Cross-posted from Tax Justice Network.
I had the honour of giving a keynote address at the World Bank/International Monetary Fund annual meetings on 15th October 2017, for an event entitled ‘Technical challenges and solutions for taxing wealth in developing countries’ – which gave the impression that a new Washington consensus on tax justice may be emerging.
My slides and the video, kindly provided by the Bank, are below. Following a fascinating speech from Brooke Harrington of Copenhagen Business School on the role of wealth managers in creating anonymous, un-taxed assets, I ran through the development of the tax justice movement and the rise of the core policy platform (the ABC of tax transparency), highlighting the progress that has been made but also the extent to which lower-income countries remain excluded from the benefits – and what is necessary to enable effective wealth taxation.
The event, and the discussions with a variety of experts and senior figures from the two Bretton Woods institutions (BWIs), made clear just how far both the Bank and the Fund have moved towards tax justice – and also highlighted some key areas where they need to make progress now.
A draft paper by Maya Forstater, circulated by the Center for Global Development in time for the Financing for Development conference in Addis, attacks the integrity of many people and NGOs working on tax justice and illicit financial flows.
The claims include:
that (some?) NGOs have “contributed to unrealistic public expectations and an appetite for an overly simplistic narrative about a corporate tax ‘pot of gold’” (p.31);
that (some?) NGOs tolerate “exaggerated interpretations and misunderstandings”(p.33);
that (some?) NGOs do not “engage honestly with debates over economic trade offs [sic]” (p.33); and
that this behaviour is comparable to “the use of exploitative and prejudiced imagery in charity appeals” (p.34).
Blimey.
This is a (really) long post, as I’ll try to cover the breadth and strength of Maya’s many claims. I should say that I took part in the first of two meetings of the group CGD convened to look at the issues. This was really quite a constructive coming together of different viewpoints. But I stood down when the subsequent blog post seemed to ignore most of the common ground and reiterated some earlier attacks on NGOs instead, making some claims about ‘inconvenient truths’ that resurface here. Comparing back, I’m afraid it seems as if the results of the research exercise were pre-determined.
Some main points from the discussion below:
The draft paper makes a series of claims without providing any serious evidence: most importantly, a ‘complex truth’ that tax losses are not of ‘problem-solving’ scale but ‘relatively modest in relation to development needs’. The existing evidence, e.g. from the IMF or – strikingly! – the author’s own analysis in this paper of ActionAid’s work, clearly supports the opposing view.
In the two other cases where ‘received wisdom’ associated with NGOs is contrasted with ‘the complex truth’, there is in fact no direct contradiction – but the presentation in each case creates an implicit straw man of NGO opposition to the truth.
The paper’s main thrust is that there is no ‘pot of gold’ for developing countries – but no substantial evidence is offered to support this assertion. (I’m sympathetic to the idea that this aspect of the tax justice agenda is sometimes overstated, but simply to deny the existing evidence offers no way forward. Indeed this is why I encouraged this work to focus instead on substantive research issues, albeit to no avail.)
I should point out that I was a research fellow at CGD during 2013-2014, and remain grateful to Owen Barder and colleagues for giving me a great deal of space to pursue research in just this area. I hope it may be possible to revise the final draft in such a way that it can make a useful contribution.
Measuring the illicit
The bulk of the attack in the draft paper is dedicated to three elements of ‘received wisdom’, each of which are contrasted with a quite different ‘complex truth’, so I’ll focus on these before coming back to the overarching claims. First, a little bit of context.
As has often been remarked, attempts to estimate illicit financial flows (IFF) are inevitably fraught with difficulty.
By definition, illicit flows are those ‘forbidden by law, rule or custom’: so whether or not they are technically legal, like large-scale tax avoidance, they are always hidden from view where possible. Add to this the fact that the relevant international datasets are often of less than ideal quality and coverage, or sometimes simply held in private by multilateral organisations who should know better, and the problem is of estimating things that are deliberately hidden, on the basis of anomalies in data that are imperfect in any case.
The development of the research field – which has come into being seriously only in the last 15 years – has been led by NGOs, perhaps because academic researchers felt uncomfortable with the degree of uncertainty, or because those at international organisations didn’t see it as a policy priority. At each stage, NGOs and the few academic researchers have challenged international organisations to use their capacity, and ability to access data, to do better; but until this year, there had been no serious response on any aspect of IFF except that of UNODC and the World Bank in their Stolen Assets Recover (StAR) initiative.
Eurodad’s famous 2009 Illicit Financial Flows report, summarising the research contribution of international organisations
Following the G20 meetings in 2009, however, the issues originally promoted by NGOs in the wilderness rocketed to the top of the global agenda. Then in 2013, the G8 and G20 commissioned the OECD to carry out the Base Erosion and Profit Shifting initiative (BEPS), aimed at reducing the misalignment between the location of multinational companies’ economic activity, and where they declare taxable profits.
This year, the resulting research focus of international organisations has borne interesting fruit. The UNCTAD World Investment Report contributes a study estimating developing country revenue losses to one channel of multinational tax abuse at $100 billion per year. Furthermore, researchers at the IMF’s Fiscal Affairs Department suggest, in their Table 6, that the total developing country losses due to BEPS stands at $212 billion per year (in the long-run), or around three times the share of GDP of the losses of OECD members (around $500 billion). It’s worth highlighting that the developing country losses would on average exceed 10% of existing tax revenues.
None of this is to say that we don’t have a long way to go, not least in terms of collating additional datasets, and making existing ones fully available, and in burying down to the country and then the company level; and in methodological improvements, as in any quantitative research field. (Bring it on!) And just because they come from international organisations, these studies themselves are of course not immune from criticism.
But while many aspects of IFF remain ill-estimated at best, and the leading estimates from GFI for example do not include many of the aspects related to multinational tax behaviour, there is no question that thanks to the recent UNCTAD and IMF reports we are in a better position than ever before in terms of understanding the scale of revenue loss associated with multinational tax behaviour in developing countries.
