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Ten reasons why European governments should back a global tax body

Added 25 Jun 2015
Also published on The Guardian

In a basement under UN Headquarters in New York, the world’s governments are negotiating an agreement that could strengthen the future course for tax systems across the world. It could also dramatically contribute to financing poverty eradication and environmental protection. 

Negotiations will end with a global summit on financing for development in Addis Ababa next month.

A core issue in this heated discussion is whether developing countries have a right to sit at the table when global tax standards are decided.

Developing countries demanding change

After realising that they lose more money to international tax dodging than they receive in aid, developing countries have demanded fundamental change to the way global standards for cross-border taxation and financial transparency are decided.

They are demanding a global body on tax cooperation under the United Nations (UN). In the current system, global tax standards are decided behind closed doors at the OECD – also known as the ‘Rich Country’s Club’. The result is not only a set of standards that disadvantage and sometimes outright damage developing countries financially, and a broken global tax system full of loopholes for tax dodgers. It is also a race to the bottom, where governments clash in ‘tax wars’ – desperately fighting to get multinational corporations to pay taxes in their own country, while at the same time providing loopholes for multinationals to dodge taxes in other countries. The victims of these wars are many, including national companies, which can’t compete with multinational corporations dodging taxes, and ordinary citizens, who have to pay higher taxes or lose public services when multinational corporations dodge taxes.

A global tax body

Developing countries are suggesting a tax body for global cooperation between governments, based on the simple principle that countries should not destroy the tax systems of other countries. This would strengthen the ability of countries to set their own tax rates and decide their own national systems, and greatly improve transparency to the public.

European states have different positions, but - in particular due to the UK and France - the EU is currently rejecting developing countries’ proposal for a global tax body.

Let me give you 10 reasons why the EU needs to change its stance:

1) A key step towards a coherent global system. The international tax system consists of a complicated web of thousands of legally binding bilateral tax treaties and parallel international systems to regulate cross-border taxation. A global system, starting with a global tax body, is the only way to remove this complexity.

2) Stronger cooperation between tax administrations. A coherent global system will improve working conditions for tax administrations, who can then cooperate better to ensure that multinational corporations pay their taxes.

3) Less unilateral action. Blacklisting and aggressive national laws to stop tax dodging are only some measures individual governments are introducing to protect their tax base. Under the status quo, we are likely to see more self-protective measures, which complicate the lives of ordinary people and those companies not tax dodging.

4) Ending the ‘race to the bottom’. The fear of losing investments is driving governments to introduce tax incentives, loopholes and harmful tax practices, which is costing countries billions in lost tax income.

5) Better business environment. Operating across diverse, inconsistent national tax systems creates heavy administrative burdens, legal uncertainty and high risks for international business.

6) A level playing field. Governments who commit to increasing transparency and closing loopholes fear that being a ‘first mover’ will result in businesses registering in other jurisdictions to circumvent the rules. Through truly global negotiations, governments can agree coordinated action and ensure a level playing field.

7) Stronger implementation. No government feels obliged to implement tax standards adopted in closed rooms where it was not welcome. The UN is the only global institution where all governments participate as equals.

8) Less double taxation and double-non-taxation. Mismatches between national tax systems is the core reason why some get taxed twice on the same income while others don’t get taxed at all. Only truly global cooperation can end these problems.

9) More financing for development in the poorest countries. The exclusion of the world’s poorest countries from decision making on global tax standards means that international systems often don’t take into account their realities and interests. This means lower tax income and less available financing for development.

10) Fair and consistent global action against tax havens. Many governments try to protect their tax base through national blacklists based on criteria that are often unclear and inconsistently applied. One obvious example is the EU’s controversial new ‘tax haven blacklist’, which omits a countries like Switzerland and Luxembourg but includes for example Liberia – one of the world’s poorest countries and not a major player in the offshore world. These kind of initiatives do not solve the tax haven problem. Action against tax havens must be fair, consistent and globally coordinated to be effective.

And there is one last bonus reason. At the moment, disagreements about the tax body are preventing our governments from reaching an agreement on a financing for development accord, which would be the first step towards the adoption of new global sustainable development goals in September and a climate treaty in December. Unblocking the tax body could pave the way for more multilateral breakthroughs.

It’s time for EU countries to call their negotiators in New York and tell them to shift position.