Walking the Talk in Fighting Tax Evasion and Tax Avoidance: Is a New International Tax Regime Emerging
Tax revenues are an important source of funding for developing countries. Taxes can create pressure for more accountability and better governance as well as strengthen fiscal institutions. Tax systems can also be important instruments for redistributing income and reducing inequalities. Although taxes increased in recent years, many developing countries still struggle to raise their revenues. This is partly due to weak tax administrations, low collections and a small tax base. But tax evasion and tax avoidance are not only a national, they are also an international phenomenon. The free flow of capital and a global system of financial secrecy have contributed to massive, mostly untaxed, illicit financial outflows. The funds transferred out of African countries at least double the amount of aid the continent receives every year. According to Global Financial Integrity, from 2001 – 2010 the BRICS lost a total of 2.95 trillion USD as a result of trade mispricing. At the same time, 21 to 32 trillion USD of financial assets (seven to nine trillion dollars coming from developing countries) are held offshore, according to a Tax Justice Network study. International tax agreements, modeled in the 1920s, and transfer pricing rules for multinational companies, dating back to the 1980s and 1990s, are no longer suited for a globalized world.
Financial secrecy and an outdated system of global tax governance are factors difficult to deal with when trying to strengthen a country’s tax base, especially when capacities are weak. Fierce tax competition between countries contributes to the problem. Multinationals companies therefore find it easy, and perfectly legal, to transfer income away from source countries to low- or no-tax jurisdictions, often via “conduit countries”.
Because of the global financial crisis tax revenues are shrinking further. Measures against tax evasion and tax avoidance are therefore high on the political agenda of the OECD and the G20. The most important initiatives address aggressive tax planning of multinationals (Base Erosion and Profit Shifting, BEPS), more transparency and better information sharing (including automatic exchange of information). But real progress has been slow.
Will proposed reforms go far enough to overhaul an outdated international tax regime? What are possible alternatives to the current system? What is the position of the BRICS? How can developing countries that are not part of the G20 effectively participate in the ongoing process ?