Edited by Laura Figazzolo and Bob Harris
Published by The Education International Research Institute, Brussels.
The purpose of this project is to highlight, on the basis of existing research, the issue of the payment of fair and reasonable taxation by global corporations. The study aims to
expose the way in which existing tax regimes are manipulated by corporations with global reach. Through this report, citizens and political decision-makers will understand that resources for quality public services, such as public education, health and essential community services can be found, even without increasing taxation on citizens or small or medium enterprises (SMEs), but by applying the existing rules. This requires in essence that principles be put in place requiring respect by global corporations of their fiscal responsibilities.
This study is complementary to the well-researched public campaign for a tax on international financial transactions (the FTT), while putting the spotlight on an area which has received less attention – the loss of tax revenues under existing rules, due to the use of loopholes opened up by globalization. The study is set in the broader context of the role of taxation in society, as a source of revenue for quality public services, and as an instrument of distributive justice and equity.
Thirty years ago, Margaret Thatcher and Ronald Reagan succeeded politically in establishing the concept of small government linked with reduced taxation and deregulation. After three decades, it is time to reaffirm the vital role of public services in the community – and by that we mean quality, effective, ethical and adequately resourced public services. One of the major issues for industrialized and developing countries alike is the question of resources for social needs – including education, health, safety nets for the poor, and services for migrants. Yet resource constraints derived from the dominance of the small government low tax movement have militated against the provision of quality public services. The financial crisis and the attention given to tax havens by the G20 and the OECD have put the public spotlight on the extent of tax avoidance in a global economy, and debate has developed anew over the case for taxation in international transactions has been reinvigorated. .
Preliminary work by the ICFTU in 2006 [Weise, K. (2006) Having their Cake and Eating it too: the big corporate tax break, ICFTU] showed that Multinational Companies use their global reach to avoid their responsibility to contribute through fair and responsible taxation to national and community social needs. Techniques for “minimization” of corporate tax include the use of offshore tax havens, setting up competition between localities and countries for tax advantages (“arbitrage”), and the little-known technique of “transfer pricing”. The latter technique exploits on the fact that an estimated 40% of global commerce occurs within global corporations, enabling them to avoid national taxes by manipulating the prices charged for the transfer of goods and services. This phenomenon has developed dramatically since the mid 1990s. It is estimated that several trillion U.S. dollars of tax revenues are lost to national budgets annually through the use of such techniques – enough to provide the resources needed to the fund UN Millennium Development Goals (MDGs) and the budget requirements for social services in industrialized countries, including the growing costs associated with migration and global mobility.
Attempts to regulate transfer pricing today are derived either from the 1995 OECD transfer pricing guidelines or the U.S. Internal Revenue Code (section 482). To a greater or lesser degree, many states have been dealing with the matter. Despite a well-established regulatory framework, however, serious problems remain. Transactions performed in countries which promote tax havens and even in some European countries are not subject to transaction. Another difficult issue is the assessment of more intangible transactions – i.e. transfers of intellectual property, expertise (consulting) and knowledge and skills. An additional problem is that it is difficult to establish a fair market price for transactions that are not conducted between independent companies. It is hard to untangle this web as transfer pricing is also influenced by tariff structures, exchange rate fluctuations and risk profit repatriation policies, and asset capitalization policies. This means that it is very difficult to get a clear and transparent picture of what is really going on.
Why focus on global corporations? Precisely, because they are global they have opportunities to avoid their responsibilities to communities. National SMEs do not have the same opportunities.
This also links to the debate on corporate social responsibility (CSR), since the global push for corporate philanthropy is in many ways a substitute for paying taxes in the jurisdictions where the corporations operate. [See the chapter on MSPE's in EI's recent report Education International (2009) Public-Private Partnerships in Education http://www.ei-ie.org/research/en/documentation.php] Conceptually, we will present the need for corporate social responsibility through fair and reasonable taxation in all national jurisdictions.
