Tag Archives: tax

Tax responsibility: key questions for investors

Posted on by

Tax responsibility: key questions for investors

Eurodad member ActionAid has published an investors’ guide for tax responsibility. This guide is aimed at investors seeking to examine corporate tax policy and practices.

 

Tax is increasingly under the spotlight, intensifying financial, regulatory and reputational risks in this area for companies. Where tax practices are aggressive, they can also undermine the ability of governments in developing countries to provide public services, which is why international development organisations such as Eurodad, ActionAid, governments and international organisations are increasingly seeking a socially responsible approach to corporate tax.

 

In this climate, investors need clear benchmarks to gauge such risks, particularly in navigating often contradictory claims by businesses, journalists, campaigners and tax authorities. Clear, verifiable benchmarks would also help companies to cut through claims and counter-claims, enabling them to communicate their tax policies and practices, and the true levels of risk associated with them.

 

This guide is intended as a practical contribution towards defining such benchmarks across three broad areas of tax responsibility:

-          a responsible tax policy (content)

-          responsible management of tax policy (processes)

-          responsible tax reporting (transparency).

 

The report presents seven criteria to help assess tax responsibility:

Tax policy:

  1. Who sets the policy, and who provides input?
  2. Who has responsibility and how is the policy reviewed?
  3. How does the content of the policy address risk?

Tax management:

  1. What systems are in place to implement the policy?

Reporting:

  1. Is the tax policy available?
  2. How much tax is paid, and where?
  3. Is detailed information given on subsidiaries in tax havens?

 

The business rationale

ActionAid, Eurodad and others have long believed and argued that responsible tax practices make clear moral sense. But there is also growing evidence that they make clear business sense too. A combination of fiscal downturn, media attention and regulatory weakness has increased the financial, reputational and regulatory risks of irresponsible tax behaviour in the last two to three years.

 

There is a risk that investors will bear the brunt of this sea-change. Their long-term prosperity – as well as the long-term prosperity of the companies they invest in, and the economies and societies they operate in – depends upon companies and investors working together to develop responsible tax policies, tax practices and tax management and tax reporting.

 

Even 12 months ago, such an initiative seemed unlikely, with large companies wary of ‘breaking away from the pack’ on tax. Now some large UK companies – including major retailers like John Lewis and Morrisons – are themselves seeking to distinguish themselves to consumers as responsible taxpayers, and are calling for legislative action on corporate tax avoidance. Investors may find that companies are far more receptive to the business case for tax responsibility than once seemed possible

 

Download the full report here. 

The World Social Forum reviews debt and taxes: who pays, who profits and why?

Posted on by
Reply

By Bodo Ellmers

While most of the world’s population was reeling from one of the globe’s multiple crises, social movements and non-governmental organisations (NGOs) gathered at the World Social Forum (WSF) in Tunisia last month in search of alternatives. The country where the Arab Spring started in late 2010 was a great choice to host the WSF in 2013. Inspired by the successful campaign to overthrow the autocratic regime of Ben Ali three years ago, Tunisian civil society is amazingly active, highly motivated and convinced that civil society activism can actually make social change happen.

Tunisia: microcosm of a defunct financial regime

However, the Tunisian experience also shows that activism on a national level needs to be complemented by international solidarity and cooperation because nations that are integrated into a globalised world economy have limited space to determine their development. A mountain of external debt taken out by the former regime today is threatening public service delivery and constraining Tunisia’s progress. The tax system inherited from the Ben Ali regime is unjust and includes loopholes for tax avoidance and capital flight. Tax income is insufficient to finance even the current public affairs, causing high and additional borrowing needs to avoid austerity policies.

A balance of payments crisis looms as investment, export production and tourism in particular have been badly affected by concerns about instability. Tunisia is currently negotiating a loan agreement with the International Monetary Fund. Just a few years after the Ben Ali regime was overthrown, a new player that is not democratically elected and mandated by the Tunisian people is playing a substantial role in the nation’s economic and social prospects.

Tax-debt-development finance: promoting alternatives

One of the questions that concerned activists at the WSF was how to get out of the current mess – where governments depend on financial markets to fund public services, and nations depend on external lending to fund their development. These questions are inextricably linked to debt and taxes, which has been at the core of Eurodad’s work for many years. So we pushed the debt-tax-finance agenda in order to develop alternatives and promote new thinking.

