It has long been a paradox that the rich countries whose professional services firms are responsible for most of the world’s cross-border tax abuse also write global tax rules. That, pleasingly, may not be the case in the future. Last month, developing countries at the UN won a historic vote to set up a tax convention, over the objections from the body that wields power today – the Organisation for Economic Co-operation and Development (OECD), a club of wealthy countries, including the US, the UK and Japan. This is a long-overdue and much-needed change. Poor nations’ ability to feed, educate and provide healthcare to their people is hobbled by illicit and hidden movements of capital worth billions each year.
The vote was overwhelming. More than 120 mostly developing countries, representing 80% of the world’s population, called for a “framework convention on international tax cooperation”. The UK, rather shamefully, tried to scupper the vote by bringing forward an amendment to strike out the word “convention” and remove the possibility of having a legally binding outcome. Thankfully, this attempt at wrecking the proposal failed. Critics say that many UN conventions are commendable, but they are more honoured in the breach. This misses the point. Having a tax convention is better than not having one; it allows pressure to be applied on governments to take ambitious positions and stick to agreed deals.
The worldwide tax system is a race to the bottom in terms of national loopholes to attract capital flows. According to the Tax Justice Network, countries around the world are losing US$480bn in tax a year to tax abuse, with two-thirds lost to multinational corporations shifting profit into tax havens, and a third lost to offshore hidden wealth. Lower-income countries, which historically have had little to no say on global tax rules, disproportionately suffer. Rich nations lose the equivalent of 9% of their public health budgets to tax abuse, whereas poorer countries see half their public health budgets disappear.
A UN convention opens the door to more transparency in tax. According to the economists Joseph Stiglitz and Jayati Ghosh, the OECD has long tilted reforms in favour of its members – advanced countries – and the corporations in them. Earlier this year, the OECD had reportedly “persuaded” Australia to water down a law requiring multinationals to reveal where they pay tax. Currently, OECD members can act in the same harmful way as the tax havens that they condemn. Ireland’s “profit-shifting” regime sees an effective corporate tax rate set at a ludicrously low 7%. The US’s financial secrecy is such that the treasury secretary, Janet Yellen, said that it might be the “best place to hide and launder ill-gotten gains”. That might explain why the UN resolution was co-sponsored by a Caribbean nation – the Bahamas – fed up with being called a tax haven by more egregious offenders.
The charge that the OECD’s tax policies favour the richer economies that make up its membership is getting harder to rebut. Major powers such as Brazil and India expressed “reservations” over the effectiveness of its October proposals to make multinationals pay more tax where they do business. The OECD’s planned global minimum tax rate of 15% falls short of the 25% supported by many poor nations. The UN vote was a recognition that, in an increasingly multipolar world, tax policy can’t just be the preserve of its richest nations.
