Tax transparency and the developing world

This blog lays out how the global corporate tax system affects the developing world and why ActionAid, Christian Aid and Oxfam are calling for change in their recent paper, Getting to Good: Towards Responsible Corporate Tax Behaviour.

Zambia is among the top ten fastest growing economies in the world, but most of the population are not seeing the benefits of this economic development. Credit: Abbie Trayler-Smith

Zambia is among the top ten fastest growing economies in the world, but most of the population are not seeing the benefits of this economic development. Credit: Abbie Trayler-Smith

Over a number of years, ActionAid, Christian Aid and Oxfam have been campaigning for reform of the global corporate tax system.  We do so because developing countries lose much-needed revenue that could be used to finance basic services including health and education, and contribute to meeting the ambitious new Sustainable Development Goals.

These losses are difficult to measure precisely but UNCTAD estimates that developing countries lose $100 billion annually from corporate tax avoidance, while an IMF study estimates the annual figure to be $200 billion.  Furthermore since developing countries tend to rely on corporate income taxes for a much higher proportion of their tax revenues than higher income countries (16% and 8% respectively, according to the IMF), corporate tax avoidance is relatively of greater concern.

This reform needs to be government-led, and focused on regulatory and legislative rule change which business should support because a system of clear, consistent and transparent rules across all countries will help multinational companies. However since the OECD’s BEPS reforms do not alter the fundamentals of the global tax system, we believe that companies also have a role to play in terms of their own behaviour.  So long as global tax rules allow for a degree of corporate choice (for example flexibilities inherent in transfer pricing rules), then corporate agency will have a bearing on tax outcomes for developing countries.

From a corporate perspective, there was broad consensus around the principle of transparency

The success of the ‘Getting to Good’ approach is contingent on a constructive dialogue between NGOs and businesses. Therefore via the UK Tax Dialogue platform, we are hosting a series of Chatham House roundtable discussions, each focusing on a different aspect of corporate tax behaviour.  The inaugural event, which focused on the critical issue of tax transparency, took place in July 2016, kindly hosted by Pinsent Masons in London.  Participants included a broad range of companies from sectors ranging from banking and finance to consumer goods and extractives, as well as business associations, legal experts and NGOs.

The session began with a recognition that most companies are motivated to act responsibly and ‘do the right thing’, including on tax, with the caveat that there are differing interpretations of what good practice might look like.  It was also accepted that aside from corporate income tax, companies operating in the developing world can make positive contributions in a number of ways – both through the payment of other taxes, and through non-tax contributions such as investment and job creation. Tax impacts, therefore, are to be included amongst other sustainable development impacts of companies.

However it was also accepted that corporate income taxes specifically are an important part of the picture, and that corporate tax avoidance is a significant concern for developing country governments and citizens.  Likewise, there was an acceptance that corporate income tax avoidance has attracted particular scrutiny in recent years, and as such has become a major corporate reputation concern.  Public trust in business has eroded, and corporate tax avoidance is – according to surveys conducted for the Institute of Business Ethics – the issue of foremost concern to the British public about business behaviour.  Multinationals (and others) have a job to do to rebuild this trust, and tax will be an important component in these efforts.

Against this backdrop, event participants considered what role transparency has to play.

Whilst there has been considerable focus on transparency from the civil society sector, it was agreed that in isolation, it will not be a panacea.  It is a means to an end, rather than an end in itself.  However it remains an important piece of the puzzle, since greater disclosure of data provides a valuable insight into a company’s tax affairs, and allows for comparisons between different companies.  For example, corporate responsibility benchmarks and indices are further strengthened by including tax information that is publicly disclosed by companies. Furthermore, the provision of more comprehensive and reliable data will allow both tax campaigners and developing country revenue authorities to more readily identify cases of bad practice, and target their efforts accordingly.  On this basis, many NGOs are challenging the question ‘why transparency?’ and instead asking ‘why not?’

From a corporate perspective, there was broad consensus around the principle of transparency.  Many businesses in the room are very actively promoting the transparency agenda across various parts of their organisations, and there was agreement that openness is generally desirable and that feedback from stakeholders is welcome.  On the issue of tax specifically, whilst the principle remained the same, there was concern about the practice of making corporate tax affairs more transparent.

There was a recognition that endorsement of good practice needed to happen alongside criticism of bad practice

Several practical considerations and challenges were discussed. These included concerns around the disclosure of commercially sensitive tax data; the potential for data to be misrepresented; the accessibility of (often complex) data to those who may not have a comprehensive technical understanding of tax; and the risk that, by disclosing more than their peers, companies could be more susceptible to unwarranted scrutiny and criticism.

In seeking to mitigate these concerns, there followed a rich and constructive discussion of how corporates and NGOs might work collaboratively to promote tax transparency in a mutually agreeable manner.  From the corporate side, there was an acceptance that the presentation of data was paramount; that explanatory information and context needed to be provided alongside data; and that in order for data to be useful, it needed to be comparable across different companies.  From the NGO side, there was a recognition that endorsement of good practice needed to happen alongside criticism of bad practice, and that this could be made possible through constructive engagement with business. Such efforts could shift the balance towards making voluntary disclosure of tax information more desirable for companies.

To advance some of these ideas, a number of proposals were put forward, including the establishment of bilateral dialogues; the formation of working groups to consider practical issues; and a greater role for business associations and professional bodies, both in coordinating transparency initiatives at a multilateral level, and in facilitating dialogue between all relevant stakeholders.  The proposed continuation of Tax Dialogue roundtables was also welcomed.

Owing to its complexity, the issue of corporate tax will remain contentious.  However if there was one key outcome that participants would have taken from this successful roundtable event, it is that whilst there remains disagreement on the some of the practicalities of tax transparency, there is likewise a good degree of consensus when it comes to the principles. It is on the back of that consensus that we are seeking to move from dialogue towards tangible action on tax transparency, and to tackle the types of aggressive tax avoidance that is so harmful to the developing world.

ActionAid, Christian Aid and Oxfam would like to thank Pinsent Masons for kindly hosting the July 2016 Tax Dialogue roundtable.

This article was originally published in Pinsent Mason

Author

Bethan Cansfield

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