Tax justice: Who pays matters

That domestic resources should play a stronger role in public and development finance became a global consensus position recently as the OECD aid industry is running out of steam, and even formerly aid-dependent countries’ governments are getting increasingly tired of foreign funding that comes with too many strings attached.

For the civil society activists gathered in Tunis, however, the question of tax justice is the primary concern. Regressive tax policies and loopholes for tax avoidance and capital flight caused the current situation – where poorer populations pay more than their fair share to national and global public goods. Consequently, the actions needed to create tax justice – in more technical terms: progressive taxes and tax rates; shutting down tax havens; automatic exchange of tax information; country-by-country reporting; and disclosure of real ownership of corporations – featured highly on the 2013 WSF agenda, including in its final tax declaration. Which reassures us at Eurodad that we are on the right track.

Debt: who shouldn’t pay matters too

But since public debt levels in many countries of the global north and south are high and surging, and governments’ debt service is ever increasing, there is a risk that the tax regime will become an exploitation mechanism – that governments will use citizens’ tax payments for the benefit of creditors rather than citizens. So, while tax income needs to go up, debt levels need to come down to make public finance work for everyone.

Activists in Tunis challenged the current creditor-biased debt regime with the slogan “we don’t owe – we don’t pay” – and promoted a variety of exit options from the straitjacket of debt dependency that has trapped many people around the world. Among these options were comprehensive debt work-out mechanisms and debt audits that would unveil and assess the origins and legitimacy of debt.

A debt audit is currently being debated in Tunisia, with the support of local activists. The findings might provide interesting insights for responsible financing and into the question: what happened to all the money that Western banks and international financial institutions generously lent to former dictator Ben Ali, and why did they lend it to him in the first place?

Reaction to EU agreement on transparency of extractive industries

Posted on by

BRUSSELS, 9 April. Today the European Commission, the European Parliament and the Council of the EU agreed a compromise text on transparency of extractive industries. The text will be adopted by the Parliament and the Council in the coming months. 

If passed, this law will oblige EU-listed and non-listed big oil, gas, mining firms and the logging industry to declare payments they make in resource-rich nations. 

In response to today’s developments,

Catherine Olier, Oxfam’s EU development expert, said: 

“It’s excellent news that the EU is moving towards a law that will help ordinary people harness the natural resource wealth of their countries to be lifted out of poverty. But EU politicians today could have taken a bolder stance against tax evasion and corruption by including other sectors such as telecommunications or construction. Strikingly, poor countries lose more to tax dodging than they receive in aid each year.”   

Øygunn Sundsbø Brynildsen, senior policy officer at Eurodad, the European Network on Debt and Development, said:

“Despite today’s promising progress, there is still a long way to go to have EU legislation that properly fights tax dodging. While it is very important to know how much companies pay to governments, this figure alone does not give a clear picture of whether they pay their fair share of taxes. Multinationals will continue plundering developing countries until they are obliged to report information such as sales volumes, assets, staffing and profits. The currently negotiated EU banking sector reform is an example to follow in this regard.”

Although welcoming the Directive, Oxfam and Eurodad have mixed feelings about the deal: 

POSITIVE 

We strongly welcome the proposal because it is a huge step in the fight against corruption. If the legislation is finally adopted by the EU: 

  • It will help citizens in resource-rich countries like Nigeria and the Democratic Republic of Congo to hold governments to account for their use of natural resource revenues and make sure that these benefit the many and not just the few. 
  • It will oblige companies in the extractive and forestry sectors to disclose the payments they make to governments in all countries at project level - as opposed to reporting at government level only- and without any exemptions. The latter has been a contentious issue in negotiations as companies claimed that in some countries they would have to break national criminal laws which prohibit the disclosure of such information. However, such laws do not exist and companies couldn’t come up with any examples and EU member states finally agreed to remove that exemption which would have been a massive loophole. 

NEGATIVE 

 On the other hand, the proposal failed to: 

  • Include other sectors beyond extractive and forestry such as telecommunications and construction which would widen corporate accountability and help both developing countries and EU member states better combat tax evasion and avoidance. In October 2012 the European Parliament’s Legal Affairs committee voted in favour of expanding the reporting requirements to the telecommunications, construction and banking sector. 
  • Require companies to report on additional financing information such as production or sales volumes, numbers of employees and profits. Such basic accounting information that are already available to companies would allow to identify potential cases of tax dodging. 

