World Economy

Developing Nations Will Challenge Rich on Taxes

Developing Nations Will Challenge Rich on TaxesDeveloping Nations Will Challenge Rich on Taxes

 The final round of negotiations on the Sustainable Development Goals–the successor to the Millennium Development Goals, due to be inaugurated in September at the UN General Assembly–is now underway in New York.

The United Nations and many member governments want to conclude the debates by the end of July, so that there will not be an open debate during the SDG Summit. But reports indicate that the atmosphere in the room is one of seething distrust, Soren Ambrose wrote for IPS.

That’s because of what happened during the Financing for Development conference in Addis Ababa, Ethiopia last month.

The developing countries–those grouped together in the “G77”, which 50 years after its founding actually has 134 members–were pushing a proposal for a universal intergovernmental organization, within the UN, which would have as its mandate reform and maintenance of the international tax system.

While this proposal would not have immediately remedied any of the myriad ways that corporations dodge taxes in developing countries, it would be a decisive change to the system that has allowed such activities to flourish.

Changing Tax Rules

To the extent that there are international rules, or standards and guidelines, on taxation now, they are proposed and elaborated by the Organization for Economic Cooperation and Development, a club of 34 of the world’s richest countries. Every once in a while they make a show of consulting those other 134 countries, but those others never actually get a vote.

In the new proposed way of making decisions on international tax rules, every country would have an equal voice and equal vote. This fight matters because developing countries are confronting the need to change how the rules are made, and who makes the rules.

Until they manage that, they will always, at best, be running to stay in place. Changing the rules is a necessity, although not a sufficient condition for creating permanent change.

Taxation is vital because wealthy companies and individuals get and stay rich by using a portion of their considerable resources to hire lawyers and accountants to guide them in dodging the taxes they should be paying in the countries where they excavate, grow, or purchase their raw materials, assemble their products, and make an increasing proportion of their sales.

Manipulating Tax Treaties

Most big companies manipulate “tax treaties” between countries and tax havens like Switzerland, Mauritius, and the Cayman Islands to create legal fictions that exempt them from paying most of the taxes they owe.

This deprives countries of the revenue–to the tune of at least $100 billion every year–that they need to fund development, and ensures the perpetuation of the concentration of wealth in the hands of a very few. That wealth translates to power–a veritable global plutocracy.

The OECD, to be fair, has made some moves to clamp down on the most egregious forms of tax avoidance, including their “base erosion and profit shifting” process begun in 2013.

The corporate lawyers and accountants were a little nervous about BEPS, but with the process winding up, it appears that any reforms it demands will not be manageable. The promises at the outset of the process to include developing countries never amounted to much.

The FfD process in the UN was, of course, universal. But after months of negotiations in New York and a series of missed deadlines, the big debate over the tax body was not resolved. The ministers would go to Addis Ababa facing open negotiations.

Bolstered by the support of hundreds of civil society groups, the G77 governments–a group that has to accommodate the interests of the disparate countries–held together. Three BRICS countries–South Africa as the chair of the G77, along with India and Brazil–were vocal actors on the side of the developing countries, something they can’t always be relied on to do as they ascend the global power ladder.

The G77 held out to the end. But the rich countries, led by the United States with the steady support of the European Union, Canada, Japan, and Australia, refused to give up the regime of loopholes and havens and double-dealing that adds up to billions in lost revenue every year.