The report maps out the general context of the debate on taxation and society but places its main emphasis on the issue of the payment of fair and reasonable taxation by global corporations. This is one piece in a new approach to growth which is outlined in the recent ITUC, TUAC and ETUI report Exiting from the crisis: towards a model of more equitable and sustainable growth. [Coats, D. (ed) (2011) Exiting from the crisis: towards a model of more equitable and sustainable growth. Report of a Taskforce, ITUC, TUAC, ETUI: Brussels]
The study has been conducted by a ‘taskforce’ of trade unionists and scholars, who have overall responsibility for the project, under the auspices of the Council of Global Unions (CGU). This Taskforce includes Michael Kahn (NEA, USA), Pierre Habbard (TUAC), James Howard (ITUC), Jim Baker (CGU), Bob Harris (EI), David Robinson (CAUT, Canada) and Mechthild Schrooten (GEW, Germany).
The Taskforce has developed a structure for the study, reflected in draft chapter headings, and approached authors to develop each chapter. A Research Assistant, Laura Figazzolo coordinated work among the authors and assisted the Taskforce in identifying key sources and information. She prepared a selection of relevant literature and sources and wrote an overall background paper for the study. She then analysed and compared individual contributions, summarizing key findings. The draft report was reviewed by a Review Panel including Guntars Catlaks (EI), Andrew Watt (ETUI), James Howard (ITUC), John Evans (TUAC) and Frank Hoffer (ILO ACTRAV). Editing was completed by Bob Harris and Laura Figazzolo.
Structure of the Report
In Chapter 1, the stage is set for the discussion, presenting various estimates of the trillions of dollars lost to public revenues through different techniques of tax ‘minimization’ and amounts involved globally in the so-called ‘offshore’ economy. This section illustrates how multinational companies (MNCs) use their global reach to avoid their responsibility to contribute through fair and responsible taxation to national and community social needs, with harsh consequences for communities in both industrialised and developing countries.
Chapter 2 illustrates how globalisation has increased demands on communities for the provision of quality public services. Community expectations include services historically provided publicly such as health, education, utilities (sanitation, water and energy), essential services (police, and other security services including prisons, fire fighting and emergency services), municipal services and public administration, and the regulatory services required in every community, from national to local levels. Demographic changes and urbanisation have increased demands for public services, for example for the provision of services for the elderly. But increased pressure on virtually all community public services also flows from globalisation, notably as a result of migration. In many communities, additional pressures are becoming apparent because of the need to deal with the consequences of climate change, including changing weather patterns and desertification.
Chapter 3 offers an insight into the broad concept of quality in public services, presenting the priorities in both OECD and emerging countries, in terms of pressures to downsize budgets for public services due to growing state deficits, and the erosion of public services in the developing world, with the consequential increasing ‘casualization’ of public services. This chapter also focuses on key challenges to be addressed most immediately, including the need to combat corruption and development of effective tax collection systems.
Taxes are the price we pay for not only the public goods and services we need, but for living in a civilized and prosperous society. Without adequate tax revenues, we simply cannot hope to sustain public services, infrastructure, and programs that have been shown to be key factors in the economic growth and social development of nations. That is why tax avoidance and tax evasion can be so disastrous for countries and their citizens. Chapter 4 shows how, today, the fiscal stability of governments in many parts of the world is being undermined by tax avoidance and evasion.
Chapters 5 and 6 explain that international corporate tax reform is long overdue, through analysis indicating that, for the United States alone, income shifting reduces U.S. government revenue by as much as 30% of total U.S. corporate tax revenues. Chapters show that there are several policy alternatives that would improve the current situation. The most transformative method would be to adopt a ‘formulary’ approach to the taxation of international income. However, more minor policy innovations are also worthy of consideration, such as rate-lowering, tax-basebroadening reforms, proposals to end deferral of domestic taxation on international income, and minor modifications of the tax treatment of foreign income.
