Time for a Grown-up Approach to Tax Justice

Commentary, 13 December 2013

By Maya Forstater

Tax dodging has become a big issue.

Tax dodging has become a big issue in the public debate about business responsibility, recently topping the list of concerns in the UK, ahead of discrimination, supply chain labour standards and human rights. A group of British MPs are calling for consumers to boycott Amazon, while the company says it is following the rules that were set by Parliament. Starbucks, most famously, opted for double-taxation in an attempt to assuage public anger last year.

Tax is a serious topic. It is serious because taxes pay for the infrastructure, security, healthcare , education and social safety nets that our economies and our welfare depend on. It is serious because raising funds through general taxation is what makes for accountable government. And it is serious because robust, effective and well enforced taxation rules are crucial for fair competition and to avoid distorting and discouraging economic activity.

Public debate revolves around big brands, big numbers and big problems. These strands are increasingly woven together into a single narrative which runs like this:“Everybody knows that Amazon, Starbucks, Google and co. are dodging taxes. It may be legal, but it is wrong. Multinational companies are doing the same and worse in poor countries, with billions lost to the public purse each year. Closing loopholes would enable more money to be collected and spent on health and education.“

The devil is in the detail though, and the public and expert debates have become disconnected in a way that has allowed misunderstandings and misreading to abound. What you think you know is probably wrong.

Many of the big headline numbers ascribed to tax avoidance by multinationals are misunderstandings of estimates generated by the Washington based research organisation Global Financial Integrity (GFI). GFI state that their methodology which looks at 'illicit capital flows' is not able to assess transfer mispricing or profit shifting within multinational companies, and that it should not be misinterpreted as a tax loss (some of the money may be due to government, but not all of it). Nevertheless, organisations that ought to know better, from the Africa Progress Panel, to NGOs campaigning on tax avoidance to newspapers with financial writers continue to ascribe these numbers to tax avoidance.

Similarly, often the companies that have hit the headlines as exemplars of tax avoidance, such as NPower, Twitter, Amazon and Starbucks, turn out to have plain vanilla explanations for their low tax bill, through basic capital allowances, treatment of share options as a business expense, centralisation of functions within a group or when a company just doesn’t make much profit altogether. In other cases, headlines of companies exploiting ‘tax loopholes’ turnout to be companies using a law as it was intended, but where campaigners would like it changed (e.g. Vodafone’s sale of Verizon and Barclays and HSBC accused of ‘underpaying’ tax by $2.6 billion).

Tax is a rule-of-law issue – governments should only take people’s money through transparent rules, fairly applied. Working out the fair division of profits across countries is not a trivial problem in a global economy where people, inventions, investment, materials and goods can move around and combine in new ways (and moving and combining these resources in new ways is exactly what we want businesses to do, not least to build the trillions of dollars worth of green power and water infrastructure needed to square the climate change-prosperity circle). The results do not always align with our moral intuitions.

Conflating ordinary business practice with aggressive tax avoidance does not help us to understand what is going on, where the problems are or how governments should respond to them. But neither can we assume that as long as a company has not been found to be breaking the rules by a court, then all can be assumed to be ok.

Where corruption enables companies to buy-up extractive industry concessions at knock-down prices, urgent redress is needed. Where companies are operating in the grey-area of tax loopholes; finding clever ways to go against the spirit of the law, then the rules need to be tightened (as with the recent EU move on hybrid investment structures). Where there is weak enforcement, then tax inspectorates need to be strengthened (as in Burundi for example). Where tax rules have not kept pace with the way that global trade and investment, and digital economy has developed then they need to be updated (which is the focus of the OECD's work on Base Erosion and Profit Shifting). Where governments are giving away over-generous tax holidays, which are ineffective in attracting investment, they should reconsider.

Whipping all these distinct areas into a single confection, topped with cream and cinnamon sprinkles does not help our understanding of them. Tax is a technical subject, but tax reform cannot just be left to the experts. It is already part of the agenda of a broader movement for ‘open government’ which calls for more data and shared analysis, to enable informed public debate and effective accountability. And it has been drawn into the agenda on business and human rights.

