the producer countries.
Another cited study from 2010 shows how Google, a U.S. company, is shifting profits away. Google located its European head office in Dublin, where corporate income taxes are low. But Google Ireland is also owned by Google Bermuda, a country without corporate taxes. Last year, Bloomberg revealed that Google cut its taxes by 3.1 billion dollars during the last three years thanks to the use of tax havens.
“This is a global problem,” says Ruiz. “These practices are taking place all over the world, they are related to the current critical situation in Europe. Lots of these companies are European but they are not even paying the taxes they should at home.
“But from a development perspective, we stress that it these practices that are endangering each developing country’s ability to eradicate poverty and to work out a sustainable development strategy.”
Eurodad’s report was launched only three weeks after the European Commission proposed new legislation on corporate accountability. Under the new rules, EU companies in the extractive and forestry sectors would have to disclose all payments to the governments in countries where they operate. The proposal is aimed at tackling the corruption which prevents those living in poverty from benefiting from the raw materials in their countries.
But experts regard the proposed directive to be highly problematic. Richard Murphy, an international tax expert who was present at the launch of the Eurodad report, tells IPS “The proposal will be of benefit, but not nearly as much benefit as we want.
“It will help to hold developing country governments to account because we know how much money they receive. But we will not know if the amount they get is the right amount because we won’t know how much profit is made in those countries. It is only a tiny step forward.”
According to the Eurodad report, only five percent of the illicit financial outflows from developing countries is related to corruption, while criminal-related flows represent 30 percent. The remaining 65 percent is related to trade mispricing.
Ruiz says “the EC’s proposal is a welcome step, but it only tackles corruption, while tax dodging is the greatest source of illicit capital flight. Reporting rules must reveal this picture and apply to all sectors, not just extractives and forestry.”
In its report, Eurodad proposes a country-by-country reporting scheme. The system, originally conceived of by tax expert Murphy and applauded by European leaders and the European Parliament, requires transparency on the part of all multinational companies with respect to their operations around the world.
“When they are present in one hundred countries, we would like to know which countries, what activity they conduct in each of them and under which name,” says Ruiz
“At the moment this data is not available. The country-by-country standard would provide indications to tax authorities which are weak in developing countries. It could help shed light on suspicious cases of abusive practices and therefore help identify cases that need further investigation.”
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