Chapter 7 presents the OECD as a key player in international tax cooperation and in shaping the tax policy agenda of its member countries, with a focus on its initiatives for combatting tax evasion and avoidance and strengthening the tax systems of developing countries. The chapter provides a snapshot of selected OECD-led or supported instruments and initiatives for strengthening international cooperation on tax, curbing tax evasion and avoidance by MNCs and building the capacity of tax administrations in developing countries, with a discussion of the tax policy reform agenda. It also sets out the relevant trade union agenda. The Chapter provides a focus on the issue of taxation within the EU.
Chapter 8 by David Robinson presents the trade union perspective on strategies for change. After summarizing the main attempts to challenge tax arbitrage, transfer pricing, and other avoidance strategies illustrated more in details in the previous sections, this chapter highlights the need for a new compact: fair and reasonable taxation paid into public revenues by MNCs and the provision of effective quality public services in all communities.
Finally, Bob Harris draws key conclusions from the various contributions, underlining the need for a paradigm shift: global corporations should engage with global unions and civil society as partners in new thinking, leading to new and serious commitments to build better communities and better lives.
At the end of the report, Annex 1 estimates the consequences, in terms of revenue, of income shifting behavior. The consequences are calculated through regression analysis, focusing on data for the U.S. Annex 2 offers an insight into the political economies of taxation, using the example of the United States to show where corporate taxation fits in the overall framework for taxing MNCs, i.e. the rationale for Corporate Income Tax (CIT), the problems with and the solutions for strengthening corporate tax, and how they apply specifically to the case of the U.S. Three policy changes are presented which could strengthen the tax system, allowing states, governments and legislatures to increase corporate income tax from near irrelevancy as a source of revenue to a significant source of income. Annex 3 focuses on pensions and their impact on government budgets, highlighting key elements for an effective reform of the public pension system, specifically in the U.S.
Scope of the Report
This Report investigates the issue of avoidance by global corporations of the payment of fair and reasonable taxation, illustrating the way in which existing tax regimes are manipulated particularly by corporations with global reach. It presents a snapshot of the various estimates and data on the extent of this tax manipulation and the consequent effects in terms of loopholes in taxation systems, as drawn from the key international sources on this subject. The study briefly explains the regulatory framework of corporate taxation at international level, providing examples of the way in which this is manipulated by MNCs to avoid taxes. Finally, it presents possible approaches for change, both to challenge tax arbitrage, abusive transfer pricing, and other avoidance strategies, and to promote a new compact for fair and reasonable taxation paid into public revenues by MNCs, and the provision of effective quality public services in all communities. This requires a paradigm shift that would be beneficial to MNCs, as well, as they will have a level playing field, quality services to support their operations, and well trained workforce to boost productivity and profits.
There are different estimates of the overall size of the offshore economy in today’s world. By their very nature, flows of finance are opaque and thus difficult to quantify. It is clear that huge amounts are involved – trillions of US dollars annually for legal or quasilegal transactions – and further substantial amounts that flow through illegal transactions, including the drugs and arms trades, human trafficking, and various forms of money laundering.
It is not surprising, therefore, given the role of the offshore economy in tax matters, that it is difficult to quantify reliably the losses to communities through global tax avoidance. The focus of this study is on known tax minimization and avoidance through legal or quasi-legal means. There are various estimates of the amounts involved, and several of these estimates are cited in the report. It would be particularly useful for a further study to compare these estimates and to seek some coherence among them, so that figures could be reliably cited in public debate. This report highlights the need for further research on this topic.
Informed public debate is fundamentally important in democratic societies. In addition to the need for good data, the public debate around taxation requires clarification of concepts – beyond the facile slogans that prevail. Among those concepts is the rationale for corporations to pay their fair share of taxes in modern societies. That issue is addressed early in the report. Again, the particular focus remains on the global enterprises, which play such significant roles in today’s global economy, and use their global reach to minimize or avoid paying taxes. The time has come for these global enterprises to accept that good corporate citizenship requires paying fair and responsible taxes in all the communities where they operate.