For more information and comments, contact:

Oxfam: Angela Corbalan on + 32 (0) 473 56 22 60 or angela.corbalan@oxfaminternational.org

Eurodad: Øygunn Sundsbø Brynildsen on + 32 (0) 2894 46 44 or obrynildsen@eurodad.org

The European Parliament secures bank transparency

Posted on by

Members of the European Parliament (MEPs) secured a big step towards the financial transparency needed to combat tax dodging last week when they made EU Finance Ministers agree on country-by-country reporting for EU banks from 2014. This represents a major victory after years of campaigning by Eurodad members and allies. The deal under the EU’s Capital Requirement Directive is timely and it can – and should – influence the final agreement on the Accounting Directive, where country-by-country reporting is still on the table.

MEPs requested urgent action on this issue in an open letter to EU Finance Ministers, and their persistence paid off. “The European Parliament is on a roll, enjoying its most influential week since the Lisbon Treaty gave it ‘co-decision’ authority over EU laws,” wrote the Financial Times.

Under the Capital Requirement Directive (CRD IV), the EU will require banks to disclose profits made, taxes paid and subsidies received, as well as turnover and number of employees for each country where they operate. This information will be included in the banks’ audited annual reports. From 2014, the information will be disclosed to the European Commission (EC). From 2015, the data will be made public, unless the EC finds significant economic disadvantages when carrying out an impact assessment, in which case they can propose a delay.

Last week’s agreement is referred to as a ‘political agreement’ that has to be approved by EU Member States and by the whole European Parliament, where a vote is expected in mid April.

Towards full country-by-country reporting

Thanks to strong pressure from civil society organisations, including Eurodad and our members, EU lawmakers have discussed country-by-country reporting extensively over the last year in negotiations over the Accounting Directive.

Importantly, the deal made under the CRD IV goes further than the provisional agreements of the Accounting Directive in requiring disclosure of financial data. Whereas the Accounting Directive will require disclosure of tax payments to governments, the CRD IV will require disclosure of profits made, taxes paid and subsidies received on a country-by-country basis, as well as turnover and number of employees. This is crucial. Knowing how much tax a company pays to the government in each country is good, but it does not reveal where real activity takes place and hence where value is made. This is basic information required to determine whether a company is paying its fair share of taxes. Country level disclosure of financial data is key to revealing tax dodging practices, which cost developing countries hundreds of billions of dollars every year.

In addition, the CRD IV requires data to be published in the banks’ annual reports. This means the data will be audited, which is not the case under the Accounting Directive.

Spill-over ensuring coherence?

Coherence in EU law will require the CRD IV agreement to spill over into the final negotiations of the Accounting Directive. At a very minimum, the new agreement should convince EU Member States that the review clause of the Accounting Directive must include country-by-country reporting

  • beyond logging and extractive industries, and
  • beyond payments to governments.

This would mean that the questions will be up for new discussions in the legislative review.

Investment figures demonstrate why extending the requirement beyond extractive and logging industries is important. In 2010, green field investments (start-ups) in the five sectors proposed by the European Parliament for inclusion in the Accounting Directive were worth $235bn: the biggest sector was extractive and logging industries with $76bn; followed by communications ($72bn); the financial and banking industries ($46bn); and construction ($41bn). On average, 63% of these flows targeted developing countries.

When voting on the Accounting Directive, MEPs suggested that payments to governments should be disclosed at country level in the banking, construction and telecommunication sectors, in addition to extractive and logging sectors. Member States have been dragging their feet, and the final agreement may not reflect the MEPs’ sensible suggestions.

MEPs deserve congratulations for securing fast action on bank transparency. Now Member States are under pressure to act coherently and extend these transparency requirements to other sectors when finalising the details of the Accounting Directive.

Briefing: Taxes and human rights

Posted on by

The Tax Justice Network has just published a report on taxes and human rights, which argues that fiscal policy – and hence tax policy – is one of the most important steering instruments for governments. True policy priorities are often revealed more clearly through budgets and tax legislation than through declarations and actions, the report argues.

A government’s fiscal policy reflects the political influence of certain interest groups. Are defence budgets or social welfare budgets being raised? Who enjoys tax reliefs, and how are they compensated for? Answers to these questions are crucial to whether governments are fulfilling their international and national commitments or whether they may not be meeting them under the pretext of budget policy constraints.

The most important obligations of governments include respecting, protecting and ensuring human rights, among them the economic, social and cultural rights. The report examines what impact fiscal policy has on complying with and realising these rights.

