1405 Tax Avoidance: not a Legal but an Attitude Problem

The phenomenon of tax avoidance is widespread among the transnational companies around the world preventing host countries from acquiring sufficient tax revenue. Tax avoidance is one of the main structural causes of poverty in the world as it involves a massive transfer of wealth from poor to rich countries and facilitates criminal and corrupt practices. For developing countries, tax avoidance by foreign companies operating on their territory is an added problem to their limited budgets. In Africa, this practice has dramatic consequences for people living in poverty and for their societies whose governments find it hard to provide basic services to the population such us health care and education for all the citizens.

 

There are several methods that companies use to avoid paying taxes. Some of them are agreed between different companies through price manipulation and the issuance of false invoices; others, however, are carried out between companies that actually belong to the same group and that are based on tax havens to transfer their profits.[1] But the most unfair method of tax avoidance occurs when big companies and donors push governments of developing countries to give tax incentives to foreign companies operating in its territory through the so-called tax incentives.

 

Most tax incentives in Africa relate to the exploitation of natural resources and agribusiness companies. These incentives are negotiated behind closed doors and there are no public control mechanisms. Normally, they do not need the approval of national parliaments and are an open door to the corruption of governments and local authorities. With tax incentives, governments of developing countries grant tax holidays to companies starting a new investment in the host country. In return, companies commit themselves to bringing new impetus to the local economy where they are operating.[2]

The tax that transnational companies avoid paying is revenue that governments in developing countries do not receive and therefore cannot spend on social services and boosting  development. It has been calculated that tax avoidance costs the developing world at least US$160bn in lost revenue yearly. This represents almost the double the aid for development that developing countries receive. Developing countries would be less dependent on aid if tax avoidance were prosecuted more efficiently.

 

Tax avoidance, illicit transfers of wealth and unfair pricing practices are complex problems that should be addressed with multilateral solutions by international institutions, national governments, civil society and transnational companies, working together and looking for realistic solutions to stop tax dodging. For example, African civil society may demand that their governments meet higher standards of Transparency, and Governments in developed countries should demand the same thing to companies registered in their jurisdictions.[3]

 

Tax avoiding slows down the sustainable economic growth and prevents the development of the countries because these revenues cannot be invested in the country’s development or the welfare of the population. If countries could increase their income through taxes, governments would be able to create jobs, develop their infrastructure, increase the quality of the education, improve the health system and so on.

The big multinationals operate under the umbrella of legality or taking advantage of the legal loopholes in developing countries. For this reason international financial reforms on global trading must be undertaken to correct the behaviour of multinationals avoiding taxes. Different initiatives to correct tax avoidance are carried out in African countries like in Ghana, Zambia or Kenya but sometime these measures need to be accompanied by reforms in developed countries because lack of regulation allows their companies operate in tax havens. For example, 98% of big UK companies have some of their subsidiaries companies registered in tax havens.

 

National governments and international institutions such as the European Union have to eliminate tax avoidance and the corruption associated with these practices, which are detrimental for the economy of poor countries. Economic growth is useless if it does not reduce the inequality among the population and if there is not a fair distribution of benefits. The use of the money coming for fair taxation in developing countries is essential to improve social services and work for greater global justice. But things do not change merely because of perfect regulation; a whole change of attitude is needed in those who grab the world’s wealth.

 

Jose Luis Gutierrez Aranda

AEFJN Policy Officer