Assessing the ‘received wisdom’
The main section of the paper outlines three ideas, labelled as ‘received wisdom’, and contrasts each with ‘the complex truth’. The three ideas are not specifically attributed to one or more NGOs; rather, “they are a set of perceptions which are often given and reinforced by the overall flow of media reports, infographics, press releases, case studies and campaign publications on this topic and are influential enough to require clarification” (p.9).
The sub-headings here are taken from the draft paper.
Idea 1: ‘Huge amounts’
Let’s consider first the attribution of this idea to NGOs, and second its truth or otherwise.
Of the three quotes to support the claim that NGOs have promulgated the ‘received wisdom’, one is indeed a clear overstatement of the case, taken from an NGO infographic; one is a newspaper headline (which refers to an NGO report that I’m guessing doesn’t make the claim itself, or would have been used directly); and one is a statement (that strikes me as defensible) from Yale professor of philosophy Thomas Pogge.
Even with this level of cherry-picking, these quotes obviously provide less than compelling evidence if you want to make the case for NGO responsibility for the narrative. But to be fair, I’d say that many NGOs and people (like me!) do indeed think the revenue impact could be ‘problem-solving’, if that means something like ‘with the potential to provide a noticeable human development benefit’; so let’s set the paper’s evidentiary approach aside for now.
To get to the substance of the claim, we need to compare what the paper calls the ‘received wisdom’ and ‘the complex truth’. There are two important ideas being combined here. One is about scale: the difference between ‘huge’, or more usefully ‘problem-solving’ amounts of revenue, and the alternative that these are ‘relatively modest in relation to development needs’. The other is about location: the question of whether the revenues that could be available would appear in richer rather than poorer developing countries.
Maya has made some useful points on the latter before, complaining rightly that the aggregation into ‘developing countries’ can hide a mismatch between revenues and development need. This doesn’t take into account the role of inequalities that mean most people living in extreme income poverty do so in middle- rather than low-income countries, but the broader point holds: aggregation can obscure meaning.
From the summary: “Any potential gains are likely to be higher in middle income emerging economies, and lower in the poorest countries, in line with levels of FDI although extractive industry rents are likely to offer a significant focus for greater domestic revenues in some countries” (p.2).
It might have been better to consider the data on FDI. While it is true in general that bigger economies have more FDI, the pattern is much more mixed – even allowing for natural resource wealth. Here’s a quick figure with an arbitrary selection of OECD and West African countries, just to highlight that risks of sweeping generalisations are not limited to NGOs.
And of course if the claim is about the relationship between FDI and revenues, and we know tax/GDP is strongly correlated with per capita GDP, then lower FDI/GDP in poorer countries might still be associated with higher (relative) potential revenue contribution (i.e. the FDI stock, and hence potential revenues, might still be higher in relation to current tax revenues).
In addition, the paper doesn’t provide any evidence for the claim about the scale of development needs, which seems odd. It does not to provide (nor seek to provide) any proof that the amounts involved would not have powerful effects in low-income countries.
Well; in fact, it does in one particular case.
A box on Malawi (page 12) provides probably the clearest example of why I find this paper so disappointing – what could have been offered as a useful check on use of statistics, descends instead into the absurdity of inadvertently demonstrating the truth of the position being attacked.
The box summarises ActionAid’s work [disclosure: I’m on ActionAid UK’s board] on the mining company Paladin, finding that it cut its tax bill by $43 million, and states that in one year this could have paid for “one of the following: 431,000 HIV/AIDS treatments, 17,000 nurses, 8,500 doctors, 39,000 teachers”.
It is then pointed out, accurately I assume, that the tax revenues relate to six years; and argued that it would be more appropriate to identify what could be achieved annually with the relevant share of the money (rather than offering mutually exclusive alternatives).
The annual bundle of potential services that the foregone tax could pay for, according to the draft paper, is this:
a doubling in the number of doctors, AND
a 10% increase in the number of nurses, AND
enough teachers to reduce average class sizes from 130 to 100, AND
2% of needed HIV treatments.
I guess we could argue about whether or not to call this ‘huge’, though it wouldn’t be a very useful argument. But I don’t see how anyone could deny it is a problem-solving level of revenue.
Would ActionAid have been better to present the statistics this way? Perhaps.
Does it detract from the substantive value of the ActionAid report in any way? No.
Does it support the ‘complex truth’ claim that the amounts involved are modest in relation to need? Quite the reverse – it is stark evidence to the contrary.
The draft paper has taken a potentially useful contribution, dressed it up as an attack, and lost most of its value.
Thinking at the global level, and of the 1.7% of GDP that the IMF sees as long-term annual revenue loss: it is perhaps possible to imagine a distribution of those revenues among countries in which the resulting allocation fails to be ‘problem-solving’ for most; but it’s hardly a claim we could provide evidence for at the moment, and this draft paper certainly does not.
Idea 2: Transfer pricing is tax dodging
The second aspect of ‘received wisdom’ attacked in the paper is a little confused. Per the heading and some of the discussion, it is simply the confusion of transfer pricing with tax dodging. Per the box text, however, and other discussion, it is more about whether or not transfer pricing and related rules allow multinationals sufficient room to manipulate prices, via ‘tax havens’, that curtailing this could generate significant revenues elsewhere.
Again, let’s look first at the attribution. The only quotes provided that support the confusion point come from respected academics, rather than NGOs. My feeling is that there is sometimes a confusion of language here, but the fundamental points (that there are rules in place, and that these may sometimes be abused and may sometimes allow distorted outcomes) are widely accepted by the world’s most senior policymakers.
The more interesting distinction is drawn between ‘received wisdom’ that associated revenue implications are large (for countries on either side of ‘profit havens’, as seen in #LuxLeaks); or the ‘complex truth’ that allocating profits within global value chains is difficult.
I must confess I find this one quite confusing. There’s no obvious contradiction between the ‘wisdom’ and ‘truth’. You rarely hear anyone claim international tax rules are simple or easy to comply with (for either multinationals or tax authorities); and it’s almost equally uncommon to hear a suggestion that there aren’t major revenues at risk in a whole range of countries – see e.g. the details of LuxLeaks, or the IMF results shown above.