Read the full report: Taxes and human rights

 

Illicit Financial Flows from Developing Countries: 2001-2010

Posted on by

New Report Finds Crime, Corruption, and Tax Evasion at Near-Historic Highs in 2010

Global Financial Integrity just released their annual global update on the amount of money flowing illicitly out of the developing world due to crime, corruption, and tax evasion

Crime, corruption, and tax evasion cost the developing world $858.8 billion in 2010, just below the all-time high of $871.3 billion set in 2008—the year preceding the global financial crisis. The findings are part of a new study released today by Global Financial Integrity (GFI), a Washington-based research and advocacy organization.

The report, “Illicit Financial Flows from Developing Countries: 2001-2010,” is GFI’s annual update on the amount of money flowing out of developing economies via crime, corruption and tax evasion, and it is the first of GFI’s reports to include data for the year 2010.

Read full report here

Explore illicit financial flow Heat Map here

Progress on IMF conditionality?

Posted on by

A first reading of the press statements and overview paper from the IMF’s review of conditionality, completed in September 2012 might give the impression that the IMF has made a 180 degree turn in its conditionality policy, one of the most controversial aspects of the Fund’s role. However, the transformation doesn’t seem as complete as the IMF argues. Harmful conditions are still being imposed, not only to developing countries, but also in Europe, and the IMF claim to have increased its focus on poverty reduction and social protection seems uneven, both throughout countries and time.  Has the IMF really change the way it sees and implements conditionality?

As a thoughtful reading of the conditionality review papers shows, lending reforms and changes in conditionality have already had some impacts in the way the IMF deals with countries under different Fund programs, but much more can and must be done.

The IMF claims for instance to have internalized the objective of poverty reduction in the programmes in low-income countries, but outcomes seem uneven. They recognise that there’s a need for a better and more systematic analysis of social impact of policy measures in programmes. One of the main challenges remaining is therefore to monitor and evaluate, both quantitatively and qualitatively, the impacts of IMF policies in the most vulnerable people.

As the review concludes, debt relief is responsible for the only observable macroeconomic positive effects of IMF policies in low-income countries, including not only sustainable debt levels, but also an increase in social spending. In a time when, after HIPC and MDRI, there will not be a specific debt relief initiative in place for those countries in debt distress, and the chances for having a new debt crisis, not only in Europe but also in the global South, are growing, there’s also an urgent need to evaluate what will happen when no further debt relief is a resource for impoverished and highly indebted countries.

Furthermore, and as the IMF recognises, more efforts in ownership and transparency are also vital for the programmes success, and a better analysis on projections and evaluation would also help. The role of CSOs in monitoring and fostering these transformations is vital for assuring further change within the IMF. Some changes are certainly happening, mostly at a slower pace than what is needed. But the IMF has still a long way to go to be a fully democratic, transparent and efficient institution with no harmful conditions imposed on the countries.

The following briefing analyses these and other issues that arise from the IMF review of conditionality.

European Parliament resolution on the EU “Agenda for change”: a welcome step

Posted on by

Last week the European Parliament passed a resolution setting out its stance on the EC Communication on “Increasing the impact of EU Development Policy: an Agenda for Change”. The resolution on the future of EU development policy (rapporteur: Charles Goerens – ALDE) was passed with the overwhelming support of 540 votes in favour, 36 against and 65 abstentions. Despite having only general remarks on aid (ODA), the Financial Transactions Tax (FTT) and innovative financing, the resolution  insists that the implications of the proposed blending platform, which includes the mixing of public with private funds, need to be more carefully thought through, with parliament’s involvement.

ODA, FTT and innovative financing

The EP resolution points out that ODA “has to remain the backbone of the European development cooperation policy aiming at eradicating poverty”. This has a clear implication in relation to innovative sources of development financing, as for the EP “they must be additional, must be used on the basis of a pro-poor approach, and cannot be used to replace ODA in any circumstances”.

The Parliament “encourages the Council to take action on the Commission’s proposal for a well-designed, effective financial transaction tax designed to raise revenue in order to meet inclusive global development priorities”. It is worth mentioning that the October European Council meeting of development ministers ignored the Commission proposal on the issue.

On the role of the private sector

The EP resolution “demands that any support provided to the private sector in the form of ODA come within the framework of the national plans and/or strategies of the partner countries,” and that these monies should be focused on “the development of human resources, decent work, the sustainable management of natural resources and the development of high-quality inclusive public services for the benefit of the population.” This statement is very much in line with Eurodad’s stance on the issue.