The state of public debate reminds me of the field of business and human rights, before John Ruggie was appointed as Special Representative in 2005. It is long on outrage and short on analysis, and it lacks a common language to help us understand the complexities and trade-offs. Ruggie started modestly with the initial task of ‘identifying and clarifying’ things, through consultations with all concerned. A similar process of principled, pragmatic, fact-based enquiry and consensus building is needed on the matter of corporate and government responsibilities in taxation.

The International Bar Association’s Human Rights Institute (IBAHRI) has taken a step in this direction, creating a Task Force on Illicit Financial Flows, Poverty and Human Rights with a mandate to conduct research and consultations. Their first report identified four areas of particular concern; transfer mis-pricing, the negotiation of overgenerous tax holidays and incentives, inadequate taxation of natural resources and the use of offshore investment accounts, and asked many good questions, for example;

  • What are the boundaries between legitimate tax planning, illegitimate tax avoidance and illegal tax evasion?

  • Is there a legitimate role for secrecy jurisdictions in the context of an interconnected global economy?

  • What international laws, policies and mechanisms are required to address tax abuses in the 21st century?

  • How do tax abuses prevent developing countries from raising sufficient resources to alleviate poverty and meet the needs of their citizens?

  • How are human rights relevant to these tax matters?

However, their analysis doesn’t get much beyond a balanced but inconclusive reporting of divergent opinions, and ends up falling into the same trap as the NGOs and headline writers, of misinterpreting the big numbers - confusing estimates of illicit capital flows with tax losses, and misattributing them to corporate transfer pricing. The Task Force doesn’t manage to come up with a strong definition on the core question of what is tax abuse, but fall back on the circularity of identifying it with “behaviours that are of greatest concern to stakeholders interviewed”.

Part of the problem I think is that the human rights lens in itself is not useful for untangling the tax debates. It gives moral gravity to the basic statements of why taxation is a serious business, but does not offer an analytical means to determine the difference between tax abuse and legitimate tax planning, or to work out the economic costs of poor tax systems, and the potential impacts of reforms. For that you need tax specialists and economists.

I would love to see a follow up to the IBARHI report which involves a few willing tax advisors, companies and tax campaigners, with economists and human rights lawyers working together in good faith to clarify concepts and data and map out a common ground of basic understanding, which would enable a more informed public debate. The task force could seek to tie down clear common definitions and categories, for example between ordinary-tax-planning-that-no-one-serious-contests and ordinary tax planning-based-on-a-law-that-someone-would-like-changed (there may be snappier titles here…), aggressive tax avoidance, exploitation of complex tax loopholes, and exploitation of poor enforcement (such as lack of transfer pricing rules). Which terms are useful as a basis for analysis and action, and which are not? How do they help us understand the big numbers and tax scandals and the areas of most serious concern? How does what we know about specific areas of tax abuse relate to the various policy recommendations to address it? And what might be their impacts?

For people who have been working on these issues for ages, this may be a frustrating ask. It could just be a delaying tactic by people who want to scupper reforms. Group loyalties on all sides are strong and where particular big numbers or cases have become a core part of the narrative then reexamining them or admitting uncertainties is uncomfortable. It is tempting just to ignore people asking pedantic questions, or accuse them of sticking up for tax avoiders.

But without an informed, non-partisan analysis of the issues and data, non-tax experts – which includes politicians, international development experts, campaigners, funders, and the business and human rights community, as well as regular citizens, are in danger of misinterpreting data, and being driven by inchoate anger and the momentum of the narrative to support policies which we haven’t really been able to assess. That is not the right way to treat serious topics, and it is time for a grown-up approach.

Latest IHRB Publications

The Start of Modern Corporate Accountability Efforts - In Memory of Joel Filártiga

It is an unfortunate reality that when human rights defenders speak against their governments, they place themselves at risk of harm. Still, some choose to speak, and in doing so they change the course of history.

Dr Joel Filártiga was one such...

25 July 2019

Human Rights and the Built Environment - A Call for Action

Two-thirds of humanity are projected to live in urban areas by 2050. If we are to make progress in reducing global inequality and in meeting the UN Sustainable Development Goals, a rights-based approach to the built environment is critical. 


Rights and Wrongs - Where Does the Buck Stop?

Last week, Bank of America announced that it would no longer lend to companies that run the controversial centres where the United States Government is detaining refugees and migrants who have entered the country without proper documentation  (such...