There just doesn’t seem much disagreement to be had over whether transfer pricing rules are being exploited, to the benefit of many multinationals and a few secrecy jurisdictions, and the (revenue) loss of many countries (with both higher and lower per capita incomes) – at least not in the absence of some pretty striking new evidence.
The existence of complexity doesn’t reduce the revenues at risk, nor justify taking advantage of complexity (nor indeed lobbying to create or retain complexity). And it certainly doesn’t provide evidence against the ‘received wisdom’ suggested, so I think this section really weakens the draft.
The associated paragraphs largely focus on criticisms of some existing work with commodity trade data (including Maya’s very reasonable criticism last year of a Swiss-Zambia mispricing statistic for which I’m responsible). The discussion of the various broader studies in this draft paper is fairly light touch though. It raises a few questions on individual results, and we can easily agree that there is a good case for being cautious about data and methodologies in this area. But what of all the peer-reviewed, academic analysis that is left out?
The failure to engage with the vast bulk of the literature covered in the OECD’s recent BEPS 11 survey, for example, seems odd. The exclusion of pricing issues in relation to management services, intellectual property and debt – for example – seems doubly so. Even if the commodity critique was entirely valid, this section would not provide evidence against the ‘received wisdom’ that it intends to attack. And in addition there is now a range of analyses of individual multinational groups published by forensic investigative journalists of high quality, which go well beyond anecdote.
If we think of international corporate tax rules as the broader set within which TP rules sit, the entire BEPS process is a reflection of significant political and technical consensus on this problem. Do we have enough consistent data, or sufficient quantity of research as a result, to be precise about the scale and overall pattern of the problem? We do not, and this is the subject of much attention at the OECD, Tax Justice Network and elsewhere. Are we unsure about the broad contours of the problem? We are not. Transfer prices of everything from commodities to intellectual property to intra-group debt are manipulated for tax purposes. The scale is large, and uncertain.
The author is of course entirely at liberty to take a different view, and it would be welcome to see supporting evidence for such a position. But without presenting some pretty impressive new findings, I can’t understand why one would simply dismiss the broad consensus that exists, or seek to build a difference of opinion on the scale of a problem into an argument that the entire thing is a (deliberately?) misleading ‘narrative’ created by NGOs.
Idea 3: Money for nothing
Perhaps anticipating the reader’s scepticism by this stage, this section begins by noting: “Examples of this belief are rarely seen as direct statements” – this much is certainly true – “but often reflected in the implicit assumptions behind calculations of lost taxes…” (p.18).
The TJN quote offered as supporting evidence is intriguing:
“…tax-sensitive investment is by definition the least useful stuff: accounting nonsense and paper-shuffling that does not involve very much employment creation at all.”
Intriguing for two reasons. First, it doesn’t seem to bear directly on the ‘received wisdom’ claim. But second, because the missing start of the sentence is “But as Section 3.3 explains…” And section 3.3 includes a short literature survey with six references on the incidence and impact of corporate tax. Neither the survey nor any of the references are cited in the draft paper.
Instead, the main thrust of this brief section of the paper is to emphasise that (higher effective) corporate taxes can have negative dynamic effects. A selective survey of a few papers supporting some of these leads to the following conclusion:
“These arguments then, are not reasons to give up on taxing corporations, or necessarily to lower corporate tax rates, but underline the need for tax policy to be supported by economic analysis, rather than based on the assumption that there is ‘money for nothing’” (p.18).
If you believe in the existence of this particular ‘received wisdom’, even without any direct evidence being presented, then this is presumably a useful counter-point: we should be more careful to recognise the wider impacts of taxing corporate profits.
In any case, that’s hard to argue with – so hard, in fact, that you want to ask who would argue to the contrary? Here’s the implicit straw man that the paper has constructed:
“Tax policy should not be supported by economic analysis, but instead be based on the assumption that there is ‘money for nothing’.”
There may be a group of people who believe this (or there may not); and if there were, such a group might object to ‘the complex truth’ of policymakers actually having multiple objectives.
But if there is such a group, it presumably has little overlap with those people and NGOs like TJN that have been researching and advocating over the last fifteen years for a tax policy agenda based on economic analysis, rather than one that ignored the growing reality of abusive multinational tax practices; and for the importance of taking into account multiple objectives such as distribution.
It’s disappointing, and difficult to understand, that the paper would seek to attribute this straw man to those people and NGOs.
Summary: Straw men
It’s hard to see the contribution of this main section of the paper. The ‘complex truth’ with respect to idea 1 is a set of assertions lacking evidence, while any remaining objections to the ‘received wisdom’ are questions of scale that must be addressed by serious research. The ‘complex truth’ in relation to ideas 2 and 3 is hardly disputed, but does not contradict the main points of the ‘received wisdom’.
So the overall effect is to suggest that NGOs hold, or have promoted, extreme or unnuanced views that somehow contradict the known facts. That there is, if you like, in fact a received wisdom which the NGO narrative continually contradicts.
There are two main problems with this. First, the paper does not provide any serious evidence either for its own assertions (on which the entire argument hangs), or that any wrong views (disagreeing with an actually true ‘complex truth’) are in fact held or promoted by NGOs.
And second, even if a new draft were to do so – I’m just not sure that this is a useful way to make an argument: defining the righteous view, and implying that others disagree (or perhaps that they dishonestly pretend to).
That pot of gold
Ultimately, the CGD paper makes the argument that NGOs have exaggerated the ‘pot of gold’ that developing countries could obtain by better taxation of multinationals.
To be upfront on this, I share something of this concern. Specifically, I think the balance of attention here, compared to other aspects of tax systems, has not always been right. (At the same time, I can see good arguments for emphasising this aspect in certain policy situations.)