Eurodad research shows that the majority of aid flows through the private sector in the form of procurement contracts for goods and services, and that the vast majority of this goes to rich country firms. Furthermore, the proposed use of aid to leverage private sector investments may detract from much-needed public sector investments, which still face huge financing gaps. In addition the EP resolution advocates for “safeguards to ensure that private companies respect human rights, offer decent jobs and pay their taxes in the countries where they operate”.

On leveraging private finance through a blending mechanism

In response to the EC suggested blending mechanism, “proposed to mix public grants with financial institutions’ loans and other risk-sharing mechanisms”, the EP resolution call on the EC “to provide clear information on how this mechanism serves the purpose of a development policy based on ODA criteria and how the power of scrutiny of Parliament will be exercised.” This is a welcome step, since it supports Eurodad and partners concerns in relation to the purpose and added value of the blending mechanism and to the way blending has been articulated. According to the EP resolution, the blending mechanism “should have no objective besides that of poverty reduction and the fight against inequality,” while there is also a need to promote better redistribution.

Specifically, Eurodad and partners submission to the EC consultation on the proposed EU Platform for External Cooperation and Development pointed out that there are a number of issues that deserve further consideration, including:

-    the risk of financial incentives outweighing development principles;
-    insufficient attention to transparency and accountability;
-    unclear monitoring and evaluation methods;
-    opportunity costs may be high, but are not carefully considered; and
-    debt risks for developing countries.

Finally, the EP warns against the “exclusive attention to economic growth and excessive confidence in the effects of automatic redistribution of development in the private sector” which could lead to unbalanced and non-inclusive growth without having a real impact on poverty reduction. In this regard, the EP also calls on the EU “to reconsider this policy in favour of sustainable development policies including trade, redistribution of wealth and social justice.”

European Parliament: procurement policies and illicit flows vital to policy coherence for development

Posted on by

On 25 October the European Parliament voted through a resolution calling for better alignment of all EU policites to development objectives. The resolution, led by MEP Birgit Schnieber-Jastram (EPP, DE) was passed with the overwhelming support of 561 votes in favour and only 47 against and 51 abstentions. The European Parliament explicitly supports key demands of Eurodad and our members on tax and sustainable procurement, building pressure on EU institutions and governments to improve EU development cooperation and to increase developing countries’ policy space to promote nationally owned development policies.

In a blow to the Commissions controversial Agenda for change policy paper, the parliament explicitly states that “the European Consensus on Development … remains the doctrinal framework for the EU’s development policy, and that any attempt to revise or replace it in the context of the ‘Agenda for Change’ should involve the institutions that permitted its creation.” It adds that the whole concept “is not merely a technical issue, but primarily a political responsibility, and that Parliament …. has a key responsibility for translating the commitment into concrete policies.” 

Sustainable procurement

As public procurement accounts for 19% of world GDP, the resolution recognises the huge potential that public procurement has “to be a tool of implementing sustainable government policies both in the EU and in its ODA recipient countries.”

Procurement ranks highly thoughout the document, which includes some of the key asks of Eurodad and allies, including fair trade groups, regarding the revision of the public procurement directive. According to the resolution, “public procurement should be effectively used to achieve the overall EU objectives of sustainable development and, therefore, that the future of public procurement directives should enable sustainability criteria to be integrated throughout the process.”

Also in line with Eurodad demands, the resolution calls for giving “contracting authorities the policy space to make informed pro-development procurement choices.” This reference is timely, given the current discussion surrounding the reciprocity regulation put forward by the European Commission that promotes the liberalisation of  procurement markets in developing countries.

Tax and development

The resolution explicitly mentions the negative impact of illicit financial flows in mobilising domestic resources in developing countries and consequently in promoting sustainable development policies. At the same time, the resolution supports Eurodad’s call for greater financial transparency, arguing that “it is essential for supporting revenue mobilisation and combating tax evasion.”

The resolution also demands that “the current reform of the EU Accounting and Transparency Directives should include a requirement for extractive and timber companies to disclose payments made governments on a project-by-project basis, with reporting thresholds that reflect the size of the payments from the perspective of poorer communities.” Although this not as ambitious as hoped for, and does not include the crucial need for the framework to be expanded to country by country reporting, it is important that the parliament explicitly recognises the relevance of fighting against capital flight in the light of policy coherence for development.