What do we actually know about the size of that pot though? Notwithstanding all the uncertainties discussed, and the importance of new data and continuing to improve methodologies, the best guess at the moment is probably somewhere near the latest IMF researchers’ piece: that developing country annual revenue losses might be around $200 billion, or north of 1.5% of GDP. Given average total tax revenues less than ten times that size, it’s a pretty big pot. (And all without mentioning the trend for rising shares of profits to GDP, and generally stable or falling corporate income tax revenues…)
That doesn’t mean the pot is all obtainable, or that important advances in other areas aren’t also possible, and clearly we need country-level analyses to understand the specific possibilities. But on the CGD paper’s terms, and in respect of its central claim, this is a decent pot of gold. And not one that rests on the work (or the word) of NGOs, if that’s a concern.
So if we put the mischaracterisation of the narrative, and the role of NGOs aside, the central claim of the paper just does not stand up well itself.
My final sadness about the paper is this. The last section proposes some recommendations for NGOs to improve their ways of working that are really worth discussing.
It may be difficult to move towards positive engagement based on their inclusion in a paper that makes this kind of sustained integrity attack, but I hope it may somehow prove possible to take the conversation forward in a different context.
Last thought: Does it matter?
Despite the claim to be serving the cause of better evidence and clearer debate, the draft paper muddies the waters on the potential revenue benefit from improved taxing of multinationals in developing countries – even as the evidence base has recently been further strengthened.
The timing of its being published, at the kick-off of the Financing for Development conference – the best UN opportunity in years (ever?) to lock in greater policy space for the taxing of multinationals by developing countries – is unfortunate.
The Center for Global Development is an important development think tank, and so this paper, even in draft, may well catch the attention of policymakers at Addis. And while CGD publish individual views rather than institutional ones, this may be seen as more than an individual view because it comes from a CGD process with an advisory group.
For the avoidance of doubt, I don’t think there’s any agenda at CGD – so I guess the content of this paper, its timing and any potential impact on FFD progress is just bad luck.
I very much hope that the final draft of the paper, if indeed there is one, will be quite different. A removal of the most polarising claims, where these are made on the basis of limited or no evidence, would be a good start. What would be valuable instead is a concerted examination of the data and methodologies that have been used for various aspects of revenue loss and other IFF estimates, in order to point the way forward to a strengthening evidence base over time. I hope this is a possibility; but I fear the paper may end up as a missed opportunity to contribute to an important policy research debate.
But: be not downhearted: there is substantial policy focus around the world on taxing multinationals, the research field is healthy and the agenda for new work is plentiful!
A major obstacle to early agreement on the text for the upcoming Financing for Development conference in Addis is the fate of the mooted intergovernmental tax body.
Could this work? Is it a good idea? And regardless of the answers to those questions, what will actually happen? This post explores the three main possibilities, and the likely outcome for Addis.
1. OECD retains leadership
The OECD has long had the leadership on international tax issues, despite being representative of only a fraction of the world’s countries, or population. This, and the relative wealth and power of its member states, has allowed it to build a leading position in terms of technical capacity. Now, to be fair, the OECD has tried quite hard to include developing countries in the latest Base Erosion and Profit Shifting initiative, for which it received the mandate from the G20 group (including major non-OECD countries).
But ultimately, major aspects of the BEPS Action Plan have come down to political negotiation – and of course OECD members have the most power, so developing country voices have barely been heard at the sharp end of these negotiations.
The most likely outcome of all is that the OECD retains leadership, at least over the medium term, even though BEPS comes to be seen largely as a failure. But this is hardly a good outcome.
2. A challenge from the IMF?
That leaves two main alternatives. One is the IMF, where there has been clear frustration at the OECD being handed the leadership on tax since the financial crisis. The IMF rightly claims to be much closer to a globally representative membership; and to have a tax expertise that’s much more focused on national policymaking in developing countries.
But there are two big issues. If anything, there is a greater sense with the IMF than the OECD of domination by a few major economies, the US in particular. And while the IMF’s Fiscal Affairs Dept includes respected researchers, the organisation’s policy recommendations at country level have consistently failed to reflect even their own research evidence. So it’s hard to see strong support emerging for the IMF to lead here, even though there’s a growing sense that BEPS has already failed to deliver on its promise.
The other alternative is the type of intergovernmental body that many developing country governments, along with national and international NGOs, are now calling for. This short briefing, put together by a range of TJN partners, sets out ten reasons an intergovernmental body is a good idea.
The short, short version is this: it could be asignificant step towards a coherent global system, compared to the complexity of current arrangements which are clearly failing everyone – and especially developing countries who are outside the main power grouping of the OECD.
While this should sit at the UN, in order to provide a broad representation and political accountability, it’s unlikely to be simply an extension of the current UN tax committee – which has about one and a half full time staff as a secretariat, and is a technical body rather than a political one. The pressure for an intergovernmental body will only be worth it if the resulting body has at least equivalent resources to the OECD’s current tax work (which is significantly wider than BEPS); ideally, scaled up from OECD to global level.
{Aside: the most recent OECD accounts seem to be for 2013, before BEPS got fully underway, and I can’t work out what share of the €600m+ budget went on tax and related areas. Any info on this most welcome.}
Realpolitik?
The argument some make to defend the status quo, that the US would pay no heed to such a body, is not an unreasonable one, and it confronts the fundamental politics here.
The US is able to exert power over important decisions at the OECD, and hence the OECD (largely) retains US support, and its own role. (Although it’s worth noting that there is a significant lobbying attempt underway by US multinationals to obtain Republican support for rejection of the entire BEPS outcome, and more besides.)
A genuinely intergovernmental body might be more representative but powerless, because it would be starved of resources like the UN tax committee; or it might become powerful only if the US and a few other major powers are able to dominate it, in which case it might not offer much of an improvement from the OECD.
Realer politik
But think about where we are today. The latest IMF research suggests developing countries lose revenues of more than $200 billion a year to multinationals’ profit-shifting, and OECD countries around $500 billion a year. That means developing countries lose about three times as much as a share of GDP. So it’s increasingly clear that international tax rules don’t work for OECD countries, and even less so for developing countries.
How long can a few major powers prevent other countries from adopting more effective alternatives to the OECD rules? The greater the resistance to change in intergovernmental settings, the more likely we are to see substantive splits, with increasing numbers of countries giving up on the OECD rules in practice, regardless of rhetorical commitment.
As I noted in a discussion of the politics of country-by-country reporting for multinational companies, the successful lobbying by US multinationals in particular might turn out to be a pyrrhic victory: the strangling at birth of that measure, in terms of value for developing countries at least, may actually lead to more pressure for effective transparency, and potentially greater compliance costs for multinationals too.
In this case, successful resistance to a genuinely representative intergovernmental tax body might simply accelerate the loss of credibility of the OECD and its rules, leading to greater fragmentation.
And the answer is…
The most likely outcome in Addis is, of course, a fudge: agreement to a body, probably based on the UN tax committee, which has some greater political power via ECOSOC but remains so strapped for resources that it is never able to challenge the OECD or IMF.
The OECD will hold on for a while, the IMF will spin its wheels (and produce useful research), and the constrained UN body will offer just a little space – and no more – for other approaches like formulary apportionment.
But this is not a stable equilibrium, given the multiple and near-universally acknowledged flaws in international tax rules. If that’s where we end up after Addis, increasing fragmentation of national approaches seems inevitable. And perhaps it is anyway.
One of the striking differences between the Millennium Development Goals set in 2000, and the post-2015 Sustainable Development Goals, is the latter’s emphasis on domestic resource mobilisation – set against the aid-centricity of the former. While this is welcome (primarily because of the enhanced potential for domestic “ownership” of priorities, and the ensuing political benefits), it does raise a question.
A new paper published in leading health journal, The Lancet, tackles this question. Reeves, Gourtsoyannis, Basu, McCoy, McKee and Stuckler construct a panel of revenue, expenditure and health data for 89 low- and middle-income countries, from 1995-2011, and use it to explore the relevance of different sources of financing.
They reach two main findings. First, as you’d expect, they uncover a fairly strong association between tax revenues and health spending (Figure 1 – click to enlarge): more tax revenue per capita… more public health spending per capita.
In a simple model, an additional $100 of GDP per capita is associated with $1.86 of extra health spending; while an additional $100 of tax revenue per capita is associated with $9.86 of health spending. There is also (Figure 2) support for impact on health outcomes.
Second, the authors find that the association hinges on direct tax in particular. They find that $100 of direct tax revenue per capita is associated with $16 of public health spending; whereas consumption and other taxes appear to have a small negative association. Most strikingly (Figure 3) there is an association between consumption taxes (but not direct taxes) and mortality outcomes.
What should we make of these results? (Does VAT kill children?) The authors are cautious about the limitations of World Bank tax data, and about direct causal interpretations of the results. But perhaps still more caution is needed.
Broadly speaking, we expect direct taxes (on income, profits and capital gains) to be more progressive than taxes on consumption – since households with lower incomes inevitably consume more of their income. In addition, there is some evidence to suggest that direct taxes are the most powerful in driving governance improvements associated with greater reliance on tax revenues rather than say natural resources or aid – on which, see Mick Moore’s really useful, critical survey in this ebook. So if direct taxes are a progressive tool associated with better governance, should we expect also to see better public spending outcomes?
Perhaps, and maybe even probably; but let’s be careful. Correlation and causation again. If governments are more or less interested in progressive taxation, and more or less interested in universal service provision, we’d expect those to line up so that governments favouring progressive tax will generally also deliver more broad-based improvements in (e.g.) health. But that’s not the same as saying that if all governments increased direct taxes (by diktat, or from changes in international norms, or – say – improvements in the transparency of multinationals), that they would also all focus more on health improvements.
We know that there are strong correlations between GDP per capita and tax/GDP. We know, too, that this holds most strongly for direct taxes. In addition, the sample period covers what is probably the peak of the “tax consensus” which inter alia encouraged consumption taxes above all others, and the relative neglect of direct taxes. In general, such advice was most powerfully passed into policy in those countries with least capacity and least political space to resist.
By and large, then, we’d expect to see that countries with the lowest per capita incomes and the weakest states exhibit not only low public health spending and poor outcomes, but also low tax revenues and relatively high reliance on consumption tax rather than direct tax — without there necessarily being any link from tax choices to spending outcomes…
This paper is a thought-provoking contribution, but due both to data weaknesses and to the difficulties of establishing causality, it can’t be more than suggestive. The challenge for further research is to address, as far as possible, these two issues. We can’t show that specific tax policies necessarily deliver different spending policies or outcomes (these are separate policy choices); but we may be able to demonstrate the associations more strongly, not least by allowing more effectively for the causal roles of per capita GDP and state capacity, and/or by focusing on specific moments of policy change to understand the effects.
Since the OECD approved a decent country-by-country reporting standard, the lobbying to undermine it in practice has really kicked on. Here’s an update on some of the politics of country-by-country, including the manoeuvring in OECD, US, EU and UN processes; and on what may follow…
OECD
First, the OECD standard for country-by-country reporting is pretty good – probably all that could have been hoped for in the context of a process designed to defend arm’s length pricing.
As I wrote last week, though, and the Financial Times (£) picked up, the standard has been strangled at birth by the changes to BEPS Action Point 13. Lobbying on implementation has very substantially eroded the potential value of the measure, because data:
will only be provided directly to home country tax authorities;
will only be shared with other tax authorities under slow and uncertain information exchange processes; and
will never be made public.
I miss the old days, when country-by-country reporting was a transparency measure…
These deliberately inserted weaknesses mean that most tax authorities (especially but not only those of developing countries) will not receive timely data (i.e. within the tax year under investigation) for most of the MNE affiliates in their jurisdiction; and there will be no greater possibility of civil society holding tax authorities or MNEs to account.
In addition, the erosions of the standard mean there will be no central repository or access mechanism for the data. This means that the OECD has, in effect, agreed to fail to meet its commitment under BEPS Action Point 11 – which requires the establishment of a baseline for the extent of profit-shifting, and the tracking of progress over time. The very good team working on BEPS 11, who have comprehensively shown how no existing data can do the job, appear to have been completely undermined.
US
US MNEs have been highly effective in their lobbying, but evidence of serious, remaining concerns emerged last week. In a joint letter to Treasury Secretary Jack Lew, the chairs of the Senate Finance Committee and the House Ways and Means Committee (Republicans Orrin Hatch and Paul Ryan, respectively) set out a range of concerns about the BEPS process – and make a fairly explicit threat to take a different path from the administration:
Regardless of what the Treasury Department agrees to as part of the BEPS project, Congress will craft the tax rules that it believes work best for U.S. companies and the U.S. economy… We expect that as we move forward on U.S. tax reform, U.S. tax policy will not be constrained by any concessions to other nations in the BEPS project to which Congress has not agreed.
It is the specifics which are most revealing. While there are passing references to rules on permanent establishment and controlled foreign companies, the bulk of the text refers to concerns over country-by-country reporting.
[W]e are concerned about the country-by-country (CbC) reporting standards that will contain sensitive information related to a U.S. multinational’s group operations. We are also concerned that Treasury has appeared to agree that foreign governments will be able to collect the so-called “master file” information directly from U.S. multinationals without any assurances of confidentiality or that the information collection is needed. The master file contains information well beyond what could be obtained in public filings and that is even more sensitive for privately-held multinational companies. […]
Some recent press reports have indicated that the Treasury Department believes it currently has the authority under the Internal Revenue Code to require CbC reporting by certain U.S. companies and that Internal Revenue Service (IRS) guidance on this reporting will be released later this year. We believe the authority to request, collect, and share this information with foreign governments is questionable. In addition, the benefits to the U.S. government from agreeing to these new reporting requirements are unclear, particularly since the IRS already has access to much of this information to administer U.S. tax laws. Therefore, we request that, before finalizing any decisions, the Treasury Department and IRS provide the tax-writing committees with a legal memorandum detailing its authority for requesting and collecting this CbC information from certain U.S. multinationals and master file information from U.S. subsidiaries of foreign multinationals. We also request that you provide a document: (i) identifying how the CbC reporting and other transfer pricing documentation obtained by the IRS on foreign multinationals operating in the United States will be utilized, and; (ii) providing the justification for agreeing that sensitive master file information on U.S. multinationals can be collected directly by foreign governments. In the event we do not receive such information, Congress will consider whether to take action to prevent the collection of the CbC and master file information.
The push is on to prevent even the OECD’s now limited, and probably unworkable mechanism to provide CbC information to non-US tax authorities.
EU
Meanwhile… the European Commission’s repeatedly trumpeted new package on tax avoidance has been leaked, and falls substantially this side of impressive. On CbC in particular, prevarication around public data continues – now with a proposed consultation.
Similarly, the UK government reiterated at a conference on Friday its manifesto commitment to consider the possibility of public CbC.
The European Parliament will debate the issue again on 7 July, with a possible vote to follow, and so this now becomes a major test.
UN process
Finally, it seems that public CbC has been excised from the latest draft of the draft Financing for Development text for the UN conference to be held in Addis, in July, leaving a line on CbC for tax authorities which adds nothing to the OECD position. Sigh.
Where does this leave us?
Is this the end for hopes for CbC as a meaningful international transparency and accountability measure? I don’t think so.
What has already been achieved, lest we forget, is the overcoming of what was always presented as the greatest obstacle: compliance costs. Aside from the possibility of US withdrawal, the OECD standard pretty much locks in the collation of the necessary data, by more or less all MNEs worldwide.
The claims around costs were always inflated (who remembers one of the big four accounting firms suggesting it could add 25% to their bill?), and so once the political tide turned the objection did not hold much water.
And this is why, of course, the US letter reflects a shift towards the real underlying issue: an objection to transparency itself. An interesting though unexpressed implication of the concern is that US MNEs are apparently willing to operate in multiple jurisdictions where they would not trust the authorities with even quite basic data about their global operations.
An alternative view, of course, is that US MNEs are aware of the potential for such data to lead to material changes in their effective taxation rate, in multiple jurisdictions and perhaps at the global level too.
(In fact ongoing research suggests that the US is such a big loser from the profit-shifting of its own MNEs, that BEPS success in reducing profit ‘misalignment’ would produce substantial additional revenues there – as well as in many other jurisdictions. It’s arguably a real mark of lobbying success that there hasn’t yet emerged an all-conquering coalition of countries in favour of much deeper change.)
What happens next in the politics of country-by-country?
Are we approaching that point where the anti-transparency lobbying has been so successful that supporters should give up? Or once this becomes clear in practice, might one or more host countries simply demand CbC data directly, starting the crucial leak in the dam?
Such a move might well circumvent the OECD caveat around not using the data for formulary apportionment, which would open up all sorts of interesting further possibilities.
Or will the EU resist the lobbying and go for public CbC? This would not only set a standard for others, demonstrating the absence of armageddon-level side-effects and also undermining any ‘competitive’ arguments for opacity.
It would also, on its own, provide a great deal of the globally relevant data for other tax authorities and civil society to use. Expect 3 weeks of (more) intense lobbying…
One way or another, the current period is likely to mark an important turning point in international tax transparency.
The weakening of the OECD standard in practice has been a resounding counter-strike against transparency. The question is whether that remains the story – or if it is overturned at the European level, or incrementally by individual countries.
A final thought: not too much has been heard in these moments from the private sector advocates of transparency. Whether the likes of Paul Polman, head of Unilever, who has called explicitly for MNEs to pay tax where they do their business; or from investors and analysts who have identified the risks of tax opacity increasingly clearly; or from professional services firms including some of the big four accounting firms, who seemed to have identified the advantages of country-by-country. Now would seem like a good time…
Update 2: 8 May 2015, a slightly tweaked version of the blog is now back up, and the UNCTAD study authors will provide a comment which I’ll add at the start of next week.
A critique of the UNCTAD analysis of corporate tax avoidance suggests things may be (even) less rosy for developing countries.
It is a mark of the importance of UNCTAD’s study on corporate tax avoidance in developing countries that it is provides the first numbers mentioned by the World Bank’s MD and COO Sri Mulyani in a major speech last month:
A recent UNCTAD study indicates that about $100 billion in annual tax revenue is lost to developing countries in transactions directly linked to offshore hubs. The total “development finance” loss – counting both revenue and reinvested earnings – is estimated in the range of $250 to $300 billion. This prevents developing countries from stopping the outflow of money – which thus bleeds them of essential resources.
For the schoolchild in Haiti, the new mother in Malawi, or the farmer in Bangladesh, these losses have a real impact: They result in classrooms that are overcrowded, health clinics that are never built, and water that is never delivered. People’s opportunities are being stolen from them – because tax revenues are not collected.
But there is a critique of the UNCTAD report, which also found that multinational enterprises (MNEs) may be paying developing countries around $700bn in revenues.
The import of the critique is that, rather than multinationals in developing countries avoiding a dollar of tax for every seven they contribute, they may by one form of avoidance alone be avoiding a dollar of tax for every three or four they contribute. Total revenue losses to avoidance might even stack up against the total contribution made… but I’m getting ahead of myself.
There are two main elements to the critique being advanced, one conceptual, the other practical. I should repeat my disclosure from the earlier blog that I’m part of the expert group that has fed in views about drafts of the study, so I’m probably not neutral.
The role of investment
The conceptual critique concerns whether the UNCTAD study appropriately captures the role of investment in development.
One risk is that a policy of avoidance might somehow be seen as an acceptable tool to encourage investment, that a tradeoff might exist (p.5):
The dilemma is clear: how can policymakers take action against tax avoidance to ensure that MNEs pay “the right amount of tax, at the right time, and in the right place” while avoiding excessive tightening of the fiscal regime for MNEs which might have a negative impact on investment.
Three main criticisms are made.
First, the study concentrates on FDI rather than the total of investment. But it’s conceivable that reducing multinational tax avoidance could (i) increase revenues for public investment, (ii) reduce the unfair competitive disadvantage faced by domestic firms (and more compliant multinationals), and through the combination of (i) and (ii) actually increase overall investment.
Second, any possible tradeoff hinges on assumptions of the importance of tax for investment (that is, for FDI). Namely (p.5, emphasis in original):
Tax is a key investment determinant influencing the attractiveness of a location or an economy for international investors.
Taxation, tax reliefs and other fiscal incentives are a key policy tool to attract investors.
The criticism is that these statements are undercut by the evidence – for example, TJN research (PDF) drawing on the IMF and McKinsey’s inter alia has long highlighted the non-importance of tax in locational decisions. [Such overall findings do not necessarily rule out any potential role of well-administered tax incentives as a possible lever of industrial policy, however.]
The third element of the conceptual critique is that while FDI inflows might fall in the event of targeted reduction in MNE tax avoidance, it is unlikely that a fall in FDI stock would occur – and highly unlikely that such a fall would be of sufficient scale to reduce overall revenues. The strongest impact of the financial crisis came in 2009, which saw positive inflows continue, albeit with a 20% fall in volume.
My take on this, for what it’s worth: the suggestion of a tradeoff is far from prominent in the paper, and UNCTAD exist in part to promote FDI (benefits), so the framing is not particularly surprising.
And nor need it be particularly damaging, if the dominant discourse is reflected by the kind of remarks that James Zhan (Director of the relevant UNCTAD department) made at the UNECE Financing for Development consultation about the importance of MNE tax avoidance, and the need to maximise not investment per se but the broader sustainable development benefits thereof – so that there’s no immediate, actionable avoidance/investment tradeoff as such, but a more holistic conception of the potential for FDI to influence multiple channels of a (much wider again) development strategy.
I don’t think anyone would argue – and the UNCTAD study does not – for promoting avoidance as an investment attraction mechanism (although that is in a sense the game for those jurisdictions that seek to capture the tax base of others.)
Methodological critique: Varying the assumptions
The methodological critique is multifaceted, and I will set aside much of it. Suffice to say, I think there are reasonable criticisms to be made – as with any regression analyses, and any attempt to estimate hidden financial flows on the basis of limited public data – but that the central approach is quite reasonable, and represents a valuable innovation to add to existing work.
A broad point is that the revenue loss number for one form of avoidance alone has been presented as the number for all avoidance – ignoring, for example, transfer pricing abuses of the sort that a Banque de France researcher has estimated to cost France alone tax base of around $8 billion a year. We certainly need to find ways to construct broader numbers of that type, but it’s not what the authors were about here.
The more specific criticisms of the UNCTAD study calculation are interesting, however, and worth showing in order to think about where one should imagine the probable range of MNE revenue contributions, and so the relative scale of avoidance – for the ‘contribution method’ and the ‘FDI-income method’, which are the two complementary approaches proposed and used in the UNCTAD study.
Contribution method
This approach uses countries’ revenue values from the new ICTD dataset, and allocates a proportion of each revenue type from 0-100% to MNEs in order to assess their total contribution.
The critics highlight a range of decisions as potentially difficult to justify (e.g. that MNEs contribute 50% of tax paid on property, or 100% of taxes on imports), and make some different proposals (‘Alternative 1′ in the table). This additionally includes a relaxation of the UNCTAD study’s assumption that MNEs’ share of taxable profit will be equivalent to their share of operating surplus, which will be violated when methods like thin capitalisation are used for profit-shifting. There is also a somewhat arbitrary reduction (by the critics) of the MNEs’ share of corporate tax revenues, apparently to reflect the original study’s recognition that ‘generous discounts on tax rates’ may lead to bias here.
This reduces the total estimated MNE contribution from $723 billion to $391 billion. In addition, the critics point out that the UNCTAD study uses a reference year from the crisis period. Choosing a different reference year (‘Alternative 1b’) leads to a total contribution of $399 billion, but where the share due to corporate income tax is now 43% of revenue contribution, as opposed to 30% in the original.
Here I have to put my hands up – the UNCTAD study (very wisely) uses the ICTD Government Revenue Dataset, as a better source of tax data, and until the upcoming release, the present edition contains only data to 2009/10.
FDI-income method
In this method, the UNCTAD study takes balance of payments data on FDI income, and applies an average effective tax rate to estimate a revenue outcome. Good data on MNEs’ foreign tax payments, never mind effective tax rates, is notoriously difficult to come by – and especially so for lower-income countries.
The critics re-engineer the data in the UNCTAD study to show that an effective rate of 11% is not unreasonable, but more generously apply 15% (compared to nearer 20% and 25% in the original).
The overall effect, combined with the above finding that income tax produces a higher share of the total contribution, is to reduce the estimated total contribution to $291 billion.
Implications?
It is true that the UNCTAD study considers only one form of avoidance – so as they themselves say, one might reasonably add to their $100 billion an estimate of transfer pricing avoidance (for example).
[The reason not to, I imagine, is that there isn’t as rigorous an estimate of this as their estimate of the thin capitalisation avoidance, due to the failure to make available more widely the type of trade data used in the Banque de France study which explicitly contrasts real arm’s length pricing with related party trade prices.]
This is not a criticism of the UNCTAD study – just a caution against presenting the $100 billion as if it were an assessment of all avoidance.
A genuine, but as yet untested criticism relates to the potential sensitivity of the assessment of the revenue contribution of MNEs in developing countries, to the necessary set of assumptions made.
Is MNEs’ revenue contribution $300 billion or $700 billion?
You wouldn’t stand full square behind either, it seems to me, but that feels a more or less inevitable result of current data problems (yet one more that would be solved, of course, by public country-by-country reporting).
The UNCTAD study provides justification for the various choices it makes. It would be useful to have a broader discussion of these, and to onsider the range of movement in the estimate level of contributions.
What does this all mean for policy? One response to the UNCTAD study would be to acknowledge that it provides confirmation, at a minimum, of the ‘scale-reasonableness’ of NGO estimates of revenue losses of this scale. Another would be to note, as I did in the previous post on this report, that $100bn is small in relation to total revenues.
If the critics were right, and the total MNE contribution is half of what we thought, perhaps this whole area of tax should be even less of a priority. Alternatively, if the MNE contribution could be doubled from what it is – without any unreasonable impositions – that would suggest a much bigger prize…
The one form of avoidance (thin capitalisation) in the UNCTAD study seems likely to be joined by several significantly sized other mechanisms – as the evidence for Europe suggests fairly strongly may be the case; and see also the new OECD survey paper on evidence on an even broader range of BEPS channels.
So the total developing country revenue losses to MNE avoidance could be several times that $100 billion – which could be half of, or the same as MNEs’ total contribution, if the original or the critics’ assumptions are used.
The authors of the study have very kindly agreed to provide a response to some of the points raised, which I’ll post here when I have it. I think it will help the rest of us to understand more about the range of possible revenue contributions we should consider reasonable.
The African regional consultation on Financing for Development (FfD) took place at the start of the week (like the European one). The submission from TJN-Africa puts particular emphasis on inequality, including women’s rights, and on global data issues.
Summary of CSO Recommendations to African governments
African countries should push for the centrality of taxation as both the most important source of financing for development needs and the key lever to fight inequality.
African countries should call for the establishment of a new intergovernmental body on tax matters with a clear mandate.
African countries should stand together to ensure that FfD process not only recognises the importance of measures to increase transparency and accountability within the private sector as it does in Article 25 of the Zero draft but also that it commits the countries to act.
African countries should implement the recommendations contained in the AU/UNECA high level panel (HLP) on IFF report.
African countries should push for the integration of women’s rights into the FfD agenda as an important issue which has relevance for tax policy.
African countries should push for commitment to the principle of redistribution via taxation and ensure the global data collection effort envisaged within the SDGs includes tracking the equity implications of tax policy
African countries should call for the recognition of international cooperation on tax as a key priority related to financing within the new global partnership for sustainable development.
African countries should make an explicit statement that MNCs paying their share of tax will be a major means of financing the SDGs.
The full document (with thanks to Savior Mwamba) can be found here.
An interesting conference, including Amina Mohamed’s stressing of the urgency for development finance of tackling tax evasion and illicit financial flows. Of the three elements I discussed, it was governance that generated the most interest (perhaps in part because the suggestions on norms and transparency fall more clearly under post-2015 targets).
There felt to be quite broad consensus that simply upgrading the UN tax committee to intergovernmental standing would not do – resources are crucial if this is to become the globally representative, rule-setting body. To think about how much resourcing is required, think of the OECD’s current capacity on tax – and then scale up to global level.
But much supportive capacity already exists, if so mandated – for example, James Zhan of UNCTAD was on the same panel and spoke impressively about the work they have done on ensuring investment is not pursued for its own sake, nor maximised in terms of quantity, but rather seen as an important tool in the pursuit of the sustainable development. UNCTAD’s expertise in, for example, assessing investment and tax treaties in terms of their overall development benefit can be of value.
Is the required level of resourcing realistic? I’m not sure. But one suggestion from IBIS seems the right starting point: to hold a ministerial panel on the subject during the Financing for Development summit in Addis in July. If there is sufficiently broad desire to address the failed international governance of taxation, it should start in Addis – and if nobody turns up, I guess that’s the signal that the same failure will be accepted for the next wee while…
Here are the slides I’m presenting at the UNECE regional consultation on Financing for Development in Geneva today (click on them to see the controls to move forwards). I’m arguing for a bit of focus in FfD on changing norms, governance and transparency at the international level, in order to open up space for effective taxation at the domestic level.
The slides are a little basic, because (a) I am, and (b) I’ve only got 7 minutes. With those excuses in place, comments are very welcome. And the hashtag is #FFD3ECE…
